Outsourcing in Edinburgh and Lothians

European Journal of Purchasing & Supply Management 8 (2002) 83–95

Outsourcing in Edinburgh and the Lothians

W. Bailey, R. Masson, R. Raeside*

School of Mathematics & Statistics, Napier University, Sightill Court, Edinburgh EH11 4BN, Scotland, UK

Received 10 March 1999; received in revised form 16 February 2001; accepted 27 April 2001

Abstract

The findings of a survey into the outsourcing activities of large organisations in the Edinburgh and Lothian region of Scotland are

reported in this paper. The aim was to carry out a study of outsourcing activity against a theoretical framework of practice and

problems derived from the literature. It was found that 70% of the organisations outsourced at least one activity, with cleaning,

maintenance, catering, security, and manufacturing/operations being the most common areas, the principal motivation being to

improve the quality and cost of the activity outsourced. The criteria used for selecting outsourcing contractors were mainly

reputation, cost, previous contacts and technical capability. The main benefits of outsourcing were reduced costs, improved quality

of service, increased management focus on core activities, and access to new capabilities. The main problems with outsourcing were

loss of control, poor supplier management and problems with confidentiality and opportunist exploitation by supplier. This research

was supported by Lothian and Edinburgh Enterprise Ltd. r 2002 Elsevier Science Ltd. All rights reserved.

Keywords: Outsourcing; Survey; Strategy

1. Introduction

Outsourcing can be defined as when an organisationuses an external company to carry out activitiespreviously carried out within the organisation. We takethe definition of outsourcing to be similar to that usedby Willcocks et al. (1995), when researching into IToutsourcing. The definition is that outsourcing anactivity ‘‘means handing over to a third party manage-ment, for required result, some or all of’’ that particularactivity and related services. It is not a new phenomen-on: services such as security have been outsourced sincethe 1960s and earlier. However, the volume and rangeof activities has significantly increased in the last10–15 years, to include such services as informationtechnology, personnel, finance and accounting, and evenactivities traditionally central to the firm such asmanufacturing and research and development (see, forexample, Bedford, 1996 and Bailey et al., 1998).According to Hendry (1995) outsourcing is ‘one of thestrongest and most sustained trends within business overthe last ten years’, and it has been estimated that d130

billion a year is spent on outsourcing in the UK alone(Bedford, 1996). This way of doing business has beenvariously described as the ‘network organisation’ (Milesand Snow, 1986), the ‘virtual company’ (Erens et al.,1996) or the ‘shamrock organisation’ (Handy, 1989).

The trend to outsourcing has been influenced bymanagement techniques such as business process reen-gineering (Hammer and Champy, 1993), which demandsthat radical solutions be found to business problems toachieve step improvements; the use of downsizing toachieve cost savings and increase flexibility; the intro-duction of benchmarking, which encourages the com-panies to look outward to achieve world classperformance; and the theory of core competence(Prahalad and Hamel, 1990), which argues that compa-nies succeed because they are only able to perform alimited range of ‘core’ activities to a world classstandard. Organisations have increasingly come toquestion what is ‘core’ and what is ‘non-core’ orperipheral. A number of categorisations have beendeveloped; for example Nichols (1998) defines coreactivities as ‘activities which are of critical importance tothe enterprise’, complementary activities as those whichare ‘facilitating activities which enable or enhancevalue’, and residual activities as ‘auxiliary services whichare non-critical’. According to this classification,

*Corresponding author. Tel.: +44-131-444-2266; fax: +44-131-455-

3485.

E-mail address: [email protected] (R. Raeside).

0969-7012/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.

PII: S 0 9 6 9 - 7 0 1 2 ( 0 1 ) 0 0 0 0 8 - 9

residual and many complementary activities are candi-dates for outsourcing. It would appear that the trend isto classify an increasing number of activities ascomplementary and residual.

