Alternatives to Permanent Staffing
By Peter Ryan, Sunday Business Post
Though the majority of new and expanding organisations tend to grow their staffing structures and employee numbers in a conventional manner, this approach should be questioned as there can be very significant advantages associated with the adoption of more innovative or ‘lean’ organisational structures.
Lean organisations do not increase personnel numbers to correspond to increases in demand, activity or output levels, instead, they outsource certain activities or implement alternative staffing structures in order to achieve the same ends on a more efficient and cost effective basis.
While this approach has resulted in cost savings and efficiency improvements for larger organisations, it offers a significant additional benefit for smaller organisations. Critically, it serves to mitigate the risks associated with growth and expansion.
Many SMEs fail because they are said to have expanded too quickly. In essence, this means that they have acquired additional personnel, plant, machinery and/or technology to meet demand which has either failed to materialise or which has been lost to competitors before market share has been consolidated. By outsourcing certain activities, expansion does not have to jeopardise the future of the organisation or constrain its growth prospects.
In addition to reducing expansion risks, outsourcing or the adoption of flexible staffing structures can – if properly managed and implemented – result in improved response times, quality, service and efficiency.
In identifying whether certain activities can be outsourced, managers should ask themselves (i) whether it is essential that all existing or proposed activities be undertaken in-house and (ii) whether the demand for such activities or outputs is sustainable, year round and into the foreseeable future. If the answer to either of these questions is ‘no’, then the case for outsourcing should be considered further.
Core Competencies
Of the risks associated with outsourcing, the most significant relates to the critical requirement to protect your intellectual property and competitive position. Accordingly, as a rule of thumb, your core competency and associated activities should not be outsourced.
Any organisation should be positioned to compete on either: cost, quality, customer service or innovation. The relevant core competency should be jealously guarded and should be the focus of continuous improvement. By outsourcing activities which support the core competency, the organisation not only risks damage to its brand and reputation, but also undermines the future development of its competency and will quickly be overtaken by competitors.
Core & Peripheral Personnel
Once the organisation’s competitive positioning has been identified, the challenge for any MD or CEO is to justify why any non-core activities are undertaken in-house. It should be recognised that in addition to posing risks and contributing to inefficiencies, the pursuit of non-core activities servers as a distraction for the organisation.
Taking this principle one step further suggests that only personnel who support core activities should be retained on the organisation’s payroll. All other ‘peripheral’ activities should be outsourced. To support the achievement of excellence, the organisation’s HR strategies should then focus on the attraction, retention, motivation, reward and development of this ‘core’ group of personnel.
Though economic cycles and competitive pressures may cause demand, activity, growth and profitability levels may fluctuate, core staff, competencies and intellectual property can largely be preserved where non-core activities are outsourced. In addition, the leaner organisation is better positioned to protect itself against the prospect of bankruptcy under such circumstances.
Advantages & Disadvantages
As indicated, a critical advantage for SMEs relates to the ability to expand without committing to headcount increases, new plant, machinery, warehouse/office space, additional technology and/or user licences, etc.
More generally, there can be significant cost, quality and efficiency advantages associated with decisions to:
- ‘Buy rather than build’, i.e. outsource the production of certain components,
- Purchase sales and marketing expertise rather than developing such capabilities in-house,
- Outsource IT and data storage rather than developing costly IT functions,
- Outsource administrative, financial and secretarial/reception functions, etc.
A good outsourcing partner should have developed significant expertise in their field and as such should be in a position to offer excellent service as this is their chosen core competency.
An organisation’s managers can then concentrate their effort on value added tasks, with fewer distractions arising from, e.g. poor employee performance, absenteeism, turnover or unreliability.
Disadvantages do exist and can be particularly problematic if your organisation is either unclear about what it requires, or retains an outsourcing partner which is simply not up to the job.
If either or both parties are unclear about the level of service or quality which is required, there is likely to be dissatisfaction with the results. The implications in terms of management time, efficiency and customer dissatisfaction can be both significant and costly.
If an organisation makes the mistake of outsourcing its core competency, then quality, innovation, cost or customer service will inevitably suffer. In turn, this will result in an erosion of market share.
There is also a danger that the outsourcing agent or organisation will leverage its position to increase rates/price once a reliance on the partnership arrangement has been established. This risk can be reduced by arranging to have an alternative outsourcing agent on ‘stand-by’ or by including a clause in the contact which provides for controlled annual price increases; these may reflect increases in the CPI.
Depending on the organisation’s circumstances, employee morale may suffer where existing activities are outsourced and job security is threatened. This can be avoided by outsourcing such activities from the early stages of the organisation’s inception or reduced with the aid of a clear communications programme, designed to reassure remaining employees about their future job security.
Costing
In determining whether it will actually be cheaper to outsource certain operations, consider both the seen and unseen costs associated with undertaking the relevant activities. For example, in calculating staff costs, consider employment, training, salary and benefit costs while factoring in management time, staff turnover and absenteeism costs.
Likewise, when considering the cost of additional plant, machinery, technology, office or warehouse space, also consider the cost of capital, insurance costs, opportunity costs and the management time associated with the completion of such projects.
When considering the cost of outsourcing, the annual fee should be clear, but also consider the time associated with the effective management of the relationship as well as time spent seeking and reviewing tender documents and conducting the selection process.
Checklist for Effective Outsourcing
- Research your organisation’s requirements, identifying critical deliverables and key performance indicators
- Put the contract out to tender and identify the selection criteria
- Examine credentials and investigate references
- Put a contract agreement in place which incorporates the service level agreement
- Include penalty clauses to protect the business
- Include dispute resolution, termination and handover clauses in the contract
- Include quality assurance and ‘blind testing’ stipulations as appropriate
- Actively manage and monitor both the relationship and level of service received
- Investigate the outsourcing agent’s business model. Avoid e.g. ‘boiler room’ (high pressure) work environments which result in very high levels of staff turnover. Ensure that your customers won’t be likely to suffer due to the outsourcing partner’s selected business model.
Finally, remember that activities may be outsourced not just to large product or service providers, but also to sole agents who have the necessary experience and expertise.