Skip to content

22 May, 2025

  • Saved Articles
  • My Account
  • Subscribe
  • Log In
  • Log Out

Board Agenda

  • Governance
  • Strategy
  • Risk
  • Ethics
  • News
  • Insight
    • Categories

      • View all
      • Governance
      • Strategy
      • Risk
      • Ethics
      • Board Expertise
      • finance
      • Technology
    • UK Corporate Governance Code

      Board meetings ‘are not up to scratch’

      Nearly three-quarters of board members believe the board’s performance in meetings needs improvement, an expert...

    • gender pay gap

      Act now to close the gender pay gap

      This month, it is 55 years since the Equal Pay Act, yet pay inequality persists....

    • monitor sustainability

      How to equip the auditco to monitor sustainability

      The board’s expanding remit to oversee non-financial reporting calls for significant reforms, with stakeholder trust...

  • Comment
      • View all
    • gender pay gap

      Act now to close the gender pay gap

      This month, it is 55 years since the Equal Pay Act, yet pay inequality persists....

    • leadership on AI How to get ahead on AI leadership

      The question isn’t how AI will change business—it’s whether leaders can harness it to drive...

    • canada tariffs Corporate governance to the fore in Canada

      As Canada responds to the tariff conditions set by the US, companies need to take...

  • Interviews
      • View All Interviews
      • Podcasts
      • Webinars
    • UK Corporate Governance Code Board meetings ‘are not up to scratch’

      Nearly three-quarters of board members believe the board’s performance in meetings needs improvement, an expert...

    • financial sanctions Tariffs chaos drives boardroom focus on resilience

      Business leaders will prioritise the resilience of their organisations in the face of economic upheaval...

    • ai boards Corporate world has a ‘huge appetite’ for artificial intelligence

      AI could change boardrooms to the extent that directors’ duties would change too, a panel...

  • Board Careers
  • Resource Centre
      • White Paper Downloads
      • Book Reviews
      • Board Advisory & Corporate Services
    • Route to the top 2025

      Route to the Top 2025

      Heidrick & Struggles’ report draws on an analysis of the profiles of the 1,232 CEOs...

    • Director Reference Guide: Fostering the board-CEO relationship

      This Board Agenda Director Reference Guide on fostering the board-CEO relationship provides practical advice to...

    • Forvis Mazars AI 2025

      Performance Pulse: Are UK businesses prepared for AI?

      Forvis Mazars measured the AI preparedness of more than 300 UK businesses: 97% say they're...

  • Events
  • Search by topic
    • Governance
    • Strategy
    • Risk
    • Ethics
    • Regulation
    • ESG
    • Investor Relations
    • Careers
    • Board Expertise
    • finance
    • Technology

Long-term perspectives

by Punit Bhatia and Mark Craddock

Outsourcing has become a go-to service to win efficiencies, but there are five key areas to consider before handing over critical functions to a third party.

shutterstock_282496097Over the past 20 years, outsourcing has become an increasingly pervasive and effective tool for businesses. However, handing over critical functions to a third party can also carry risks.

Whilst the management team may be focused on the immediate upside and rapid access to savings, it is important that the board takes an objective, longer-term perspective on the relationship.

After all, it could last anywhere between five and 15 years and have a significant bearing on the future of the business. Therefore, there are five key questions that a non-executive director should ask when reviewing an outsourcing initiative.

Objectives

Outsourcing is being used for a variety of reasons—from cost reduction, access to talent, improving service quality and access to new technologies, to completely transforming a business. A lack of clarity on the objectives is one of the main reasons for the failure of many outsourcing initiatives.

Once the objectives are clearly understood by both sides, it is important to check that these have been reflected in every aspect of the initiative.

Once the objectives are clearly understood by both sides, it is important to check that these have been reflected in every aspect of the initiative.

The supplier market is extremely varied in capabilities, so those offering the lowest cost may not necessarily be the best at leading a transformation (and vice versa).

Therefore, if transformation is a major objective and the supplier does not have the capability to drive it, has the management team prepared an alternative approach to ensure delivery?

Equally, the deal structure has a significant, but often underestimated, impact on the relationship. An inappropriate pricing model can also become a major blocker to innovation. For example, on headcount-based deals, suppliers can try to protect revenue and margin by retaining staff longer than necessary.

Future-proof

Businesses are changing ever-more rapidly. Mergers, acquisitions, expansions into new markets and changes in business models are occurring with increasing frequency. Outsourcing contracts need to provide flexibility for all of these.

The outsourcing industry itself is also at an inflection point. Similar to the expansion of low-cost locations such as India and Poland that started in the early 2000s, it is now being driven by the emergence of robotic automation and predictive analytics.

These innovations may dramatically alter the services offered, as well as the way that they are delivered.

An obvious example is the number of people employed. Given these changes, one of the key questions to consider is: does the contract incentivise the parties to incorporate these technologies and others that may emerge during the life of the contract, into the relationship?

Change management 

Outsourcing impacts a very wide spectrum of stakeholders, including employees, customers, suppliers and, in some instances, whole communities.

While management may be mainly focused on the impact on operations, it is critical that the organisation considers the changes required across all these stakeholders.

While management may be mainly focused on the impact on operations, it is critical that the organisation considers the changes required across all these stakeholders.

Whilst outsourcing suppliers can bring benefits through discipline, the retained organisation may feel straitjacketed by over-rigid processes and cultural misunderstandings may arise when working with remote, out-of-country teams.

