Michael Mainelli, The Z/Yen Group
Mary Pasby, Jaffe Associates
[A version of this article originally appeared as “Opinion: Include Me Out: Exclude Me In? (outsourcing and the professionals)”, Managing Partners’ Forum , Number 17, Professional Connections International (March/April 1999) pages 2-3.]
Professional firms are not strangers to outsourcing. Outsourcing contract fees have fuelled growth. Nor are the larger accountancy firms just independent advisors. Their consultancy practices are increasingly less consultants and more outsourcing service providers, starting with core/non-core studies through to business process re-engineering and, in many cases, providing the outsourced service themselves. Andersen Consulting has long seen its competition as the global business process outsourcers such as EDS, CSC or IBM, rather than its fellow accountancy-based professional service firms. Yet professional service firms seem hypocritical when we look at their management and business processes. Outsourcing is an interesting and often valuable booster to their clients' performance, but has little sway within a practice. Is there any basis for this hypocrisy?
Given the scale of outsourcing and the way it has swept through, and sometimes swept up, global industry, the professions need to ask penetrating questions about their apparent lack of outsourcing. “Outsourcing”, “facilities management”, “shared services”, “bureau services” and “non-core services” are terms which attempt to express some of the fundamental restructuring which has occurred over the past few decades. Many organisations question whether they need to perform all tasks internally. Likewise, many organisations question whether essential internal tasks can be bought from outsiders - or even ‘sold’ to outsiders. The pressures that beg these two questions include the need to focus on core business, to purchase quality support, to control or reduce costs and to increase. The market for outsourcing is fluid. Estimates of the UK market for outsourcing range from the current market of £47 billion to the potential market (if everyone let specialists do the work) of £160 billion. The range of outsourcing services is enormous - from information technology, to property management, accounting, mechanical and electrical engineering, cleaning, catering, plant watering and pest control to the most secure computer systems and sites of the Ministry of Defence.
Some of the most exciting developments in outsourcing have included the development of risk/reward contracts where organisations have pioneered successful contracts based on combinations of cost reduction, key performance measures and customer satisfaction ‘at the desk’. In one case, up to 40% of the contract was based on front-line professionals' satisfaction ‘at the desk’, based on customer surveys of a large proportion of the firm. For outsourcing providers, internet, intranet and extranet capabilities has led to new ways of doing business and developing intimate relationships with clients, e.g. purchasing stationery over the intranet with overnight delivery to the desk using security staff. Systems have also led to better outsourcing services for small and medium-sized firms. Outsourcing is no longer a large corporate domain.
Julian Ogilvie Thompson, Chairman of Anglo American Corporation, defines his core business as "any investment that earns a better return than something else you could do". Surely in professional firms, any non-professional staff should be potential outsourcing opportunities. Partnerships are already outsourcing at a basic level. It is a rare firm these days that provides its own security, catering, printing and cleaning. Some partnerships outsource areas such as reception or websites, although there is a reluctance to let outsiders handle client-facing roles. The big gap is the lack of total business process outsourcing - looking at entire processes that deliver client value and handing them over to a business partner who is ‘best of breed’. There have been some small attempts at business process outsourcing, e.g. technical updates for clients through re-badging industry information sheets provided by publishers.
Firms generally lack mission focus on what is core to the professional firm, i.e. professionals, their client relationships and the firm's unique twist. Firms lack business focus on providing the non-core elements economically, efficiently and effectively in support of the professionals. Diagram 1 attempts to show how core/non-core potential can be analysed in terms of risk and reward.
