Outsourcing company

There is a difference between procuring a service and outsourcing which needs to be understood. A good example of a commonly procured service is computer maintenance. It is essentially commoditiser and involves none of your own intellectual property or resources, and rarely any especial knowledge of your business. At the other extreme, if you engage a manufacturing partner to manufacture a key product this is true outsourcing and is likely to involve substantial knowledge, and resource, transfer.

There are, of course, many similarities. Is recruitment a procured service or outsourcing? It can vary but it is more likely to be a procured service. If you decided to change supplier you could approach any of the major recruitment consultancies and expect them to be up and running quickly. You would be just another client to the new recruitment agency. They would need to take time to understand your requirements and culture, but that is part of their own core services: you do not need to teach them. In short, there is very little "lock in".

The labels one uses (procured or outsourced service) are largely irrelevant. The key is the degree of non-contractual lock-in. Before signing an exclusive contract most business pause and seriously consider whether that is a commitment they wish to make. The danger with outsourcing is that it can in practical terms create arrangements which are effectively exclusive and carry a high degree of dependence and lock in.

In the UK, a major multinational was one of the first to outsource the administration of the administration of their pension scheme. They retained little internal knowledge of the processes or detailed calculations. Some years later there were problems with the standard of service and a decision was taken to bring the service back in house. Recruitment was a major task, but the really massive project was knowledge re-capture and systems development.

That is the key question which any organization outsourcing a service needs to consider before signing a contract. If the answer is "only with great difficulty" then your supplier is holding a hand of aces whenever you need to negotiate a new contract or a revision in contractual terms. If you lack the resources or knowledge to take the contract back in house, and no other supplier has them "off the shelf", then there is substantial lock-in. If a supplier knows that moving the contract away from them would cost you £2m, they can easily afford to inflate their charges to you by £1m knowing that you have little alternative but to pay.