The Essentials: Outsourcing - How to farm it out

Patrick McCurry

Promises of increased efficiency and savings are tempting, but outsourcing needs careful handling.

The pressure on charities to become more efficient shows no signs of easing as funders continue to seek value for money and Government initiatives such as ChangeUp push for a more professional voluntary sector.

One response from charities is to outsource major functions such as finance and payroll, IT, human resources and public relations. The argument is that, by choosing this route, charities can make savings and focus on their core activities.

As well as potentially reducing costs, it has been claimed that the arrangement can allow charities to buy in higher-quality services than they could afford in-house.

Outsourcing usually refers to contracting out a specific function to a commercial company or not-for-profit body, but it can also include 'shared services' agreements, in which groups of charities come together to pool their expertise.

One reason outsourcing is seen as attractive is that it can offer an alternative to merger, with its attendant complexities and possible problems.

Mark Freeman, chief executive of outsourcing provider Charity Business, observes: "A lot of charities are looking at outsourcing and shared services, rather than merger."

But alongside potential benefits sit potential risks, particularly if the wrong supplier is chosen, a poor contract is drawn up or the internal transition is badly handled by the charity.

The following points need to be addressed when deciding whether or not outsourcing is the way forward and, if it is, how to go about it.

1Different kinds of arrangements Outsourcing can range from the relatively small-scale use of services from a local Council for Voluntary Service to the full-blown contracting out of services to an external provider.

Shared services are another option. In this arrangement, two or more charities agree to share the costs of a particular service. For example, NSPCC and the Children's Society set up a company to provide them both with IT services.

The British Association of Settlements and Social Action Centres has also promoted shared services among its members. "When you get a group of charities together, they might find that one has a part-time finance officer who, with the help of the others, could become full time and provide services to the members of the group," says Mark Parker, network development manager at Bassac.

Parker adds that, for a shared services arrangement, it's best to look for similar-sized charities that you are not in direct competition with.

He says: "You could start with a benchmarking exercise in which you get to know each other and find out what each group member is particularly good at. From there, you can look at which services could be shared."

This process can also offer a useful insight into what expertise and services a charity might be able to bring to market if it is to make best use of its potential and resources. In a standard outsourcing arrangement, the charity will contract out a service to a single external supplier.

A contract, known as a service level agreement, will usually be drawn up, specifying what level of service the charity will receive, how and when the service will be delivered and how it will be monitored.

2Pros and cons One of the main arguments in favour of outsourcing is that it can save money because the charity does not have to bear the costs of employing someone full time. It can also provide access to a higher level of expertise than the charity would receive from an in-house employee.

Richard Saville-Smith of PR agency Saville-Ferguson says: "Rather than having a relatively inexperienced media person employed in-house, perhaps working on only four campaigns a year, it can cost the same to buy in high-level expertise for part of the year."

Another argument in favour of outsourcing is that it can free time for the charity to concentrate on its core activity. Paul Neale, chief executive of the outsourcing arm at accountants Kingston Smith, gives the example of an annual fundraising dinner. "The charity can organise it in-house and find that it takes up a lot of time and distracts staff from their main jobs," he says. "Or it can outsource and have one member of staff liaising with the external provider."

Another benefit is that using an outside supplier means the charity can get a more unbiased opinion on its operations than it would get from an in-house employee. Saville-Smith notes, for example, that many charity media campaigns are closely linked to the charity's policy department.

"An in-house media officer might be afraid to highlight the inadequacies of the campaign, whereas an outside agency will bring a more objective view," he says.

The fact that outsourcing can enable a charity to reduce its fixed cost base may also be an advantage when it comes to external funders. On the other hand, the arguments against outsourcing include the fact that the relationship with the external supplier clearly needs to be managed, and doing that takes time, energy and staff resources. Monitoring the service provided and dealing with the supplier, though essential, can offset some of the advantages of outsourcing in the first place. Many charities might also be worried about losing control over a major function and placing it in the hands of an external provider.

There is also the danger that outsourcing can be perceived negatively by staff, who might see it as a form of downsizing. This can be damaging to staff morale unless it is handled in a sensitive way.

