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Insourcing vs. Outsourcing in Corporate Facilities Management

What is Outsourcing?

Outsourcing is the strategic use of outside resources to perform activities traditionally handled by internalstaff and resources. Outsourcing is a management strategy by which an organization outsources major,non-core functions to specialized, efficient service providers. Companies have always hired specialcontractors for particular types of work, or to level-off peaks and valleys in their workload. They havealways partnered-formed long-term relationships with firms whose capabilities complement their own;companies have always contracted for shared access to resources that were beyond their individualreach-whether it be buildings, technology or people. But the difference with simply subcontracting andoutsourcing is that outsourcing involves the wholesale restructuring of the corporation around corecompetencies and outside relationships.

The following definitions have been furnished by the International Facility Management Association(IFMA):

Insourcing: A common approach in which facility management executives look to outside facilitymanagement service firms as process experts. Outside service providers are hired as consultants tomeasure operations against the commercial benchmark and make recommendations for improvement.The internal staff then implements the recommendations.

Outsourcing: Refers to a full transfer of the facility management functions to an outside firm. Thecorporation then manages the outsourcing contract rather than the entire facility management function.

Out-Tasking: A word coined to further define the area to be tasked to an outsource provider.

A new study, "Outlook on Outsourcing," shows outsourcing is a part of many companies strategic plans,indicated by more than 70 percent of the responses to a survey conducted by the International FacilityManagement Association (IFMA). According to the survey, the 10 services most often out-tasked are, inorder:

Architectural design, Trash and waste removal, Housekeeping, Facility systems, Landscape maintenance, Property appraisals, Major moves, Hazardous materials removal, Major redesigns Furniture moves.

Out-taskingthe hiring of individual specialized vendorsappears to be used more frequently thanoutsourcing, which is the hiring of full-service, single-source vendors. The survey revealed all facilitymanagers outsource services requiring specialty skills that are unavailable in-house or not cost-efficientto handle in-house. Furthermore, they outsource services so they can focus on their core competencies.Other reasons to outsource include acquiring access to specialty tools and equipment, adding flexibilityfor work fluctuations, enhancing quality and improving customer satisfaction. Respondents observed thatoutsourcing is good for some services, but not all. As a means of lowering overhead (via downsizing) andsaving money, outsourcing will continue to be accepted, and is expected to increase in the next fiveyears.

The initiative to outsource generally originates in the facility management department. Most respondentssaid outsourcing has helped conserve their budgets and has been a key to improving performancequality. Thirty-three percent of facility managers who responded said they reserve the right to interview


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and approve candidates for managerial, professional, non-managerial and technical positions. Inoutsourcing, new staff is often hired in lieu of retaining existing staff. However, 25 percent of facilitymanagers say their companies use a combination of existing and new staff to handle outsourcedservices.

Information Technology This is the fastest growing area for outsourcing today. Executives are currently outsourcing:

Maintenance/repair

Training

Applications development

Consulting and reengineering

Mainframe data centers

Executives are considering outsourcing: Client/server

Networks

Desktop systems

End-user support

Full I/T outsourcing

Operations

Administration Executives are currently outsourcing:

Printing and reprographics Mailroom

Consulting and training

Executives are considering outsourcing: Records management

Administrative information systems

Supply/inventory

Printing and reprographics

Customer Service Executives are currently outsourcing:

Field service

Field service dispatch

Telephone customer support

Executives are considering outsourcing: Customer service information systems


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Field service dispatch

Telephone customer support

Finance Executives are currently outsourcing:

Payroll processing

Purchasing

Transaction processing

General accounting

Executives are considering outsourcing: Payroll processing

TaxesHuman Resources Executives are currently outsourcing:

Relocation

Workers' compensation

Recruiting/staffing

Executives are considering outsourcing: Consulting and training

Human resource information systems

Real Estate & Physical Plants Executives are currently outsourcing:

Food and cafeteria services Facilities maintenance

Security

Executives are considering outsourcing: Facilities management

Facilities maintenance

Facilities information systems

Sales and Marketing

Executives are currently outsourcing: Direct mail

Advertising

Telemarketing

Executives are considering outsourcing: Reservation and sales operations

Field sales


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Cost Still Primary Outsourcing Factor