The growth in outsourcing includes the public as wellas private sector (see for example Milne (1997)), largelyas a result of the free-market economics introduced byMargaret Thatcher UK and Ronald Regan in the US inthe 1980s, and the introduction of policies such asCompulsory Competitive Tendering (which has nowbeen replaced by the ‘Best Value’ regime).

Hence, outsourcing has grown to be a pervasivefeature of organisational behaviour.

1.1. The benefits and problems of outsourcing

It has been argued that outsourcing has the potentialto improve the performance of an organisation in anumber of different ways. These include reducing costs,increasing the quality of service, increasing flexibility,and allowing the company’s management to concentrateon its core competencies. For example Quinn andHilmer (1994) suggest that outsourcing peripheralactivities can allow the organisation to concentrate onits core business, thereby enabling the organisation tomaximise their returns on internal resources. They alsostate that outsourcing can give the organisation accessto the service provider’s capabilities and innovativeefforts, which may be expensive or impossible for thecompany to develop in-house, and can allow thecompany to decrease risks and reduce cycle times andlower investments, for example when adopting newtechnology. Finally, outsourcing can give improvedresponsiveness to customer needs. According to Pagno-celli (1994) the company which makes strategic use ofoutsourcing can become ‘focalized, streamlined andagile’.

Despite the undoubted potential benefits, outsourcingcan also lead to significant problems. These includelosing control of the activity, the dangers of beingexploited by the supplier, the difficulty of bringing theactivity back in-house should circumstances change.Hendry (1995) highlights some of the social and culturalcosts associated with outsourcing. He suggests that thedilution of the company culture can lead to thebreakdown of informal communication lines, and theloss of flexibility and robustness if things go wrong:

‘in cutting off parts of the organisation it is easy tolose flexibility of another kind, namely the flexibilitythat comes from awareness and understanding. Thegreater the focus on the core of the company, the lessawareness there will be of events beyond the core’.

He also suggests that outsourcing can also beassociated with problems related to the company’sability to learn, as it can increase the insecurity and

motivation of the workforce, reducing willingness toquestion and experiment.

Although Alexander and Young (1996) highlight thebenefits of outsourcing in terms of the change of attitudeit can induce (leading, they suggest, to an increased useof benchmarking, improved target setting, augmentedstaff training and development, in addition to givingaccess to specialised expertise and technology), they alsoargue that outsourcing can fail to create any new valuefor the company if it is implemented in the wrongcircumstances. They argue that ‘without an under-standing of where the value is coming from, companiesmay succumb to specious suppliers who either cannotdeliver what they have promised or who will attempt toclaw back rapidly what they have apparently givenaway’.

1.2. Selecting outsourcers

To maximise the potential benefits and minimise thedangers of outsourcing there is a need for an out-sourcing strategy to best select outsourcing candidates,see Choi and Hartley (1996) and Coulson-Thomas(1997). There is a need to clearly establish selectioncriteria and then to monitor the performance ofoutsourcers against these criteria once a contract hasbeen established. Coulson-Thomas (1997) show that themost common selection factors are: market position ofthe potential outsourcer, perceived quality of goods andservices offered, product and technical leadership, trackrecord and the contending companies image andreputation. Bailey (1997), when investigating collabora-tive technology development found a significant linkbetween how vendors were selected and the eventualsuccess of the collaborative venture. He discovered thatthe factors most closely associated with success weretechnical management, management ability, develop-ment speed and compatible aims of the contendingcompany. He also found that giving cost of bid a highweighting in the selection procedure was negativelycorrelated with having a successful partnership. Baileyet al. (1998) go on to give advice as to how to selectcompanies to outsource activities to, and suggestsprimarily focussing on technical excellence.

In summary, it is claimed that outsourcing can offergreat potential benefits, such as increasing managementfocus, reducing costs, and freeing capital amongstothers. However, outsourcing also raises dangers,including those of being exploited by your supplier,losing the ability to adapt to changing circumstancesand losing control of an activity which may notpresently be considered ‘core’, but whose strategicimportance may change over time. However, if compa-nies to outsource activities are chosen in a rationalmanner, with a focus on technical ability rather thancosts then the dangers can be minimised.

