Either it is something specialised that requires skills / kit you dont have and cannot justify aquiring to meet your needs (ie you would need 50% of a widgets capacity)
or it is something that has scaleable costs such that someone servicing 30 businesses can have savings over the 30 individual costs.
However - in most cases it is done because a firm is incompetent.
|
One aspect of this that I have seen is that during the design, development, and qualification stages of aerospace projects, the engineering effort required is much greater than that required during the production and in-service life of the item.
Engineering companies tend to outsource non-core engineering work and/or employ hoardes of contractors during these phases rather than take on extra full time employees.
Of course, it would be ideal if there were a more consistent, or balanced work flow, but cyclic feast and famine are the rule in many areas of engineering rather than the exception.
Number_Cruncher
|
|
|
|
>>Basically, how can it be cheaper to pay someone else to do the SAME job and make a margin on the business also."
[using IT as an easy example, but the principles apply everywhere]
1) Is the job being done efficiently ?
Typically the people doing the job will have been doing it for a while. They will have fallen into comfortable habits and approaches. It is probably that the procedures haven't been looked at in some considerable time. Revisiting job descriptions, process and procedures, job descriptions and changing management will cause an increase in efficiency. Some of that will be temporary, but some of it will hold. There is no reason that this cannot be done internally, but it never is. Or if it is, it isn't done well. It is virtually always done with outsourcing.
2) Is it a full time job ?
There may be a skill that you have to have. A DBII engineer to look after a barely used DBII database. But it might only take 50% of his time. Therefore he could look after two, but you don't have two. The outsourcer has 38,000 and can use that economy to fire one in two DBAs. Even if someone only has 10% free, that still means that you can reduce by every 10th engineer. ERPs can be a prime source of this difficulty - for example frequently a knowledge spread of 10 modules amounts to 6 consultants where only 3 FTEs are required.
3) Are there economies of scale ?
It might take 30 hours per week to look after a computer. But it doesn't take 60 hours to look after two. It probably takes 40 hours. Therefore every doubling of the amount of computers only causes an 25% increase in resource requirement. This ensures savings can be made.
4) Purchasing power
It is cheaper per unit if you are buying 1000 of something than if you are buying 10. That is true of computers, auditors, recruitment fees, cleaners, etc. etc. etc.
However, those four are not the significant ones. Here's the biggie which is best explained by an example....
5) Total lack of understanding
I once had to explain and show the pitfalls to a company considering an disastrous outsourcing approach and this was the method I used;
Take an IT group. Explain to them that they will timesheet their time to within 15 minutes. Anybody who does not complete a timesheet will be fired. Anybody who lies or exagerates on that timesheet will be fired. However, add an extra time code which represents "I was working but either I can't remember what I was doing, or it doesn't fit into one of the other codes" and explain that absolutely free use of that code is permitted, provided it is accurate.
At the end of [say] 3 months investigate bookings to that code. You will find that it amounts to around 30% of all activity. However, it is a 30% that you don't understand, haven't defined and therefore would not have outsourced. Since you hadn't outsourced it then the outsourcer does not have to perform it. If you insist he performs it, then he will charge you for it.
That area would represent one or more of the following to the outsourcer...
1) His profit margin
2) The free resource time he can use to achieve 1) - 4)
3) Additional revenue
And to you it would represent some combination of..
1) perceived service degradation
2) actual service degradation
3) increased cost
However, if you understood your group, if you controlled your group, if you removed all unneccesary or inefficient activity, if you correctly charged internally for performed activity, ran procurement aggressively, and truly understood people management and performance, - in fact, if you just did your job properly - then you could achieve all the above savings as the outsourcer could. Perhaps you would be a little limited around the economies of scale, but they are not usually independently significant and are more than outweighed by the fact that you are not now paying an outrageous 40% gross margin and 12.5% risk on top of the actual cost of the service you receive.
The reality is that many companies do not have the skills required to do the job properly. Many more do not wish to have those skills. For them outsourcing is an easy option. It also changes the way that the cost is handled on your balance sheet, which may be to their advantage.
Frequently it is actually nothing to do with any of the above, and actually represents one or two steps in a company strategy which you may nto be aware of. An actual case I was involved in was where we outsourced a group since we knew that the company we would merge with next year had already done so, and therefore synergy savings would be arrived at from combining two outsourcing deals. Outsourcing a group after merger might well be a saving, but it would not be a synergy saving and therefore could not be reported against merger cost. But here are many, many reasons for outsourcing which have nothing to do wiht actual cost.
But I do have to say that I do rather well out of everybody else's inability to understand or control outsourcing contracts, so please don't spread the word too far.
|
Thanks Mark for that very interesting explanation....currently arguing about timesheets and charging projects directly for time spent rather than blindly allocation (and charging) resources to the projects, so all ammunition and examples gratefully received!
StarGazer
|
>>so all ammunition and examples gratefully received!
More than happy to help, but could you give me a clearer idea of the discussion ?
|
Thanks, the explanation was enough for now. Basically my department is undergoing massive restructuring, also grant awards now are supposed to cover the full ecomonmic cost rather than a simple 46% overhead rate, this means that everything is becoming much more accountable....outsourcing conference/tea/coffee facilities,cleaning....but not IT yet...too specialised I suspect.
For example if I have a grant to fund a department technician
for one year, then when the grant is announced the salary is automatically deducted from the grant every month, the technician fills in a timesheet so that I can report on project progress against a project plan, but the loop isnt closed so the grant gets charged for hours worked....I dont think they want to have the problem of a 30% unfunded effort.
cheers
Ian
|
|
|
|
Mark - related question..have you ever come across a simple time planning package, a bit like a time-sheet looking into the future where you can click client name, type of task, estimated time to complete task and enter date by which it should be completed? Suitable for a fee based business with retainer fees from a clients. A cheap one.........Ta
|
Sorry Nsar, not off hand.
However, I would think you should be looking for a cheap project management tool rather than time management. Look for something which allows program planning and then enter each of your clients as a project.
You could use MS Project but its really rubbish in dealing with resource/time/effort across multiple projects.
I'll have a mooch about later in case anything comes to hand.
|
|
|
|
|
|
|
