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When should you outsource? Questions that ought to have be asked before G4S got a sniff of the Olympic contract

I was recently asked by a family member ‘what’s your ideological objection to outsourcing?’.  This was before the G4S scandal took off when I had been worrying about police ‘privatisation’.

I don’t really like the word ideological, it can sound like you are abandoned rational debate or that you don’t accept that there are nuances.

So for the record I’m not against outsourcing – when by outsourcing we mean having a 3rd party carry out tasks for an organisation.  I work for a business that outsources quite a few functions – for example our Reading offices are rented from another company.  The council also has a number of private and voluntary sector partners working with it.

Generally however organisations like firms exist because it is more efficient to co-ordinate activities than to have every single employee working as a sole trader selling their expertise to each other (if you are interested Coase’s seminal and relatively short economic paper on transaction theory is here).  So perhaps the real question is when should you outsource?

I have this debate with my students regularly as it’s a common exam question for accountancy students.
I would certainly ask at least the following questions:

– Is the function you are outsourcing non critical? (in the jargon not a core or supporting competence)
– Are you going to be able to effectively measure performance along all the dimensions that matter to you?
– Is it cheaper to outsource?
– Are the workforce going to be treated in accordance with your ethics and expectations?
– Can you make sure that the outsourcing company will “suffer” sufficiently if they let you down?
– Is this a reversible decision?
– Will outsourcing affect your reputation?
– Do you lack the capacity to ramp up the activity levels that you need to?
– Does it affect your long term ability to perform these functions?

In the public sector there are additional concerns such as the over all impact on the public, democratic accountability, a higher level of risk avoidance (if a business fails it’s bad for it’s employees and suppliers if a public service fails it’s bad for society as a whole).  Of course some of the answers to the questions above may be more significant too: public confidence or reputation is more crucial for a service like the police than for security guards outside a nightclub.

There are some functions and activities in both the public and private sector that have been outsourced successfully but have the police forces that are already starting on outsourcing what I would have thought most people consider to be critical, core functions asked them?  I’m not sure they have sufficiently and now we see that G4S and others are taking advantage of this.

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