W. Bailey et al. / European Journal of Purchasing & Supply Management 8 (2002) 83–9584

The purpose of this paper was to carry out anempirical study of outsourcing activity in a typical areaof the United Kingdom, the Edinburgh and Lothianregion of Scotland, to determine if the issues outlined inthe literature above are reflected in practice.

1.3. Edinburgh and the Lothians

The Edinburgh and Lothians region consists ofScotland’s capital city, Edinburgh, Midlothian, EastLothian and West Lothian. The region’s population isapproximately 765 000, of which nearly 490 000 are ofworking age (Scottish Abstract of Statistics, 1997). Thearea has a diverse range of economic activity, and anumber of large organisations. The majority of theregion’s workforces are employed in the service sector(84% of the total workforce), typical of the largemodern city. The largest service sub-sectors are ‘RetailDistribution’ (Edinburgh is a major shopping centre,catering for the tourist market as well as the indigenouspopulation), and ‘Business and Professional Services’.Edinburgh is also the major financial sector for Scot-land, the third largest financial centre in Europe(Scottish Enterprise, 1998), containing the headquartersof the two largest banks in Scotland, and a number oflarge insurance companies.

Although, as is common to many western cities,manufacturing industry in Edinburgh has been indecline, 10% of the region’s employment is still inmanufacturing. The largest manufacturing sectors are‘Food and Drink’, which employ 28% of all manufac-turing workers, and ‘Electrical and Optical Equipment’,with 26% of all manufacturing employment. Edinburghis a centre for brewing and distilling, and the region alsocontains a number of large foreign-owned electronicsplants, such as Hewlett Packard and Sun Microsystems.

Edinburgh is also the centre of local government,containing the City Council and the Scottish Executive,and the new Scottish Parliament is located in the city.Presently 9% of the workforce is employed in publicadministration.

2. Methodology

The aims of the research were to investigate the extentand nature of the outsourcing activities of typicalorganisations in the Lothian region, their motivationsfor outsourcing, how outsourcing partners are selected,examine if locally-based vendors are used, and toinvestigate the benefits and problems of outsourcing.

In order to obtain both qualitative and quantitativedata, it was decided to utilise a methodology based onsemi-structured interviews with typical outsourcers andsubsequently develop a postal questionnaire from aframework established from the literature and the

interviews. The developed postal questionnaire was sentto a sample of 200 organisations obtained throughsearching the Kompass and FAME CD-ROM data-bases, and other organisations registered in the Lothianregion and employing over 250 people.

Interviews were conducted at a total of 10 organisa-tions: two manufacturing companies, two insurance/assurance companies, two banks, a council department,a police force, an educational establishment, and atransport company. At each organisation between oneand four managers were interviewed, on one or severaloccasions, and the interviews normally lasted forapproximately 1 h.

Based on the literature and the initial series ofinterviews a two page questionnaire was developed.This included questions regarding the background of therespondent and the company; which activities areoutsourced, why, how vendors were identified andselected, where their vendors were based, and howsuccessful the contract was. The questionnaire isreproduced in Appendix A.

Companies in the database were initially contacted bytelephone. The name of the managing director or chiefexecutive was obtained, and a questionnaire was mailedto that person. They were asked either to complete thequestionnaire themselves or to pass it on to a manager intheir organisation with relevant experiences of out-sourcing. In total, information was obtained from 58organisations, almost a 30% response rate.

3. Results

3.1. Composition of the responding sample

Responses were obtained from 12 public and 46private organisations. The sectors, which these repre-sented are displayed in Table 1. The most heavilyrepresented sector is manufacturing, although there areexamples from all the major sectors present in theLothian and Edinburgh region. The responses point toan over representation from manufacturing and anunder representation of service sector, particularlyretailing.