A number of the problems that arise with outsourcing, such as lack of clarity about hoped-for benefits, often stem from the charity's failure to think through what it is doing and drawing up a clear contract.

3Finding a supplier It is important to find a supplier you feel comfortable with, but who can also deliver the service efficiently. Mark Parker of Bassac favours outsourcing to other charities or social enterprises, rather than to commercial organisations.

"The charity can view outsourcing as part of its mission, and outsourcing to a not-for-profit agency can add more value to the transaction," he says.

Others are less concerned about whether the supplier is another charity. For example, East Anglia's Children's Hospices (Each) has outsourced its IT to commercial company Cambridge IT.

"We were looking primarily for a supplier that could give us a good deal and understand what we were about and how we worked," says Roger Wood, facilities manager at the charity. He says it is important to get word-of-mouth recommendations from other charities that have outsourced.

It is also vital that the supplier has a proven track record in the service being provided, has no conflict of interest with other clients and in some cases is willing to provide continuing training of staff. "We see our role not just as one of technical supplier but also of supporting the charity's staff and training them in using the IT service we provide," says Mike McIntosh, a director at Cambridge IT, which provides services to several charities.

Paul Neale of Kingston Smith advises getting references from suppliers and information about their experience, record and knowledge of the voluntary sector. Not all suppliers provide a good service, he says. "I know of at least two companies offering management accounting services who have run into trouble or are not respected by the market," he adds.

4Making it work Being clear about your objectives is crucial to ensuring the outsourcing is successful. Roger Wood of Each says: "Identify what your aims are and what your budget is - and stick to it, because some suppliers will try to persuade you to take all kinds of extras you probably don't need."

It is also important to draw up a good service level agreement with the supplier. This should offer the flexibility to make changes to the contract if the need arises, include terms dealing with charges and compensation and mechanisms for dealing with day-to-day operational problems.

One of the biggest factors in making it work is maintaining good communication with the supplier. "Don't simply see it as offloading the function to the supplier and then forgetting about it," says Paul Neale. "It's important to liaise regularly with the supplier and keep up with what's going on."

It is also important for charities not to be over-ambitious in their outsourcing aims, at least initially, because there will probably be teething problems in any new relationship. It is worth starting in a small way and building up.

Charities should be particularly aware of the danger of thinking they can use this method to sidestep difficult issues. "A lot of organisations think they can avoid a particular problem by outsourcing, but you'll find that the outsourcing company will quickly tell the charity it needs to sort out the problem and not try to pass it on," says Mark Freeman.

5Impact on the charity A badly handled outsourcing arrangement can have a seriously negative effect on the charity. It is important not to rush the process and to be able to manage the transition smoothly. The outsourcing process will take several months from start to finish and may have significant implications for staff.

In many cases, outsourcing occurs because a key member of staff leaves or retires and the organisation decides to outsource that function. But where staff will be remaining, the charity will need to consider carefully whether it can redeploy them, whether they will be transferred to the outsourcing supplier or whether they will need to be made redundant.

According to Charity Business's Freeman, some charities are better than others at managing these challenges. "The charity needs to think through how it will deal with what can be a very significant change, and certainly not assume that the outsourcing company will handle it," he says.

THE BEST CANDIDATES

Activities most suitable for outsourcing

- Payroll and accountancy

- IT

- Internal audit

- Banking and investment

- Donor database management

- Parliamentary campaigning and public relations

- Publications - Catering

One area less suitable for outsourcing is front-line delivery of services, because it is hard to find external organisations that can do this in the same way the charity can.

COUNTING THE COST

Although cost savings are often cited as a benefit of outsourcing, this is not always the case. Charities need to bear in mind that, as long as the outsourcing company is VAT-registered, VAT will be charged for the services.

In calculating whether outsourcing is worth it, a charity will need to compare the quality of service it can expect from an outsourcing contract with what it could achieve in-house.

Many charities, for example, may find it hard to pay the high wages of an experienced IT or finance specialist, or to offer them career progression.

The choice, therefore, may be between employing a less experienced specialist in-house or outsourcing and gaining access to a more experienced specialist.

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