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Section 8

Outsourcing – is it really

worthwhile?

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Outsourcing – risk and reward

Outsourcing - refers to the process where

a business contracts with a third partyservice provider to provide services thatmight otherwise be performed by in-houseemployees of the business.

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 Outsourcing – risk and reward

Why outsource? 

 A key driver for upstream companies inoutsourcing functions is cost reduction.Tight margins mean upstream companiesare under tremendous pressure to cutcosts.

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 Outsourcing – risk and reward

Why outsource?

Other benefits targeted:

Greater focus on core competencies  

Improved regulatory compliance   Access to the best minds and technology  

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 Outsourcing – risk and reward

Why outsource? 

It reduces headcount and related costs,(wages, benefits and HR, IT,office space.

 Its aim is to maximise efficiencies anddrive down costs by simplifying,standardising and automating financeprocesses through the use of best

practices.

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Seven Advantages of Outsourcing

1. Cost Savings:- The costs associated with

an in-house employee are normally higherthan the cost of an outside service provider- This is main reason for most businesses

opting for outsourcing non-core functions.

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2. Quality services:- Since most 3rd partyservice providers excel at the services theyprovide, businesses are believe they are

guaranteed better quality than an in-houseemployee would give.

 Additionally, any service provider will

always look to give the best of servicessince their reputation is at stake

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3. Access to specialized skills:- Any 3rd partyservice provider will be expert at the servicethat it provides. In fact, to beat competitionit has to keep honing its employees’ skills.

 Also, the service provider would build upspecialized skills in it's niche area ofoperation. Business therefore gets access to

such specialized skills.

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4. Contractual Obligation:- The liability of aservice provider is higher than that of anin-house employee.

This makes working with them a safer bet.

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5. Staffing issues:- By outsourcing a non-corefunction, your business avoids all theheadache associated with recruiting andhiring staff for such non-core function.

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6. Risk Mitigation:- Non core functions maybecome critical & need skilled intervention,which the business may be lacking.

 At such times, if this function is outsourcedand becomes critical in the hands of theservice provider, the talent pool available atthe service provider and its experience ofother clients would allow it to counter anyrisks.

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7. Capacity Management:- Sometimes thenon-core function may need additionalhands to meet deadlines. In such times, it’sdifficult for an in-house employee to tackle

the pressure. However, if the function isoutsourced, it’s the service provider’sheadache. Also the service provider would

have major expertise at its disposal, &easily overcome such issues.

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Seven Outsourcing risks

1 Cost Savings:- These may not berealised!

How good is your knowledge of yourcurrent departmental costs? H ave youthe data to measure these true costs with

the new outsourced costs say a yearlater? Cost measurement is key!!

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2 Quality services – In the North Sea thewave of redundancies at the majors ofexperienced senior staff was a boost to

the contractor service providersThe engineers knew their formercompanies inside out  – including theweaknesses that could be exploited by

their new employers e.g in contractnegotiation!

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3. Company knowledge:- An in-houseemployee will always have a betterunderstanding of the nuances of a function

since he/she would always have a betterknowledge of the company and its businessas compared to a third party.

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4. Access to specialized skills – Thecontractors ranks were swelled with thesenior staff who joined them from the oiloperators.

The major contractors by taking over thefunctions of the operators have therefore

almost become operators in themselves!

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5. Contractual Obligation:- The liability of a

service provider is higher than that of an

in house employee. This makes workingwith them a safer bet for businesses

But is it?

It depends on how well the company hasnegotiated the outsourcing contract withthe service provider!

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 6. Staff turnover at the provider.

High turnover of contractor staff can mean continuity broken in terms of skills inefficiency leading to cost over runs which the

operator may not recoup if the original contractpoorly negotiated

 In outsourcing the jobs often highlymonotonous and this makes people loathe the

 job after a while. This is a big factor contributingto higher turnover.

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7. Linguistic barriers:- When a function thatneeds call handling is outsourced to aforeign location and the first language ofthat nation is different from the nationwhich outsources the function, it may leadto low quality call handling. People can findthe accent and word use difficult to

understand.

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Making outsourcing work 

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Making outsourcing workUpstream companies should consider thefollowing steps

1.Carefully calculate the cost. 

Will it cost us more? (e.g If its financedept.we are thinking to outsource what is

the current cost of managing the presentfunction?).

