Outsourcing – don’t get caught out
In an effort to remain competitive and reduce costs, many companies are choosing to outsource some or all of their production, manufacturing, service or development processes. In this article, we look at the steps you can take to protect your business.
While outsourcing can bring enormous cost benefits, it can also house hidden pitfalls. To ensure it works for them, businesses must put the right measures in place from the start.
So why consider outsourcing? Cost savings are frequently quoted as the driving force as it can be cost-effective for businesses to outsource to other companies specialising in key technologies or skills. In the short term, outsourcing can dramatically reduce overhead costs, and long term it can reduce capital investment, meaning products can be brought to market both cheaper and faster.
Customisation and capacity are also important benefits. Some larger companies are not equipped to quickly change their production schedules and so outsourcing allows them to adapt to market conditions much faster. It also enables smaller companies to take on larger contracts, safe in the knowledge that if they do not have the capacity to deliver the volume required, they can outsource the task to a company which can.
While some businesses may choose to outsource all of their processes, others choose to outsource certain elements only, such as packaging, transportation, research or development. This flexibility allows for a greater focus on key competencies.
However, particularly in areas involving stringent standards (often imposed by regulatory authorities or ISO standards), failure by the original party to the contract to comply with restrictions (whether this is ultimately the fault of the subcontractor or not) will remain the responsibility of the original party. The costs of correcting the situation, along with damages to reputation and loss of future contracts are potentially devastating and often dissuade businesses from outsourcing. Poor product quality, late deliveries, disharmonious relationships and a dilution of brand identity have also been cited as further pitfalls.
So how can you protect your business? Where you are subcontracting your obligations under a contract, you must ensure that your subcontract closely mirrors the terms of the main contract. This is sometimes referred to as “back-to-back” subcontracting. Doing this should mean the subcontractor assumes all of the responsibilities and obligations of your business, and you are not left with any responsibility which isn’t met by the subcontractor.
Carrying out due diligence on your subcontractor will help you to determine if this is the correct company to use. Additional checks and balances can be negotiated to include provisions such as the right to carry out annual audits or spot-checks at the subcontractor’s premises, obligations for them to provide their disaster recovery policy and insurance and up to date copies of relevant records.
A properly drafted outsourcing agreement must be in place – if in doubt, consult your lawyer because a carefully negotiated, well written outsourcing agreement is imperative. While particular considerations will vary depending on the circumstances, some essential provisions to include are: the scope of the services, the regulations to which you are subject, the length of the agreement and the price.
Lastly, to be effective and longstanding, contracts must be closely managed. A company must apply the terms of the outsourcing agreement to ensure an appropriate level of oversight and control is maintained over the subcontractor.
If you put the right measures in place from the start, you are much more likely to achieve a successful outcome to your outsourcing.