It goes in and out of fashion as a corporate strategy but, for many smaller businesses, there’s no choice but to outsource many aspects of their running. Thinking of joining them? James Graham looks at your options.

This may involve a chunk of a manufacturing process but often relates directly to the administrative side of the
business, such as the handling of payroll or computer-related functions like networks and software.

In fact, the list is very long, covering most areas of business, from answering the phones to marketing. The National
Outsourcing Association (NOA), a trade body that represents both the companies that outsource and their partners, says anything “non-core” can be subcontracted.

The NOA’s approach is that non-core activities can be done better by a specialist and it’s usually cheaper to outsource. But the Federation of Small Business has warned smaller firms to evaluate the potential benefits carefully and ensure they get the right service for their size.

However, not all decisions are driven by cost. Bharat Vagadia, a board member of the NOA, says the decision to outsource something like IT is often down to a lack of available skilled labour.

But cost is clearly a big factor, particularly in today’s climate. Increased overheads are squeezing margins and managers are constantly seeking greater efficiency.

These decisions are also being shaped by new legislation. As employment law becomes more complex or there are changes to the rules on maternity and sick pay, it can be more attractive to hand over these responsibilities to specialists, especially when such a move could save money as well as time.

North West accountancy firm Hurst has a Stockport-based outsourcing division that specialises in payroll services. It manages the payroll affairs of 150 businesses, some with just two or three staff, others with as many as 500. It charges about £600 a year to handle a business with ten staff. The price changes in line with staff numbers.

“It takes the hassle away from the clients – it’s one less worry”, says Hurst’s finance director Narendra Mistry, pointing out his fees are cheaper than paying for stationery and payroll software, and easier than keeping up with the latest changes in the law.

But how much can outsourcing actually save? Vagadia says companies that outsource in the UK can make savings of between 10-15 per cent. If they look abroad to a country like India this figure could rise significantly: “Companies can halve the cost but, after taking into account the time and effort required to set up the agreements, it’s actually about 30 per cent.”

Simon Kite, a business advisory partner at the Manchester accountants Saffery Champness, is more circumspect. He recognises there are clear cost benefits but there are also risks, and it’s often difficult to place a value on future problems.

He thinks the biggest danger is the impact a shoddy service can have on a company’s reputation.

“If you outsource it doesn’t mean you should give up responsibility for quality control,” he warns.

Problems can also arise when a new partner is ill-prepared for changes within a business and struggles to handle the extra work. Another concern is the financial stability of a business partner.

With business failures rising – up four per cent in the first quarter on last year – could your new outsourcing partner go under, taking a big chunk of your business with it?

Fearing this scenario, some have brought the work back inhouse by acquiring the business in question. Kite says he has seen cases of “vertical integration” increase during the last six months as executives feel less confident about the economy.

To reduce the risk of these problems the NOA gives four tips: do your homework when selecting a company; nail the contract; make sure everyone involved in the business knows what’s going on; and work with the new partner – it’s important that you retain some knowledge of the outsourced function.

Good contracts are obviously at the heart of secure outsourcing relationships. They should cover required service levels, intellectual property and ensure that data is protected and regulatory compliance is managed carefully.

Firms should avoid making assumptions about a service – contracts should be clear and unambiguous.

The term “extended enterprise” describes the idea that a company is not just made up of its employees and executives but also its business partners, suppliers and customers. Contracts with outsourcing partners should reflect this concept and include the right to carry out an internal audit.

One of Simon Kite’s clients outsourced credit control but feared its money was not being passed on correctly so it invoked its right to look at the books. Without this it would have been left in the dark.

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