3.2. Which activities are outsourced?

Overall, across all sectors, 70% of the organisationssurveyed stated that they engaged in outsourcingactivity. Fig. 1 shows the proportion of the total numberof companies, which outsource each particular activity.As can be seen the activity outsourced by the highestpercentage of organisations is cleaning (CLEAN),followed by maintenance (MAINT), catering (CAT)and security (SECURE). Around 12% of the organisa-tions outsourced some of their operations (OPER), such

W. Bailey et al. / European Journal of Purchasing & Supply Management 8 (2002) 83–95 85

as manufacturing. The least commonly outsourcedactivities were financial and accounting (FIN), market-ing (MARKET) and human resource management(HRM). The respondents were also asked how manycontracts had been awarded in each category, and it wasfound that the majorities were in ‘operations/man-ufacturing’ and ‘maintenance’.

Of the responding public sector organisations, 80%said that they outsource at least one activity. Cleaning,catering and maintenance are the activities mostcommonly outsourced by public sector organisations,whilst human resources, information technology, opera-tions, marketing, and logistics were not outsourced at allby the public sector organisations in our survey.

72% of the responding manufacturing companies saidthat they outsourced at least one activity. Again,cleaning and maintenance were the activities mostcommonly outsourced by manufacturing companies.However, over 40% said that they outsourced some oftheir manufacturing/operations, and nearly 30% saidthat they outsourced information technology activities.56% of the service sector companies outsource at leastone activity. Again, cleaning, security and maintenanceare the activities most commonly outsourced by servicesector companies, whereas none claimed to outsourcemarketing activities.

Many of the organisations in the sample said thatthere were certain core activities which they could neveroutsource: for example, the chief executive of a hospitaltrust said that there would be considerable opposition tooutsourcing any medical function. The representative ofthe police force explained that security reasons meantthat outsourcing many activities would be prohibitivelyproblematic, and even some non-core activities aredifficult due to the strict personnel vetting proceduresthat are required.

3.3. Location of the outsourcing contractors

Of the total number of outsourcing contractsawarded, 70% went to organisations which were eitherbased in or had a main office in Lothian, 21% were fromthe rest of the UK and the remaining 9% were foreignbased companies.

3.4. Percentage of turnover outsourced

Most companies outsource less than ten percent oftheir business when measured by turnover, although onemanufacturing company outsourced 45% of their turn-over. The average was found to be just under 8% with a95% confidence interval going from 4% to 11.9%(Fig. 2).

3.5. When did outsourcing start?

From Fig. 3, it is apparent that the volume ofoutsourced activities in the region increased exponen-tially during the 1980s and 1990s and has shown no signof diminishing

This then gives support to Hendry (1995).

Fig. 1. Outsourced activities.

Fig. 2. Histogram of the percentage of turnover which is outsourced.

Table 1

Composition of the respondents

Sector Number Percentage

Manufacturing 21 36.2

Food and drink 7 12.1

Financial 6 10.3

Service sector 6 10.3

Education 3 5.2

Health 3 5.2

Government/council 3 5.2

Utilities 3 5.2

Construction 2 3.4

Printing and publishing 2 3.4


3.6. Change in the level of outsourcing

The respondents were asked to indicate whether theybelieved their level of outsourcing was likely increase,decrease, or remain the same. From the results,displayed in Table 2, it is clearly indicated that, in theopinions of the majority of the respondents, outsourcingis likely to become more important in the coming years.

3.7. Motivation for outsourcing

Fig. 4 shows the results of the survey regarding themotives why organisations outsource. (A score of +2indicated that the respondent strongly agreed that themotive was important, �2 indicated that the respondentstrongly disagreed.) From this figure it can be seen thatimproving the quality of service, increasing managementfocus on core business activities and reducing costs arethe most important motives, with accessing capabilitiesalso being important. This supports Pagnocelli’s (1994)view that companies are becoming more core‘‘focalized’’.

Analysis of variance indicates that reducing/sharingrisks and forming strategic relationships were signifi-cantly less important than improving the quality ofservice, increasing focus and reducing costs, at the 5%,two-tailed significance level. This gives little support toAlexander and Young (1996) view that outsourcing canlead to changing attitudes. One way analysis of variancewas used to determine if the motivation variedsignificantly between services. The only significantfinding was that the cost motive was significantly lessimportant in the education and printing and publishingsectors.