What is the potential scale of the benefit? Obvious areas (all of finance, all of property and admin combined, information technology, etc.) often seem too daring for a partnership - yet are partners aware of the scale of potential benefits? With accountancy practices a professional to staff ratio of 3:1 is typical. Some of the larger firms set higher targets. In legal practices ratios of 1:1 can be found, although 1.5:1 is more common. Taking some typical average overall support staff salaries, e.g. £35,000 with on-costs, a legal practice of 400 total staff including 40 partners which moved from 1.5:1 ratio to 3:1 would be looking at moving some 60 people and £2.1M of salary outside the firm. Typical direct savings would be between £200,000 and £360,000 per annum - £5,000 to £9,000 per partner per annum. More radical re-engineering could double or treble these figures if some of the areas including professionals are examined. At least as important a financial argument is the reduction in fixed costs. So often, financial evaluation of professional firms treats staff costs as variable. Staff costs hardly seem variable to a managing partner. Variable costs are costs you either do not incur, or only fractionally incur, when the income to pay for them melts away. When the cliff edge of no new business looms just three or four months away, staff costs are not variable. There is great value in the option of being able to move fixed costs to variable costs.
Certainly, financial arguments have merit, but there are other benefits which should accrue from a good outsourcing arrangement. In general, outsourcers provide more motivated support staff. Even though working for an outsider, support staff now have a professional career. Support staff are no longer second-class citizens within their own organisation. Motivation translates into better productivity and skills enhancement. Outsourcers are generally able to retain a key specialist for use with several clients, while most internal departments try to make a generalist do everything possible or use expensive consultancy services. Often outsourcers provide better support systems, with the costs spread over several clients with similar requirements. Business direction and business volumes can change more rapidly to meet client demands. Depending on circumstances, the list of benefits can lengthen quickly.
Clearly there are risks. The list of risks also lengthens quickly, but certain key points seem to have been learned:
looking for a genuine partner - a much abused phrase, but a partner should share in the risks (e.g. loss of the firm's business, quality or reputation) and in the rewards (e.g. increased margins when the firm succeeds);
looking for scale - piecemeal outsourcing can only achieve so much. Successful outsourcers are heavy users of computers and information systems for measurement, updates, best practice, training and integration. This is only justified if they have a reasonable portfolio of services to manage;
not overspecifying the contract - a tough criteria for the professions, but contracts which describe a service level agreement negotiation process generally succeed where a specific service level agreement, at any level of detail, fails to reflect changing circumstances and leads to meeting only the letter of the agreement;
specifying satisfaction measures - ensuring that partners and professional staff throughout the firm have the opportunity for structured assessment of their satisfaction with services, e.g. a satisfaction questionnaire that affects the outsourcer financially;
developing a contract which rewards innovation and continuous improvement - permitting the outsourcer to realise benefits from investing in infrastructure, training, new systems or radical re-structuring.
In general, successful outsourcing arrangements have meant a leap of faith at some point for both parties. The organisation must realise that not everything can be specified in advance. The outsourcer must estimate not calculate, using their experience to establish how likely benefits are to be achieved. Outsourcing business processes is a tough decision. Total business process outsourcing is unlikely to be done right the first time. Diagram 2 demonstrates the complexity of the core/non-core argument by showing the complex relationships among support services which lead to customer delivery. Is tax form processing core or non-core to an accountancy firm? Is conveyancing core or non-core to many larger legal practices? Clients may need these services from their supplier, while the supplier finds these services low-value and difficult to deliver effectively. Partnership with the outsourcer is crucial.
As firms divide more and more into two grouping - businesses and dilettantes - tougher decisions need to be made about what the firm is truly good at doing. Outsourcing decisions can be amongst the toughest and riskiest decisions, but will be crucial for the success of the highest performers.
Z/Yen Limited is a risk/reward management firm which applies risk analysis and return incentives to strategic, systems, human and organisational problems. Z/Yen is an independent advisor involved in all aspects of outsourcing - advising on strategy, re-organisation, business process re-engineering, specifications, contractual advice, outsourcer selection - and has helped structure four of the eight largest UK outsourcing deals over the past five years and helped establish the UK's fifth largest outsourcer.
Jaffe Associates is the only consulting firm devoted to the professional services market that provides all the elements partnerships need to reach their business goals. . . .
Z/Yen Limited and Jaffe Associates are strategic partners.