Function heads have a complex agenda: multiple business customers; demonstrating the value-add function of your area to supported units; the need to continuously evolve and align to dynamic and fast changing business strategies ; the ongoing scrutiny of costs; and, ongoing judgment of the delivery.

The exclusion zone

Perhaps an overplayed term, but each business has a DNA that should not be tampered with. Functions and areas that are critical to the execution of a business model are generally not good candidates suitable for external sourcing. While these are obvious, unfortunately business is seldom binary in right and wrong decisions. Rather it is typically complex play a multitude of factors such as managing trade-offs; timing; environmental factors; and business culture.

The grey zone

Upon reflection, many executives are surprised how crucial certain functions are to the value-add of a business. For example, mortgage origination processing has often appeared to be an obvious candidate given its appearance of process uniformity; common processes and industry standards; fluctuating volumes and scale benefits; and, guise of being a large back office function. While this is all valid, consider the trade-offs associated with such a move. You lose control over a function that if it goes wrong can result in material credit, operational and reputational risk. Credit risk may appear to be the greatest exposure, however a combination of controls and commercial agreements (supplier and third party) can usually mitigate against this. Operational and reputational risks however are thornier. Mortgage origination issues can quickly escalate beyond customer grievances. Systemic issues can draw the eye of regulators and competitors; incur breach costs; and, result in expensive recovery costs.

This is not to say that outsourcing such functions should be avoided, but rather to suggest a proceed with caution approach, ensuring appropriate controls are in place. Additionally, certain selective functions may well be conducive to outsourcing within an overall value-add process.

Contender attributes and considerations

There are a number of scenarios in which external service provision may make sense.

A business may be able to gain access to scale economies that are not possible given the extent of internal operations. The consideration is that your business will become one of many clients and as such leverage over the supplier becomes relative.

You may identify areas of specialist expertise that you require to execute your programme, the demand for which is one-off or unpredictable. External service providers can provide access to this specialist skill, but ensure that you are an important enough client to be able to procure the true experts when you need them.

You may also want to outsource activities that are routine or commodity, so as to concentrate your scarce resources on higher-value add activities. The danger here is that you outsource a commodity skill today that becomes a valuable skill tomorrow. Ensure that you have adequately considered alternative future scenarios before you make such a move.

Do the numbers

As an extension to the scale, specialist or focus opportunities listed above, a business may be able to yield a lower service cost proposition through outsourcing. Given the trade-offs, the business needs to be rock solid. When factoring in costs, it is important to look at the total cost of the transaction in addition to the direct costs. Broadly this includes:

• The business impact costs associated with any top line turnover dent due to outsourcing
• The transition cost as no successful outsourcing function occurs over night
• Management overhead in establishing and maintaining the arrangement
• Peripheral support costs such as legal

Doing it!

In order to drive true benefit from an external relationship, you need to have a solid understanding of the area to be outsourced. Where a poorly understood problem area is resourced away, the power lies squarely with the service provider and the likelihood of benefits being passed on is lessened.

Factor set-up costs into the case for sourcing. Often a resource-intensive exercise is required to clean your data, develop interfaces, and design processes and procedures so that the external provider can deliver an efficient service.

If these processes are not well constructed, the overhead in managing the provider will increase, with detrimental impacts on responsiveness. You should not expect benefits to flow immediately.

Finally, maintain functional ownership Outsourcing of a function does not abdicate responsibility of performance. This seems obvious, but how often have you heard quality problems being blamed on the supplier?