How much does a business really save by outsourcing? Let’s start with one of the most commonly outsourced services – data inputting.
Checkatrade.com hosts profiles of companies in the building trade, so customers can avoid cowboy builders. With 9,200 members, Checkatrade has 100 staff and a turnover of more than £6.8 million, so it needs a lot of data inputting.
Founder Kevin Byrne has outsourced the work to Serbia. And how much does he save? Mr Byrne reckons it would cost £19,000 per employee in the UK and salaries in Serbia are cheaper, so there’s a 5 per cent saving straight off the bat. But employing staff in the UK comes with a string of other costs. Mr Byrne lists sick pay (£395), holiday pay (£1,462), national insurance contributions (£2,090), office space (£1,250), bonuses and incentives (£2,000) – none of which he pays because he has outsourced the work. This is a saving of £8,147 per worker or more than 40 per cent off.
Another meat-and-potatoes segment of outsourcing is data hosting. When Slough Borough Council was forced to move out of its elegant, but ancient, town hall building to make room for a school, IT boss Simon Pallett was forced to choose whether to keep his data centre in-house or to outsource. He decided to outsource, giving the £30,000-a-month contract to managed hosting specialist Savvis.
“The costs of building our own data centre were so colossal the council couldn’t even meet the capital requirement,” he recalls. There were other savings too. “Running a server room means big air conditioning costs. In our old town hall building, where we’d previously had our servers, the cooling was a nightmare. Sometimes we’d be called up in the middle of the night because a server had overheated, and someone had to get out of bed and go to the town hall to switch it off. Outsourcing removes all of that.
“Staff costs are lowered because our IT team can concentrate on doing their jobs instead of maintaining the servers. The electricity costs are lower too.”
Can he quantify the total saving? “Actually, although we know we’ve saved money, it is hard to provide an exact figure because we previously couldn’t quantify our costs. Different parts of the system were paid for by different departments, so there was no overall cost figure. Now, because we have one partner, Savvis, we can record and control exactly what we are spending. And there are no more midnight call-outs.”
Savings of more than 20 per cent, over the in-house model, are routinely achieved
But what about outsourcing something really tricky? Nottingham University is as awkward as they come from an IT perspective. There are 7,000 staff and 34,000 students, all of whom need access to printers. Until recently the solution was a mess. Each staff member had their own printer on their desk. Every make and design, from inkjet to laser, colour to black and white, large to small, ancient to modern, was present on campus.
Head of procurement Jim Reed had the job of cutting costs, and his solution was to remove every single printer and replace them with large multi-functional printers provided by Xerox. “We have a £9.2-million contract with Xerox over five years. The business case says we’ll save at least 20 per cent by outsourcing, maybe as much as 25 per cent,” he says.
Mr Reed rattles out the savings: “The new printers are industrial units, so the ink is cheaper. They have better power management, as they power down when not in use cutting electricity costs by 30 per cent. The default is printing to black and white on double sides, saving ink costs and paper costs.”
Importantly the new system is more convenient too. “The Xerox system means you can print to any printer from any device. You can be on the bus, send a job, then arrive later at the printer, swipe your card and collect the job. This has been a really popular improvement,” he says.
The National Health Service is one of the most contentious areas of outsourcing. Activists argue that the NHS is being privatised by stealth as outsourcers take over more and more functions.
Those in favour can point to examples, such as Mid Essex Hospital Services NHS Trust, which last year employed supply chain management consultant Inverto to find savings. The goal was to save £3 million out of £32 million expenditure. So far £1.1 million has been saved, with £2.3 million projected this year.
How? One trick was to get suppliers more involved in the sales process. This led to traditional tympanic thermometers being replaced with infra-red devices, saving £50,000, and the introduction of easy-to-clean mattresses, a 67 per cent cost saving.
Crucially, Inverto did the opposite to what is sometimes alleged by critics of NHS outsourcing – they put clinical staff at the heart of procurement. In orthopaedic, a £3-million department, the procurement team included a consultant, lead nurse, theatre ordering technician and procurement consultants, who reported at weekly meetings to the clinical director, chief operating officer and chief financial officer.
Bill Martin, the consultant orthopaedic surgeon involved, says: “An initial worry that financial pressures would lead us towards accepting sub-standard implants or major inventory changes has not been borne out. It was reassuring to be involved in the process as a surgeon.”
These are just a few case studies, but two lessons stand out. First, that calculating savings needs to take into account a long list of items, including often-forgotten issues such as electricity and the amount of time senior management spend dealing with relevant issues. And second, that savings of more than 20 per cent, over the in-house model, are routinely achieved on a continuing basis.
Collectively this evidence suggests that on cost alone, without even factoring in the no less relevant triumvirate of expertise, convenience and capacity, the case for outsourcing can be powerful.
SUMMIT
OUTSOURCING AND STRATEGIC PARTNERSHIPS
Inspired to outsource? In need of reviewing your existing relationships? Whether you are new to outsourcing or a veteran in need of some focused analysis, a conference in London next month could help businesses from all sectors.
The Gartner Outsourcing & Strategic Partnerships Summit promises to deliver practical guidance and strategic advice on outsourcing and IT services. The September 9-10 conference focuses on rethinking sourcing strategies and developing best practices.
“The truth is that almost all firms will need to consider the issues on the summit’s agenda,” says Gartner. “Disruptive forces – social, mobile, information and cloud – have created a new imperative for organisations’ sourcing strategies to evolve.
“What does that mean for you – assessing new products and services, selecting new vendors, adapting evolving delivery options and new pricing models, addressing a host of geographic opportunities, and optimising the vendor ecosystem?
“Attending this conference will help you to make informed sourcing decisions based on the latest industry thought-leadership and best practices.”
The agenda is designed for key sourcing roles:
Track A – Chief information officers and senior leaders: Growing and succeeding in a digital world
Track B – Sourcing and contract managers: Selecting, evaluating and contracting for optimal deals
Track C – IT vendor managers: Optimise your IT vendor ecosystem
Track D: Activating the next generation enterprise with cloud and industrialised services
Track E: Workshops, roundtables and networking.
To view the full agenda and register, visit gartner.com/eu/outsourcing