During the interviews, one company in the financialsector suggested that outsourcing gave the companyflexibility in terms of their total employment withouthaving to directly hire and fire, which would be againstthe corporate culture. A number of companies said that

outsourcing had enabled the company to speedily gainaccess to the technical capabilities of specialist vendors,such as a state-of-the-art fund management system.Some interviewees said that they were forced into usingoutsourcing vendors, as they could not find directemployees with the skill-sets that they required, espe-cially in certain areas of IT. Legal requirements forcompulsory competitive tendering was the prime reasonfor outsourcing in the public sector.

Reducing costs was clearly the most importantmotivation for public sector organisations, althoughseveral of the public sector managers we interviewedsaid that costs had not been significantly reduced.Where costs had been reduced, this was most commonlythrough reducing wages, as the outsourcing contractorsdo not have to employ staff on existing grading scales.

According to the questionnaire returns, reducing risksand forming strategic alliances were not found to beimportant motivations for outsourcing by public orga-nisations, although one council department that wasinterviewed said that they do like to form ‘positivepartnerships’. Many council-run organisations haveoutsourced due to compulsory competitive tenderinglegislation. This has now been abolished, and is beingreplaced by the Best Value regime. According to onecouncil department, this is likely to increase the numberof activities it outsources, although other public sectororganisations said they were not yet sure of its effects.

Fig. 3. Year organisation first outsourced.

Fig. 4. Reasons for outsourcing.

Table 2

Forecast change in outsourcing

(%)

Increase 55

Stay the same 38

Decrease 7


Increasing management focus was found to be aparticularly important motivation for the manufactur-ing companies. Reducing costs, and improving serviceswere also significant. The interviews with manufacturingmanagers also revealed that focusing on core activitieswas the primary reason for outsourcing: in one case thecompany saw new product development as being theirkey strength, so had embarked on a programme ofoutsourcing the majority of their manufacturing andperipheral activities.

The most important reasons for outsourcing activitiesin the service sector were to improve services and accesscapabilities. Other reasons stated to be important by themanagers interviewed are to increase flexibility to copewith varying demand without hiring and firing; and togain access to skilled personnel and state-of-the-artequipment quickly and with minimal capital investment.

3.8. How are potentials outsourcing contractorsidentified?

Respondents were asked to rank the importance ofvarious methods of identifying potential contractors.From Fig. 5, one can see that reputation and previousexperience of working with the outsourcing vendor areseen by the respondents as being the most commonmethods of identifying possible candidates. Meetingsthrough conferences, press advertisements, bodies suchas Local Enterprise Companies (LECs), and through theInternet were found to be rather less common.

Using the Kruskal Wallis test as a non-parametricequivalent to analysis of variance reputation andprevious experience were significantly higher rankedthan the other methods. No significant difference inranking the methods amongst sectors was found at the5% level.

The interviews revealed that many organisations hireconsultants to identify potential contractors (particu-larly common in the financial sector). One interviewee

had asked other companies which had outsourcedsimilar activities to recommend potential suppliers. Listsof approved contractors maintained by the councils areused by some of the public sector organisations. One(manufacturing) company had used the Internet toidentify overseas companies with the manufacturingcapabilities that they required. An educational establish-ment had used the ‘Yellow Pages’ for small contracts.Placing advertisements in European journals was acommon method for larger contracts.

3.9. Geographical location of outsourcing contractorsconsidered

Respondents were asked to select a recent outsourcingarrangement. They were then asked to indicate wherethe contractors they considered were located, and thelocation of their chosen contractor. As one wouldanticipate, the most common region for both potentialand chosen outsourcing contractors was the local area,although 54% of selected contractors were not based inthe Lothians, and nearly 20% were based outside theUK.