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 2. Building consensus  

Outsourcing affects every level of acompany from top executives to front-linemanagers.

Outsourcing affects every level of acompany from top executives to front-linemanagers and employees. Initial reactions

to the idea may be negative due to themajor changes it will bring.

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2. Building consensus (contd.)Executives concerned with strategic fit andshareholder value may view outsourcing as

a risky investment. Front-line managersmay fear a loss of control and adiminishingof their roles and responsibilities. Lower-level finance and accounting staff will

likely fear the loss of their jobs.

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2. Building consensus (contd.)  Outsourcing must be accepted not imposed,

to succeed!

 You must demonstrate the benefits to gaincompany-wide acceptance and answersatisfactorily employees’ concerns. 

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 3. Choosing the right partner   to outsource to

- requires extensive due diligence.

Doing the homework prior to any negotiation:

1) Eliminates the risk of costly surprises laterand

2) Helps to ensure a long-term, mutually

successful relationship.

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 3. Choosing the right partner   to outsource to

(contd.)Re service efficiency - speak to at least threeclients with similar needs and get feedback

e.g:How long have you been a client? Why didyou choose this provider over other

vendors? How satisfied have you been withthe provider? What problems have youhad? How have they been resolved?

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Step 4: Negotiating the contract  

Developing a good working relationship is the first goal of the negotiation process. Ideally, 

building a flexible partnership based on mutual trust and respect will be the guiding force in

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 4. Negotiating the contract  

Develop a good working relationship - firstgoal of the negotiation process.

Build a flexible partnership based on mutualtrust between the partners rather than arigid enforcement of contractual terms.

Ensure the contract reflects agreement on

scope of services, performance and pricing.

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building a flexible partnership based on mutual trust and respect will be the guiding force in 

the parties' relationship, rather than a rigid enforcement of contractual terms. Even so, it is  

essential that the contract reflect concurrence on all issues-most importantly, those related 

to scope of services, performance and pricing. 

Step 4: Negotiating the contract  

Developing a good working relationship is the first goal of the negotiation process. Ideally, 

building a flexible partnership based on mutual trust and respect will be the guiding force in

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 4. Negotiating the contract (contd.)  

The outsourcing agreement should containa detailed description of services to beperformed in a “Service Schedule” or

 “Statement of Work.”

Otherwise disputes will arise as to whethera request is within the scope of services to

be provided. Services and deliverablesshould be carefully documented.

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Outsourcing –  risk and rewardbuilding a flexible partnership based on mutual trust and respect will be the guiding force in 

the parties' relationship, rather than a rigid enforcement of contractual terms. Even so, it is  

essential that the contract reflect concurrence on all issues-most importantly, those related 

to scope of services, performance and pricing. 

Step 4: Negotiating the contract  

Developing a good working relationship is the first goal of the negotiation process. Ideally, 

building a flexible partnership based on mutual trust and respect will be the guiding force in 

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 4. Negotiating the contract (contd)  

The outsourcing agreement should containa detailed description of services to beperformed

in a “Service Schedule” or “Statement ofWork.” Without this, disputes will arise asto

whether a particular request is within thescope of services to be provided.

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g p p p g g

the parties' relationship, rather than a rigid enforcement of contractual terms. Even so, it is  

essential that the contract reflect concurrence on all issues-most importantly, those related 

to scope of services, performance and pricing. 

the parties' relationship, rather than a rigid enforcement of contractual terms. Even so, it is  essential that the contract reflect concurrence on all issues-most importantly, those related 

to scope of services, performance and pricing. 

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 4. Negotiating the contract (contd.)  

Performance incentives and penalties - avital component of any outsourcingagreement.

The contract should clearly stipulatepenalties for failing to meet service levelrequirements and provide financial rewardsreed.for exceeding expectations.

Finally – ensure your audit rights areagreed!

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the parties' relationship, rather than a rigid enforcement of contractual terms. Even so, it is  essential that the contract reflect concurrence on all issues-most importantly, those related 

to scope of services, performance and pricing. 

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ConclusionThe pressure to drive down costs is constant

within the upstream oil and gas sector.

Outsourcing a company’s activities isbeneficial – but only with a goodunderstanding of what it takes to succeed

at outsourcing with a well-planned strategyto achieve the planned goals.

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