Why do large corporations outsource some of their functions that they have in-house departments for it?

7 comments

1. Sometimes it’s about contacts, particularly in marketing and PR. I work in a university who has a dedicated PR team, but we also contract a big PR agency for the stuff that we want to get into bigger and wider media (nationally). They have the “little black book” of who to contact.

2. I can give you an example from the world of IT:

   It’s all about economies of scale. Say for example you have a company with 1000 seats, a couple of dozen servers a website and all the network infrastructure that goes with it. You need people who know how to work on desktop equipment, servers, networking equipment, software, deployment, hardware, hardware deployment, email, firewalls, operating systems, cabling, disaster recovery, project management, testing, development etc. A lot of those tasks are skill-specific (The guy who manages the UNIX servers isn’t going to be fixing printers) and those skills cost money to hire, to retain and to train.

   An outsourcer can provide all those skills at a fixed cost to the company and can increase or decrease staffing as required from it’s own pool of staff and (potentially) has access to a larger skill-set that can be deployed quickly, without having to hire someone on and they can generally do it cheaper because they’re not buying a few laptops or whatever here and there, they’re buying thousands at a time and getting a better deal. Their staff are likely working on more than one account, so they’re paying one salary but getting paid for them multiple times.

3. I’ll head this by saying that this is a serious take on how it works in theory, and why the concept appeals to company executives. Obviously sometimes things don’t always work like this and there are plenty of failings in this system too. Sometimes outsourcing justifies itself and sometimes it doesn’t but company bosses don’t get the luxury of making decisions knowing for sure what will happen in future, so these are the sorts of theoretical cost savings they see which make these sorts of decisions attractive. Also, all the figures I’ve used below are just vague hypotheticals, I don’t know if they’re accurate but they give some idea of how it *can* work.

   In short – it’s a combination of specialism and economies of scale.

   That PR/Marketing department at your historic high street bank probably spent something like 45% of its time working on the next marketing strategy including all the market research needed, 10% of its time responding to press enquiries about whatever scandal the CEO had last become embroiled in, 25% of time reviewing company policies and communications, 20% of time attending inconsequential meetings (of which about a chunk are just the director passing on what the CEO just told them) etc.

   If you hire out a marketing firm to handle that ad campaign then that’s 45% of your time saved. The company you just contracted out doesn’t have to keep splitting its time between all sorts of PR and Communications duties, but what it does have are a lot more marketing people.

   They have a whole market research team full of people who know the job inside out, and so when they take on a contract they can get right on it without half the team needing to read some guides online about what the best way to get the answers they want actually is. What’s more, as they are likely working for two dozen clients at once they can also carry out the market research for half a dozen companies in one go with the same public participants, making it much more efficient in both time and money.

   They then pass their findings on to a whole other department dedicated to corporate strategies. These people have each been involved in several dozen projects over the past 5 years so they already have a decent idea what makes for a good TV advert, what attracts the eye in a newspaper, what is likely to cause offence etc. They therefore come up with an ad campaign which is twice as effective as the in-house team and get it done in 3/4 of the time. The extra engagement they generate creates the revenue which justifies them charging a high fee, but that fee is still slightly lower than what the in-house team would cost you in salaries (salaries make up 70% of an average business’ entire expenditure, after all). Since an advertising campaign does not take a full year to craft, they can then get reassigned to another campaign without their marketing firm needing to find random PR/Comms jobs to keep them busy.

   The first company can now look at trimming its department. They lay off most of the staff, leaving two people to handle Communications strategy and one PR manager. That PR manager can dedicate 100% of their time to being a press liaison, and suddenly they know everything going on in the company a little bit better and quicker and have dealt with half of the country’s major newspapers enough times to know which newspapers will react in what way to certain types of press releases. Similarly, the two Comms people can focus 100% on building a consistent strategy which they can keep on top of instead of dropping it constantly to refocus on other duties, and since there’s only two of them they can both meet with the CEO with hour-long Director debriefs afterwards. They become more experienced in their line of work and start doing Comms work more effectively.

4. There are *some* operational advantages to agencies, including access to better networks. PR firms will have a contact book better than their customers, and digital media agencies might have tradings desks that have access to premium inventory that is hard to get as an individual entity attempting to buy (although this is less common now).

   The main reason is budget flexibility. If you assign budget to a staff position, you have much more risk should you need to cut costs. If you have a staff member costing you £60k all in (so £5k a month) and you decide for whatever reason that you need to get rid of the position, you will have to make the position redundant to remove the costs from your budget. This might require the employee continuing to earn for a consultation period, and will cost you in wages and redundancy payout. You also open yourself to legal risk should the employee challenge the validity of the redundancy. By comparison, it is generally much easier to reduce costs and service levels from agencies and doesn’t carry the same degree of legal risk.

   This is particularly pronounced in the advertising and media space because technology moves quickly and can result in ways of working changing dramatically when new levels of automation are released, which makes roles redundant pretty quickly, on an industry wide basis.

   Tl;dr it is much easier and cheaper to cut costs with third party suppliers than it is with employees.

5. There’s a few reasons but one that’s not often focused on is that shareholders don’t necessarily want the best value for money but for you to focus on what you specialise in I.e. they don’t want HSBC paying cleaners to clean their buildings, for that they’ll buy a facilities company.

6. I outsource one off projects from time to time.

   If the team isn’t big enough to get a project done in the timescale I want, and at the end of the project a larger team would no longer be needed, I’m not going to hire more just to let them go.

   So I use code shops.

7. Some do some dont. Its not a mystery.

   You could employ a small but knowledgeable team to oversee the work done externally. Maybe you overpay per job but you benefit from agility, and the opportunity to hire global experts for a job.

   You could keep it in house and benefit from cost savings per job, and stay closer to the work. On the other hand the best work you’ll get is the best that Suzanne do. If you want better work, you have to fire Suzanne and find a better expert, but they’re already making a fortune with their consultancy.