The breakdown is displayed in Table 3:These figures relate to the example contracts given by

each respondent. For all the contracts entered into in thelast 5 years, 70% went to organisations based inLothian, 21% to UK-based organisations, and 9% tooverseas companies. In terms of the probability of asuccessful bid a w2 test indicates that there is a significantassociation between region and the likelihood of beingawarded the contract. (w2=21 with 4 degrees offreedom).

3.10. What criteria are used to select outsourcingcontractors?

The respondents were asked to rank on a scale of 1–5how important possible selection criteria were in makingtheir selection (Fig. 6).

As can be seen, the most important criteria are thequality of the service provided the cost of the service andthe technical capability of the outsourcer. The locationof the outsourcer, and their cultural compatibility were

Fig. 5. Method of identifying potential outsourcers.

Table 3

Search area for outsourcing contractors

Region No. of candidates

from region (%)

Location of selected

contractor (%)

Lothian 33 (29) 16 (46)

Scotland 22 (19) 6 (17)

UK 42 (37) 7 (20)

European 9 (8) 1 (3)

Global 9 (8) 5 (14)


found to be of less importance in selecting betweenpotential outsourcers. Using the Kruskal Wallis test isappears that cultural compatability and locality areranked significantly lower than the other criteria.

When comparing between sectors the only significantvariation appear in the criteria service quality which wasgiven a significantly lower rating by the health, utilitiesand construction than other sectors and in the trustcriteria where finance, health and government/councilsectors ranked this significantly less important than theother sectors. The questionnaire returns suggest that thepublic sector managers see cost as the most importantselection factor, with service quality also seen as beingquite important. According to the interviews mostpublic sector organisations have to go through a formaltendering process, and ultimately have to accept thelowest bid unless there are good reasons for not doingso.

These findings were generally confirmed by theinterviews, which also raised some other issues. It wasfound that the locality of the contractor was importantin some specific circumstances: for example, whereresponsiveness is particularly important one companychoose a local printer so that they could check items onthe presses. Another organisation said that they wantedto use a locally based call centre, as Scottish accentswould present a seamless image to their customers.However most of the managers said that locality wasirrelevantFthey considered themselves to be part of anational or global organisation, and many of theoutsourcing vendors were also national or global, withunits situated in many different localities.

Several of the interviewees said that cultural compat-ibility was significant where the organisations wished toform more of a long-term, strategic partnership. Onepublic sector organisation said that they preferredworking with Scottish rather than English companies

for cultural and political reasons. These findings supportthe findings of Hendry (1995).

A number of the service companies interviewed haddeveloped formalised methods of selecting outsourcingcontractors. For example, one company in the financialsector had a formalised checklist of factors, which theyasked referees to score:

* time (the ability to prioritise, sticking to time-scales),* quality (past performance and general understand-

ing),* costs (whether they delivered in budget),* relationships (ease of working with them, team

orientation),* attitude (commitment and dedication),* communication (verbal and written skills),* integrity (honesty and consistency), and* relevant experience.

In the manufacturing sector the managers interviewedhad searched for outsourcing contractors throughoutthe globe, including in the developing economies, andhad utilised the Internet in identifying potential part-ners.

In order to see if the importance of the criteria differsdepending upon the type of activity being outsourced,the sample was split into three different groups. Theseare ‘Operations’, which includes the outsourcing of allmanufacturing and engineering activities; ‘basicservices’, which covers activities such as cleaning,catering, security and larger facilities managementcontracts; and finally ‘Information processing’ whichcovers IT and call centres. The following table wasconstructed by calculating the relative importance ofeach criteria as a percentage for each respondent, andthen calculating average relative importance for eachactivity type (Table 4).

As can be seen, there are some differences in howoutsourcing collaborators are selected, depending uponthe type of activity which is being outsourced. The moststatistically significant difference is that technical cap-abilities are more important when selecting an out-sourcing vendor of an operational activity, compared toa basic service activity.

