UK companies are shifting towards ’bundled outsourcing’ – using single contractors to deliver multiple services – to transfer risk off their balance sheets and concentrate more on their core businesses. Duncan Hall of Bilfinger Oil and Gas explains more.
With UK manufacturing showing signs of a slowdown and the oil and gas sector facing unprecedented challenges, engineering managers are increasingly being pushed to increase productivity levels while enhancing overall cost and resource efficiencies. These pressures are also resulting in the need for many firms to transfer risk and functions away from their balance sheet. With this in mind, companies are increasingly looking to engage with outsourced service providers both in the UK and in international markets.
As a result of this increased demand for outsourcing contracts, we’re now also seeing a shift towards bundled outsourcing frameworks. Bundled outsourcing refers to the use of a single provider to deliver multiple service functions. For example, an organisation might engage one supplier to provide complete lifecycle support on a new plant or facility, from consultation, to installation, to maintenance and repair of equipment. More specifically in an industrial scenario, an organisation might agree a bundled framework agreement to provide industrial scaffolding and insulation services , while also providing maintenance services such as fire and corrosion protection.
Maintenance and repair of equipment might be included in a bundled outsourcing contract
When implemented effectively, bundled outsourcing can help to cut costs, reduce complex supply chains and associated admin and simplify back office functions.
For those organisations looking to benefit from bundled outsourcing they should consider an outsourcing provider who self-delivers rather than one who sub-contracts to a third party. This provides the opportunity for multi-skilling and multi-tasking which can generate further operational efficiencies and performance benefits.
Some parties argue that there is more risk associated with bundled outsourcing due to the increased dependence on just one or two providers. To help avoid this, many organisations are now favouring larger suppliers within the supply chain who offer a broader range of services and have the financial stability to support 10-20 year bundled agreements and the varying economic and business challenges that arise.
It’s also worth remembering that there are many risks associated with multi-sourcing. In a best practice scenario a multi-provider service delivery environment should not create additional complexities. However, when compared to a bundled contract, the more complex supplier structure means that there may be more scope for inconsistencies, security issues and additional costs due to continued monitoring and renewal of contracts, and possible replacement of providers.
To help mitigate risk, there’s always the option of introducing an incentive based shared risk and reward pricing model. Although these agreements are complex and can vary massively according to individual business needs, they are typically based on projected revenue generation or cost savings and involve a reward for providers if they exceed service performance or a penalty if objectives aren’t met. Although incentives can’t change the provider’s function, they can help to maximize the overall outcome and solidify a sense of trust and partnership.
It goes without saying that the best way to mitigate risk is to engage an outsourcing provider that is well established, with a reputation for transparency and high quality service.
Effective strategies to maximise return
Before a manger chooses which functions to outsource, I’d insist on a full business evaluation to determine the organisation’s strengths and values. By identifying its core competencies and capabilities, businesses can then pin point tangential functions that use resource but contribute little to profitable growth.
In most cases, engineering companies will find it beneficial to outsource non-core activities to third parties, allowing them to redirect strategic internal resource to mission critical projects.
From my experience, I would recommend that an organisation considers outsourcing if it’s looking to reduce operational costs, transfer risk to a third party or acquire new technology or specialist skills that can ease entry into new markets without the need to invest in training or new infrastructure. By outsourcing these functions, companies can look to increase profit margins.
Engineering managers should also keep in mind that effective outsourcing requires clearly established goals and a timeline with contractors from the outset and continuous lines of communication. To support this, some outsourcing providers have developed proprietary technology that can help to provide structure to consultations and helps to determine customer requirements and provide defined objectives and actions.
Another key issue to consider for initial outsourcing is whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply. This may mean that employees who are wholly or mainly assigned to the service being outsourced will automatically transfer to the supplier. For that reason, internal communication is absolutely crucial. It’s important to be fully transparent with stakeholders and employees and communicate objectives, rationale and impact. To ensure success, time needs to be given to people to allow them to adjust to new working environments.
Conditions within the private sector, in particular the industrial sector, are continuing to drive demand for outsourcing contracts. With this in mind, many organisations are now recognising the benefits of divesting non-core activities to specialist providers as part of bundled contracts, in order to focus on growth and avoid complex supply chains.