Outsourcing: the shape of things to come for the non-profit sector?

“The picture that emerges...is that at a minimum, outsourcing has the possibility of giving your organisation a competitive advantage. Outsourcing at its best enables you to excel at your core competencies while your outsourcing partners excel on your behalf in their core competencies”. (Association Management magazine).

“Charities are reducing their in-house staff contingents in order to save money and are buying in services only when they need them – otherwise known as outsourcing

Outsourcing – the way forward?” ( www.fundraising.co.uk. 2010)

“…..but outsourcing can pose some risks……”

Don’t fear outsourcing: it can help reduce costs (Third Sector Magazine, 2017)

“For growing charities it can be a great way to lower costs and re-invest funds…”

Outsourcing for charities: a blessing or a curse ( Rafflingers.co.uk, June 2017)

1. Introduction

Outsourcing is an enduring management concept. The impetus to implement it can be traced back to Charles Handy’s book “The Empty Raincoat” in which he described the “Shamrock Organisation” — the corporate structure of the future where slimmed down corporate managements kept in house the key functions of business management and farmed out to experts the specialist services they needed.

But is outsourcing appropriate for charities? More fundamentally, is fundraising a suitable candidate for outsourcing? How do you assess the benefits and pitfalls in a systematic way so that you can reach a sensible management decision on how you resource the function that brings in the money? Or is it simply too important to put into the hands of “outsiders”?

This report examines all of these issues and more. In so doing, it draws on a major research study into the experience of outsourcing reported by non-profit organisations. 

2. Background to the growth in outsourcing

Charities have contracted with suppliers to handle a wide variety of activities. Usually these have been specialised functions outside of day to day management. An example is payroll preparation and record keeping. Another might be database management. The charity could have done either of these itself, but chose not to do so.

However, making a planned and strategic decision to outsource a management function, or one closely tied to the core needs of management is not widely practised by charities in the UK. Until very recent times the prevailing attitude has been one of “do it yourself”, regardless of whether the task was done properly or cost-effectively.

By contrast, outsourcing is now accepted in the commercial sector as a valuable practise and strategic decisions on whether to outsource or have an in-house resource are taken on a huge range of functions. Nike, the sportswear retailer, for example, is renowned for its strategy of outsourcing its entire manufacturing requirement.

In the modern corporate world, the outsourcing decision is taken purely on a cost-benefit basis and not on the basis that in-house is the preferred option, with outsourcing as a fall-back option if the in-house route fails or the post cannot be filled.

However, attitudes in the voluntary sector are changing under pressure of the new business environment. In particular, the current very difficult environment for recruiting competent fundraisers in the charity sector is the stimulus for a re-think; and a new, more objective assessment of the benefits of outsourcing specialist functions.

As a leading publication in the sector, commented recently, “ Outsourcing is now recognised as a key contributor in several specialist areas as charities’ drive for greater efficiency and effectiveness. Its role is likely to grow”.

3. Outsourcing – the most common reasons why organisations adopt it

In a surveys repeated over the recent years, the 3 leading reasons why commercial companies outsource are:

• To reduce and control operating costs
• To improve company focus
• To gain access to world class capabilities.

Underlying these reasons is an acceptance that it is simply not possible to recruit and retain an in-house team that has the full range of specialisms needed for success. Thus outsourcing becomes a solution to ensure that specialist functions are handled with maximum competence, leaving the management team to focus on core competencies.

In a charity context, this would translate into the retention of a strong management team who between them have the core competencies needed for delivery of the charity’s service, outsourcing specialist functions such as fundraising, database management and administrative tasks.

By the same token, care must be taken not to go too far and outsource core competencies.

Once satisfied that the activity is suitable for outsourcing (see Evaluation Form below), the greatest potential benefits are agreed to be:

• Greater skills applied to the task
• Increased output in relation to cost
• Lower risk and legal regulation/protection than employee
• Greater flexibility of arrangement
• Faster reaction to change in knowledge/technology 

4. Outsourcing - the pitfalls

Every new development in management techniques has its successes and failures and outsourcing is no exception. But a number of generic problems relevant to outsourcing have been identified.

The overriding problem that has surfaced is that the outsourcing supplier’s sales pitch can give the impression of a much more comprehensive service than is actually the case.

Following closely on this are problems in physically delivering the service offered. The outsource supplier may have been better at identifying the problem than delivering the solution.