3.11. By what means are potentials outsourcingcontractors assessed?

The respondents were asked to say how they assessedpotential contractors. The following results were found:

1. Meetings. The most common way of assessing avendor was through talking to them. The mean rankfor meetings was 2.33, 1 being the most popular and 9the least popular.

2. Reviews of technical expertise and staff abilities: Mostmanagers said that they had considered the abilities

Fig. 6. Criteria by which outsourcers are selected.


and technical expertise of the outsourcers staff, givingthese methods a mean rank of 2.84.

3. References. Many managers said that they hadobtained references, usually from previous or existingcustomers of the vendor. Some made site visits to thevendors’ existing customers, to see them in action.The mean rank for references was 3.24.

4. Review of equipment. This had a mean rank of 4.14.5. Financial audit. It was reasonably common, having a

mean rank of 4.47, especially for major outsourcingcontracts, to ensure that the outsourcing vendor hasthe necessary resources and financial stability.

6. Trial projects. Few of the organisations we spoke tosaid that they used trial projects to assess theirpotential vendors, before embarking on longer-termpartnerships. The mean rank is 5.69.

7. Management audits and third party certification.Again these were not particularly common (respec-tive mean ranks were 5.47 and 6.32)Ffew organisa-tions said that they conducted a formal audit of theiroutsourcing contractors management system, andonly a few insisted on ISO 9000 certificates.

3.12. Has the outsourcing contractor met expectations?

The respondents were asked to indicate whether theirpartners had met their expectations in a range of areas.(+2 indicated they had greatly exceeded expectations,�2 indicated they had greatly disappointed.) FromFig. 7, it is clear that, on average, the outsourcercontractors exceeded expectations in terms of theirtechnical capabilities and cost performance, but werefound to be deficient in terms of their managementstrength. This suggests that more care needs to be takenin assessing how well managed the contractor is.

3.13. What are the benefits and problems of outsourcing?

From Fig. 8, one can observe that there is a positiveoverall view regarding the benefits of outsourcing. The

graph shows the results of asking how successful ordisappointing the outsourcing arrangement had been,(again +2 indicated ‘very successful’ and �2 indicated‘very unsuccessful’). Outsourcing is thus perceived ashaving problems related to loss of control, beingexploited by the supplier, confidentiality and to lesserextent legal and industrial relations problems.

The organisations were asked on the questionnaire toindicate the percentage reduction/increase in costs

Fig. 8. Benefits and problems of outsourcing.

Table 4

Criteria importance for different activity types

Criterion All contracts (%) Basic service (%) Operational activity (%) Information processing (%)

Service quality 14 13 14 15

Cost 13 12 13 11

Commitment 12 13 12 10

Reputation 12 12 11 12

Technical capability 12 10 14 12

Management 11 11 10 11

Trust 11 12 11 12

Cultural compatibility 8 8 6 9

Locality 8 8 8 9

Fig. 7. Contractor performance.


outsourcing had achieved, compared with keeping theactivities in-house. One company had a bad experiencewith outsourcing stating that costs increased by 100%,excluding this company the average reduction in costarising from outsourcing an activity was 11% (6.4% ifthe company was included).

The benefits and problems of outsourcing was alsoexplored in the interviews, and these confirmed thatmost organisations were reasonably happy with theiroutsourcing experiences. Several of the interviewees saidthat outsourcing had not significantly reduced costs,although in the main this had not been the objective.Where costs had been reduced, this was largely due towage reductions: for example, employees in a certainpublic sector organisation had to be paid on a certainpay-scale, which resulted in wages above the market ratefor security and cleaning personnel. Outsourcing hadenabled these costs to be reduced. A further benefitexperienced by public sector organisation was theremoval of complacency from in-house staff. One ofthe benefits most commonly cited by companies out-sourcing information technology services was thatoutsourcing allowed the organisation to access highquality specialists. A difficulty faced by one financialsector company was that, once a computing activity hadbeen outsourced they found it difficult to then take itback in-house, as the skills were not transferred to theirown organisation. Several interviewees said that theyhad experienced difficulties in communication andvendor management, sometimes due to problems intheir own organisations such as lack of contractmanagement skills. One manufacturing company saidthat outsourcing their operations had lead to increaseddelivery times and increased product change lead-times,although costs had been reduced and the company feltbetter focused on its core competency of product designand development.