A survey conducted at the Outsourcing World Summit indicates that cost is still the main factor inoutsourcing decisions. PricewaterhouseCoopers sponsored the survey, which was accomplished bypolling summit attendees, who used hand-held keypads. Some of the questions and results were asfollows:

How much did spending on outsourcing change at your firm over the past year (1998)? 5% or less increase 32% 25% or more increase 19% Decrease 3%

How satisfied are you with your outsourcing initiatives? Satisfied 49% Neither satisfied nor dissatisfied 21% Dissatisfied 17% Very satisfied 11%

What is the single most important factor driving satisfaction? Realized cost benefits 42% Customer/end user satisfaction 24% Process improvement 20% Close working relationship 14%

The main reason my company outsources is to Reduce costs 35% Focus on core competencies 30%

What is the correlation between business process outsourcing and shareholder value in the mind ofexecutives?

Moderate 49%

Strong 44%What is the financial analysis technique for making an outsourcing decision?

Straight dollar decision 38% Cash flow 28% Efficiency measures (e.g., return on asset) 20%

On a percent of contract basis, how much does your company spend managing an outsourcingrelationship?

Up to 5% 38% Up to 2% 37% Up to 10% 17%

Based on a report from The Outsourcing Report

Top 10 Reasons Companies Outsource

1. Reduce and control operating costs2. Improve company focus3. Gain access to world-class capabilities4. Free internal resources for other purposes5. Resources are not available internally6. Accelerate reengineering benefits7. Function difficult to manage/out of control8. Make capital funds available


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9. Share risks10. Cash infusion

Source: Survey of Current and Potential Outsourcing End-UsersThe Outsourcing Institute Membership, 1998

Top 10 Factors in Vendor Selection

1. Commitment to quality2. Price3. References/reputation4. Flexible contract terms5. Scope of resources6. Additional value-added capability7. Cultural match8. Existing relationship9. Location10. Other

Top 10 Factors for Successful Outsourcing

1. Understanding company goals and objectives2. A strategic vision and plan3. Selecting the right vendor4. Ongoing management of the relationships5. A properly structured contract6. Open communication with affected individual/groups7. Senior executive support and involvement8. Careful attention to personnel issues9. Near term financial justification10. Use of outside expertise

Source: Survey of Current and Potential Outsourcing End-Users The Outsourcing Institute Membership,1998

Top 10 Drivers Behind Today's Outsourcing Decisions (in alphabetical order) Accelerate reengineering benefits Access to world class capabilities Cash infusion Free resources for other purposes Function difficult to manage or out of control Improve company focus Make capital funds available Reduce operating costs Reduce risk Resources not available internally

Characteristics of a well-structured alliance

Strategic synergy. Can the two (or more) organizations together achieve a high level ofbenefits?

Growth opportunity. Can the relationship--and its benefits--be expanded? Less risk. Does the relationship reduce the level of risk for your organization? Excellent chemistry. Is there a good "fit" between your organization and the provider(s)

organization? Clarity of purpose. Are the goals and benefits explicit and clear? Win-win. Does each party benefit fairly from the relationship?


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Develop and document a preliminary Outsourcing Mission, Strategy and Goals (OMSAG)statement.

An Outsourcing Mission, Strategy and Goals (OMSAG) statement is a document that sums up theorganization's outsourcing intentions and the strategic rationale for outsourcing. The OMSAG statementshould describe the:

Processes to be outsourced and the broad objectives for outsourcing. Relationship of outsourcing to the overall corporate strategy. Links between the outsourced process and your company's core competencies. Strategic forces that are driving your organization into a relationship. Expected positioning of the relationship on the Strategic Sourcing Spectrum. Scope of coverage (international, across business lines and so forth). Critical risks involved. Expected duration of the relationship.

The value proposition

In drawing up a value proposition: Consider how specific target customers (internal or external) are affected - how the relationship's

product or service makes the customer more: Successful? Profitable? Competitive? Efficient? Effective? Productive? Satisfied?

Seek validation from target customers. Describe explicit, quantified benefits. Fix the date when measurable success is expected. Assess the feasibility of reaching goals. Consider the advantage of an alliance versus other approaches. Strive for simplicity and elegance. For example, a value proposition might state that "by FY2003,

the sourcing alliance will reduce the cost of our travel by 35%, increase productivity of ourpersonnel on travel assignments by 15%, and establish a performance-metrics system that allowsus to measure both of these goals."

