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Outsourcing is the contracting out of a company’s non-core, non-revenue producing activities to specialists. It differs from contracting in that outsourcing is a strategic management tool that involves the restructuring of an organization around what it does best - its core competencies.

Two common types of outsourcing are Information Technology (IT) outsourcing and Business Process Outsourcing (BPO). BPO includes outsourcing related to accounting, human resources, benefits, payroll, and finance functions and activities.

The Benefits of Outsourcing

Cost savings
Outsourcing payroll can deliver significant cost savings that can be leveraged through the application of business process improvement (BPI) techniques to make internal processes more efficient.

Quantifiable costs
The cost is clearly quantifiable and predictable whereas the internal costs of payroll processing are often unknown and rarely monitored.

Freeing capital
The capital investment required to process payroll inhouse is typically greater than required for outsourcing. The capital freed up by outsourcing can be invested more profitably elsewhere in the business.

Growth
If the organisation is growing and payroll is outsourced, this growth can be readily absorbed without significant investment in equipment or people.

Latest technology and expertise
Outsourcing payroll can also give organisations access to the best solutions and latest technology without the need for software upgrades or direct investment. More importantly, they gain access to payroll specialists dedicated to ensuring they meet their statutory obligations.

Competitive edge
Businesses which harness both internal and external resources are often better equipped to react to changing circumstances or to explore new market opportunities. Concentrating on core activities, they are usually more flexible and responsive, giving them a competitive edge.

  Not so long ago, outsourcing was the preserve of the biggest companies. International organisations, such as Andersen Consulting (Accenture), set up dedicated services that enabled large businesses to have information technology, payroll and other “back-office” functions managed by teams of specialists.

However, the arrival of the internet has given smaller businesses the opportunity to gain from the concept. Increasing numbers of growing businesses are, for example, avoiding employing full-time human resources managers by obtaining advice and services via the net.

A typical case is API Group, a producer of specialist packaging and security products used by consumer goods companies to help their products stand out on the shelf. Now a UK-listed company, API has grown into an international business with 1,000 employees and an annual turnover of £120m. By the time Iain Anderson became director of information systems in 2002, the company’s IT operations had also grown spectacularly. The IT budget was running at 2.5 per cent of turnover and there were 25 full-time employees. Now, the team is half the size and the budget is less than 1 per cent of turnover.

Anderson says this has been achieved through a restructuring that “focused on what was important to the organisation”. He and his colleagues started by making infrastructure changes that involved moving the architecture of the IT systems out to BT. Then they made Dell the standard supplier of computer hardware, making use of the company’s support to do away with the need for support personnel on site.

But perhaps the most far-reaching change Anderson has made has been to implement Oracle On-Demand, which involves outsourcing hosting and management of hardware, software and applications of IT systems. There was initial scepticism on the part of the board, but the advantages have been so great that any opposition has been overcome.

Moving to this approach has contributed greatly to reducing the IT headcount, cut the cost of hiring and training IT support and reduced IT operating costs by 40 per cent. Moreover, having the system supported by a remote hosting centre has proved cheaper than the company setting up its own disaster recovery plan.

Among the associated benefits is the fact that users of the system enjoy higher service levels than before – making them more productive. The ease with which the system can be updated and upgraded to accommodate more users is also a great benefit, adds Anderson.

Above all, the changes mean that the business can focus on its core manufacturing operations instead of worrying about IT.

This backs up research, which show that firms that outsource aspects of their operations tend to be more profitable than those that do not. This is partly because such businesses are probably more likely to analyse and seek to make as efficient as possible all aspects of their business. But it is also true that by outsourcing activities such as finance, HR and IT, companies are able to gain access to higher levels of expertise than might be available in-house and also save costs.

The practice is not without its risks. Again, research indicates that businesses engaging in outsourcing need to ensure that the providers are meeting their needs, the costs are appropriate and that there are adequate controls. After all, if something goes wrong it is the reputation of the company outsourcing rather than the service provider whose reputation is likely to be affected.

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