Outsourcing Criteria

On occasion it may be necessary for the University to take a ‘make or buy’ decision, judging whether it is better (in value for money terms) for the University to deliver (or build) something internally, or to purchase it from suppliers (outsourcing). The University Purchasing Department can advise departments who are undertaking analysis to support such a decision.

It is possible that outsourcing may reduce the costs of providing a service, because a commercially-motivated supplier will have a financial incentive to minimise the costs of delivery. Also a contractual relationship may be the best way to drive optimum performance, as a contract can rigorously specify the outputs to be provided and include clear performance incentives. Outsourcing particular services may also free up time for the University to focus more on supporting its core objectives – research and teaching.

There is no definitive list of the kinds of services which should be outsourced, and each service should be reviewed on a case by case basis. The analysis may include consideration of the following advantages and disadvantages.

Potential Advantages of Outsourcing

  • Greater Focus on Core Objectives – outsourcing particular services may allow more time for staff to focus on supporting the University’s core objectives in research and teaching.
  • Better Quality Service – improvements may arise from the use of formal specifications to define the service to be delivered. The process of establishing a contract specification and objective performance measures may make it easier to measure performance. The supplier will also have a focus on service quality because of the threat of contract sanctions or ultimately losing the contract.
  • Innovation – outsourcing may encourage innovative solutions through access to a wider knowledge base, new ideas and new technology. Suppliers may be able to offer specialist expertise and sophisticated technical solutions which the University may not maintain. Suppliers may also be able to make changes to practices, policies and technology more rapidly.
  • Better Work Practices – when suppliers competitively tender to provide a service they have to critically assess what work they do, how they do it, whether it should be done at all, and if so, who should do it. This forces evaluation of the effectiveness of the service delivery.
  • Cost Savings – suppliers may be able to provide services at a lower cost through the use of skills or technology which the University does not have, economies of scale achieved by delivering services to multiple customers and, more efficient use of capital assets across customers.
  • Cost Certainty - suppliers generally enter legally binding contracts with specified prices.
  • Accountability – the University has to clearly specify the objectives of the service and the responsibilities of the supplier which can make it easier to identify who is responsible for different aspects of the service.

Potential Disadvantages of Outsourcing

  • Loss of Control – outsourcing can result in a loss of control over suppliers where in-house expertise to effectively define specifications and contract manage the outsource arrangement is lost. Loss of in-house expertise also creates a risk of becoming dependent on the supplier.
  • Diminishing Service Quality – over time the quality of service can diminish if not tightly managed, with the supplier providing the minimum service specified in the contract. This may be a particular issue where it is difficult to specify meaningful performance indicators (resulting in a tendency to focus on process, rather than outcome measures).
  • Higher Overall Costs – the total transaction costs of outsourcing need to be well understood, to ensure that any benefits outweigh the costs of transitioning the service (initially, and then between suppliers on renewal), contract management and other internal management costs.
  • Supplier Lock In – incumbent suppliers have a considerable advantage at the time of contract renewal which can lead to a risk of long-term lock in with a supplier, where the University cannot easily change supplier or bring function back in house. This might lead to less competitive behaviour from the supplier.
  • Loss of Privacy / Confidentiality Issues – where sensitive data may be held by third party organisations confidentiality risks require careful management.
  • Accountability – the line of service can become extended between the ultimate customer of the service and the internal department responsible for the service. For services where it is difficult to allocate precise responsibilities, this may create additional complexity.

Summary

The case for outsourcing generally becomes stronger when the following criteria are met:

Strategic Service

The less strategic the service (i.e. where a service is not a ‘core function’ of the University and/or where it is not important to retain in-depth in-house expertise in all aspects of the service)

Service Clarity

The more precisely the service can be specified in advance

Methodology

The less there is a need to specify how a service is delivered, as opposed to the outcomes the services needs to deliver

Performance Management

The more accurately performance can be objectively measured and quality assured

Innovation

The more likely the supplier is to invest in new working practices, technology and capital assets (and where such investment may not be a priority for the University)

Contract Management

The greater the competence of the University to manage the procurement process and the resulting contract (and retain  these skills in the longer term)

Costs and Benefits

The more the likely benefits (savings, enhanced service) exceed the likely costs (transition, ongoing management)

Efficiency

Where the service could potentially be delivered more efficiently by an external supplier, due to access to latest working practices, staff with specialist knowledge and skills, up to date technology, economies of scale

Competitive Market

The more certain that a number of suppliers are able to genuinely compete (i.e. a developed marketplace)

Ease of Switching

The more certain that the University will not be locked into a monopoly provider, and the more readily an unsatisfactory supplier can be penalised or replaced without significant interruption to service (this includes consideration of the costs of transitioning between suppliers)

Worked Example

The following is a very simple worked example, intended to show how the ‘make or buy’ decision must be supported by cost analysis.

Example: 100 units of goods (no maintenance required)

 

Unit Cost to Buy / £

Unit Cost to Make / £

Purchase Price (incl. Delivery)

8

-

Purchasing and Other Administration Costs

2

1

Raw Material Costs

-

3

Labour Costs

-

5

Overheads (incl. Fixed and Variable Costs)

-

2

Unit Total

10

11

Total – 100 Units

1000

1100

Contact details

For further information, please contact:
The Purchasing Department
Telephone: 01865 (6) 16022
Email: purchasing@admin.ox.ac.uk