The Performance Work Statement

The PWS defines what is being requested, the performance standards and measures, and timeframesrequired. It provides the basis for the technical performance sections of the RFPs. It states therequirements in terms of "what" is to be the required output rather than "how" the work is to be performed.

When developing the PWS, take special care to ensure that it does not limit service options, arbitrarilyincrease risk, reduce competition, unnecessarily violate industry service or service grouping norms, or

omit statutory or regulatory requirements without full justification. The PWS should be performance-oriented, specifying what outputs or measures are desired and limiting directions as to how the results areachieved.

INDUSTRY:

In July, 1996, J.P. Morgan signed a contract with a prime contractor and 3 subcontractors to outsourceapproximately 30 percent of J. P. Morgans IT functions. The value was estimated at $2.1 billion over 7years. The scope of the outsource activities included J. P Morgans IT infrastructure (mainframe datacenters, midrange computing, client/server, desktops, voice and data networks), plus about 20 percent oftheir software application base. Approximately 900 employees were transferred from J.P. Morgan.


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Benefits achieved:

Costs in general have fallen and fixed costs have been reduced,

Company managers are beginning to focus on strategy rather than on day-to-day operations, and

The company has gained access to IT skills it could never have developed internally.

Keys to success: Teamwork and communication between all parties.

Source - Integration Management, "Ten Deals That Shook the Globe," Mark Mehler,(http://www.integrationmanagement.com/sub_sections/ten_deals.html, January 29, 1998)

FEDERAL:

In August, 1977, the National Air and Space Administration (NASA) outsourced IT operations at its JetPropulsion Laboratories (JPL) to a Prime contractor. The contract was estimated at over $200 Million overa 5 year time period. The contractor will provide personnel, computer hardware and software as well asequipment and support services for over 7,000 PCs. The fixed-price, performance-based contract covershelp-desk services, systems administration, software acquisitions and upgrades, computer hardwaremaintenance, and hardware replenishment.

Key Objective: Focus on core competencies.

Source NASA Press Release c97-k, August 26, 1997

STATE & LOCAL:

In 1996, the City of Indianapolis awarded a contract to a prime contractor to provide IT services to theCity and the surrounding Marion County. The scope of the effort included all IT services not involved withPublic Safety. The contract was estimated at $81 Million over 7 years.

Key Objectives:

Reduced costs

Improved quality

Access to better talent

Enhanced public access to records.

INTERNATIONAL:

In May 1994, Britains Inland Revenue (comparable to the Internal Revenue Service in the United States)signed an outsourcing contract with a prime contractor to provide computer services previously providedby Inland Revenues in-house Information Technology Office. The contract was a 10 year "strategic

partnership" estimated at over $1.6 billion. Approximately 1,900 employees from Inland Revenue weretransferred to the contractor.

Key Objectives:

Substantial improvements in cost-effectiveness

Significantly improved speed of response in the development and enhancement of systems

Rapid access to the latest information technology skills and technologies

Optimized career opportunities for Information Technology Office staff.


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Source National Audit Office, Report by the Comptroller and Auditor General, "Inland Revenue: MarketTesting the Information Technology Office", March 8, 1995.

Effectively Managing The Outsourcing Relationship

Outsourcing is growing at a rapid rate in the United States, Europe and Asia because organizations viewoutsourcing as a way to achieve strategic goals, reduce costs, improve customer satisfaction and provideother efficiency and effectiveness improvements. Like any organizational decision, outsourcing requireseffective management from the outset of the outsourcing evaluation through the life of the contractualrelationship.

Define the Objectives you Want to Achieve; Outsource for the Right Reasons; Answer Key Questions; Use a Methodical Approach;

Planning Phase; Analysis Phase; Design Phase; Implementation Phase;

Operations Phase; Termination Phase Consider All Stakeholders; Get the Right People Involved; Understand the Vendors; Realize that Outsourcing is not All or Nothing; Choose the Right Relationship; Negotiate a Sound Contract;

Terms of the agreement; Minimum services levels; Ownership and confidentiality of data; Warranty; Exhibits; Incentives; Disclaimers; Bankruptcy; Force Majeure (Acts of God); Performance measures; Anticipating change.

Use Performance Incentives and Penalties; Establish a Relationship Management Structure and Processes as Part of the Contract; Use Objective Performance Criteria; Emphasize the Development of the People Responsible for Relationship Management; Manage the People Issues.

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