The Moscow Times
In business practice we are quite used to outsource cleaning, security, delivery, catering, and make decision about outsourcing without long disputes. All mentioned here functions are non-core and non-critical for the business. That is why they are first candidates for outsourcing. European and American economies moved further in outsourcing habits and actively outsource functions, which are non-core, but critical. Such functions include accounting, HR administration, supply chain management, claims administration, etc. Penetration of the outsourcing of non-core, but critical functions in Europe in various industries exceeds 60-70%. In Russia this parameter is below 1%, but we inevitably will move in the direction of business specialization via outsourcing.
I will not speak here about reasons why non-core, but critical functions have to be outsourced, as this subject worth separate publications. I will just assume that there are very fundamental benefits of doing things in a most efficient way, which outsourcing can help to realize. In more detail I would like to outline here comparison framework of the internal function and outsourcing.
The way how the business function is organized internally and with participation of the external provider is very different and these differences do not allow us to directly compare internal function and outsourcing as apple to apple. In order to make such comparison we should identify common grounds and assess indirect effects of the outsourcing decision.
In order adequately compare both options the following stages have to be accomplished:
First of all we have to grade relative importance of the four main criteria: Influence of the cost of the function to the bottom line financial result, Influence of the quality of the function to the client’s business success, materiality of the assets dedicated to the internal function and integral improvement of the manageability of the company in case of successful outsourcing (It can be measured as percentage of time, which management will safe for the core business after successful transfer to outsourcing model). Such grading will allow us to define weight of each criterion in total evaluation.
Secondly we have to assess in what degree current state of the function meets business and legal requirements. The comparison should be made in relation to service provider proposal, which presumably should be structured to meet 100% of legal and business requirements of the client.
Finally we have to calculate direct and indirect expenses in relation to both scenarios.
The following direct costs have to be considered: salary and bonuses, payroll taxes, personnel insurance, various benefits, cost of replacement for the vacation and sickness time, cost of context retention in case of the employee replacement, training, office rent, depreciation of the equipment and furniture.
In addition to the direct costs we should take into account share of the indirect expenses: share of the office maintenance costs, telecommunication, legal database, consultations, IT and accounting system support, software license, share of the managers’ time. Indirect costs can be assessed by taking a share of the overall administrative and management costs in proportion of the head count.
Combination of the total cost of the function with the coefficient obtained at the second stage will give us monetary value of the internal function. We now can compare this value with alternative outsourcing propositions taking into consideration weighted criteria defined at the first stage.
The approach outlined here allows comparison of the apples and oranges - very different business solution by bringing to the common frame of reference.