Next, purchasers of outsourcing services face the risk that the supplier they are negotiating with themselves plan to outsource some or all of the service implementation.

Lastly, it cans sometimes seem that too much control over an important aspect of a facility is ceded to the outsourcer. Regaining control is the largest reason why non-profits take an outsourced service back in-house.

All of these problems, however, are ones of clear contract specification of the service outsourced and regular management and monitoring of the outsource provider. The critical element to solving these problems is a totally clear schedule, with time deadlines, for delivery of service and at least monthly monitoring of delivery against this. ~~

5. Experience of organisations that have adopted outsourcing

Despite the risks of failure and the relative novelty of outsourcing as a management option, the levels of satisfaction reported so far have been re-assuringly high on a consistent basis. This must be the result of good management of the outsourcer by the purchaser. Non-profits have consistently reported the following levels of satisfaction with their outsourcer (the graph is in the same order as graph 1):

6. The steps to successful outsourcing

Experience has shown that there are clear steps to successful outsourcing. These follow a logical progression of planning and verification from setting up an initial planning group through to managing the relationship on a long term basis.

Step 1 Planning

The first step is to set up a planning group of the key stakeholders in the success of the activity to be outsourced. At the same time, it is vital to inform employees that the option of outsourcing is being explored. Failure to do this will lead employees to fear the worst and lose morale or move jobs in anticipation, when it may well be that outsourcing will liberate time so that their skills can be directed elsewhere.

This group should follow steps 2 to 5 and be the forum for making the final recommendation to the body of final decision.

Step 2 Exploring strategic implications

In this step outsourcing is examined as a strategic tool in light of the organisation’s long term vision and aims. Will outsourcing help to meet key objectives underlying the organisation’s plan. For example, if an increase in funding is called for in order to meet important service targets, will outsourcing contribute to this increase? Can the increase be met from current fundraising resources or competence?

Step 3 Analysing cost and required performance

Outsourcing will involve not only the direct cost levied by the outsourcer. There will inevitably be indirect costs as well. An example is the time and cost involved in monitoring and management of the outsourcer.

In addition, an audit needs to be conducted of the current performance of the facility which is being considered for outsourcing. This is vital in order to establish a baseline of performance which the outsource must achieve or improve.

Step 4 Selecting providers 

It is important to be highly analytical when selecting providers and to conduct the selection process in the same methodical way you would when recruiting a member of staff. This probably means creating an evaluation form on which the key attributes, skills and resources you require are listed and each provider judged against this list.

Cost should not be the guiding or deciding factor. It is tempting to hope that providers will all be roughly equal in competence, but this is seldom the case.

7. Will it work for you? How to evaluate outsourcing

It is important to evaluate the potential benefits of outsourcing in a dispassionate and critical manner. The evaluation tool below enables you to score the potential benefit against 14 different criteria. Obviously, the more beneficial the answer, the higher the score. For example, it is highly undesirable to outsource a core activity, so the activity should be scored low if core. A score of less than 70% overall places outsourcing in doubt.

8. The key points to include in an outsourcing contract.

Finally, if the project has passed safely through the evaluation process and a suitable provider has been identified, it is appropriate to move to contract. Here are the key points to consider:

Specify expected outcomes. 

It is vital to describe in detail the specific services to be provided and a timetable for completion or provision, so that performance can be measured.

Pay in stages as the service is delivered. 

You should resist making payments in advance. The payment profile should be no less favourable than when employing someone to do the work in house.

Have some control over personnel changes. 

Make sure the contract gives you the opportunity to veto any change of key personnel delivering service to you.

Own copyright and protect confidential information. 

Your contract needs to assign to you all intellectual property rights arising during performance of the contract and prevent the outsourcer from disclosing confidential information — such a databases of supporters or members, plans for the future etc.

All changes to be agreed in writing. 

Any changes to service delivery or price need to be agreed in writing. Also, the provider should indemnify you for any claims or damages resulting from the vendors acts or omissions.

Beware the provider’s standard contract. 

If the provider offers a “standard contract”, examine it very carefully and have your own lawyers do the same. It is convenient to have a “ready to go” contract that avoids costly legal drafting fees, but a contract is a contract, so it is worth being sure it reflects a “win, win” for both sides. 

Copyright Small Charity Fundraising (www.smallcharityfundraising.co.uk) July 2020.

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