For local management used to having direct control over all of their own processes, shifting their leadership style so they are instead supervising the outputs the outsourcer delivers, can be frustrating.

Properly addressing and managing the change to this new way of working is critical, but often delegated to the outsourcing supplier. Whilst the supplier does have a part to play, the management team needs to take the lead in assessing the impact on stakeholders and making the appropriate interventions.

Realising benefits

We have seen businesses challenged on whether their outsourcing arrangements have delivered any financial savings at all, and even one where the original business case had projected savings in excess of 50%!

In such a circumstance, while a management team may believe that the benefits had been realised, it may have no data to prove it. This situation is all-too-common if there is insufficient emphasis on driving as well as tracking the benefits of outsourcing.

Having a clearly communicated, comprehensive business case is an essential starting point. This should ideally be in place before the supplier is selected, and then managed and updated through transition and beyond.

The old adage that “what gets measured gets managed” is never truer than in an outsourcing engagement.

Often, outsourcing business cases may identify financial improvements beyond simple cost reductions (for example reduction in debtor days or improvement in cash flow). In such cases, it is vital that the project has accurately understood the current situation, before transitioning to a supplier.

These additional improvements then need to be tracked regularly, and supplier incentives linked to achieving real improvements for the business. The old adage that “what gets measured gets managed” is never truer than in an outsourcing engagement.

Exit plans

Thinking about an exit may seem counter-intuitive on the verge of starting a relationship, but experience shows that it is actually the best time to do it. There are two points to consider here.

Firstly, is there anything that may prevent the business from exiting the relationship, or to make it difficult? For example, is the buyer going to be reliant on proprietary technology that it will not have access to on an ongoing basis?

Secondly, in the event of an exit, what assistance is the supplier obliged to provide? Experienced users require their service providers to maintain an exit plan throughout the life of the contract. Good plans also include all the costs involved and how they will be treated. For example, significant benefits can be gained at the time of exit by negotiating full access rights to staff during the contracting phase.

In conclusion, outsourcing agreements can deliver significant value to a business, attested to by the ever-growing number of deals. However, like any long-term relationship, they are best entered into when both sides fully understand each other and what they will get out of it.

Punit Bhatia is head of Deloitte’s BPO advisory service, where Mark Craddock is a director.

  • Facebook
  • Twitter
  • Google+
  • LinkedIn
  • Mail

Related Posts

  • Pandemic 'opened door' to the use of new boardroom technology
    August 27, 2021
    Man working remotely

    A recent webinar hosted by Board Agenda and Diligent explored the ways boards are using technology to enhance effectiveness.

  • Beware of cryptocurrencies
    October 9, 2023
    cryptocurrencies

    Cryptocurrencies promised a freer marketplace but bring unforeseen exposure to economic, technological and security concerns.

  • Alan Keir joins Nationwide board as non-executive director
    March 14, 2022
    Nationwide Building Society

    Keir is a former group managing director and CEO EMEA at HSBC, and is expected to chair Nationwide's board risk committee from July.

  • Susan McErlain joins Brickability as an independent non-executive director
    May 20, 2022
    Builders on construction site

    McErlain founded Square Mile Communications and holds non-executive director roles at Trackwise Designs and Dewhurst Group.

For thoughtful journalism, expert insights on corporate governance and an extensive library of reports, guides and tools to help boards and directors navigate the complexities of their roles, subscribe to Board Agenda

cost management, finance, non-executive directors, outsourcing, strategy, Technology

Search


Follow Us

Register Free

Stay in the know! Register to access our latest governance news; plus receive updates about our events and podcasts – Sign up here

 

Most Popular

Featured Resources

wef global risks 2025

The Global Risks Report 2025

The 20th edition of the Global Risks Report reveals an increasingly fractured global...
Supply chain management cover

Strategic Oversight in Supply Chain Management: A Guide for Corporate Boards 2025

Supply chains have become complex, interdependent and opaque and—according to research...
OB-Cyber-Security

Cyber Security: What Boards Need to Know

Maintaining firewalls, protecting servers and filtering malicious emails rarely make...

The IA’S Principles Of Remuneration 2024 2025

This guidance from the Investment Association is aimed at assisting remuneration...
Diligent 2024 leadership tech cover

Leadership, decision-making & the role of technology: Business survey 2024

This research report by Board Agenda and Diligent sheds light on how board directors...

Director Reference Guide: Navigating Conflict in the Boardroom

The 'Director Reference Guide' on navigating conflict in the boardroom provides practical...
Nasdaq 2024 governance report cover

Nasdaq 2024 Global Governance Pulse

This Nasdaq survey gathered data from more than 870 board members, executives, and...

Becoming a non-executive director (4th edition)

Board composition is the subject of much debate, while the role of the non-executive...
art & science brainloop new cover

The Art & Science of Creating an Effective Board

Boards are coming under more scrutiny and pressure than ever before from regulators,...
SAA First time NED guide

First Time Guide for Non-Executive Directors

The role of the non-executive director has never been more vital: to advise, support,...

Register Free

Stay in the know! Register to access our latest governance news; plus receive updates about our events and podcasts. Register


  • Editors & Contributors
  • Editorial Advisory Board
  • Board Advisory & Corporate Services
  • Media Marketing Solutions
  • Contact Us
  • About Us
  • Board Director Network
  • Terms & Conditions
  • Privacy Policy
  • Cookies
|

Copyright © 2025 Questor Media Group Ltd.

  • Terms & Conditions
  • Privacy Policy
  • Sitemap