Lessons in outsourcing

Outsourcing of engineering and facilities management (EFM) is less well known than that of other areas, such as information technology and business processes. However, its relative success suggests it has lessons that could have ramifications for the more familiar forms of outsourcing.

by European Management Journal, Vol 23 No 5, October 2005
Last Updated: 31 Oct 2014

Research published in the European Management Journal is based on a survey by the University of Technology, Sydney, with Transfield Services, one of the largest EFM outsourcing providers in Australasia and South-east Asia, of 26 businesses in Australia and New Zealand.

It identifies four key success factors as a guiding framework for how managers can make the most of their current capabilities and see the benefits of EFM outsourcing. These are: choice of contract style and management; innovation management; relationship management; and workforce management.

There are two main types of contract in EFM outsourcing - schedule of rates and alliance. The former tends to be used as a starting-point for outsourcing contracts by organisations with less experience of the practice and less understanding of cost and service levels. Most companies believed that alliance-type contracts, which are 'open-book', with profit based on performance and penalties imposed for non-performance, were required if there was to be innovation and best-in-class practice. Additionally, 40% of those with the most successful outsourcing relationships saw contract management as an essential competence.

With innovation management, successful relationships depend on key performance indicators (KPI) that accurately reflect the firm's top priorities. They cover categories such as cost reduction, speed and quality of service, safety, meeting statutory requirements and customer service. The most successful outsourcing relationships are those that have constructive tension - the contractual mechanism by which the relationship is kept invigorated to maintain the performance of the service provider - built into the contract.

The key to a successful outsourcing relationship is the ability to alter KPIs as the true extent and scope of the work involved emerges. To enable effective relationship management, many firms operate with an alliance board and alliance team structure.

Finally, when choosing an outsourcing provider, managers need to evaluate the vendor's ability to provide excellence in workforce management. In nearly all cases the initial once-off cost saving is based on the outsourcing provider's ability to manage the workforce more efficiently than the organisation outsourcing its activities.

Future studies could look closer at cost savings and the reasons for them.

Source: Lessons from the untold success story: outsourcing engineering and facilities management
Paper by Steve Burdon, University of Technology, Sydney and Ajay Bhalla, Cass Business School, City University, London
Published in European Management Journal, Vol 23 No 5, October 2005

Review by Roger Trapp

European Management Journal, Vol 23 No 5, October 2005 recommends

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