4. Discussion and conclusions

4.1. Extent and nature of outsourcing activity

The results of the survey show that the vast majorityof organisations in the Lothian region outsource at leastone or more of their activities. The results also indicatethat the trend towards outsourcing, which began in theregion in the 1980s, is, in the opinion of the respondents,likely to continue into the new millennium. The mostcommonly outsourced activities are component manu-facture, maintenance, security, cleaning and catering.The least commonly outsourced activities are account-ing, marketing and logistics. Only 17% of thesampled organisations outsourced any informationtechnology activities, which is somewhat surprisingly

small given the volume of literature on the subject ofoutsourcing IT.

4.2. Motivation for outsourcing

Increasing the quality of service was found to be thesingle most important motivation for outsourcing.However, the difference in importance between improv-ing service and increasing management focus or redu-cing costs was not found to be statistically significant,and a number of managers interviewed said thatreducing costs was actually the most important motiva-tion for them. Thus, these findings do not whollysupport the views of people such as Richard Measelle ofArthur Anderson, who argued that ‘the main motiva-tion [to outsource] is better service; cost is rarely aprimary motive’ (Butler, 1997). Certainly in the Lothianregion, a number of organisations still view costreduction as an important reason for outsourcing.

Forming strategic partnerships and reducing riskswere found to be a significantly less important motiva-tion than the others. This suggests that signing out-sourcing contracts is not generally seen as part offorming more wide-reaching, long-term, strategic alli-ances. If the organisations that took part in the surveyare entering into these, then they are largely separatefrom their outsourcing arrangements.

One of the foci of the survey was the locality of theoutsourcing contracts: were they local firms or did theycome from outside the area. It was found that, althoughlocality was not stated as being a particularly importantselection factor, and most of the responding organisa-tions said that they considered potential outsourcingcontracts from outside the area, 70% of the contractorswere based in the Lothian and Edinburgh region.

4.3. Selection of outsourcing contractors

The second focus was how outsourcing contractorswere identified and selected. The results of the surveysuggest that reputation and previous contracts areparticularly important in an outsourcing vendor beingconsidered for a contract. Advertisements and meetingsat conferences and trade fairs were also found to beimportant. The most important criteria in decidingbetween potential outsourcing vendors were found to bethe quality of service they offered, their cost and theirtechnical capabilities. The high importance given tocosts is of concern as both Bailey (1997) and Choi andHartley (1996) argue that focusing on costs rather thantechnical ability will be to the detriment of theoutsourcing partnership.

The criteria, which were not generally considered tobe significant in discriminating against potential con-tractors, were their locality, and the compatibility oftheir organisational culture. Perhaps the fact that the


locality of potential vendors is not important to themajority of the respondents reflects the increasingglobalisation of the modern economy: the barriers to agood relationship caused by geographical separationhave been brought down by improved communicationsand transport. Having a compatible culture is raised inthe literature, for example Hendry (1995), as being animportant determinant to a successful relationship. Thisview was not however supported by the majority of themanagers who provided information for this survey.More research is needed to satisfactorily conclude whichview is correct, or at least to determine in whichcircumstances does culture become important. The mostcommon methods of assessment were through meetings,reviews of technical expertise and staff abilities, and bytaking up references from existing clients.

4.4. Benefits and problems

Most outsourcing contracts were, in the opinion ofthe respondents, reasonably successful in that they didprovide higher quality services and reduced costs.This supports Quinn and Hilmer’s (1994) research.The most commonly encountered problem was that,by outsourcing an activity, organisations lost control.It was found, as Hendry (1995) argued, that thiscould lead to reduced responsiveness, increasedlead times when introducing new products, anda range of other problems. These difficulties may bereduced by ensuring that requirements have beencorrectly identified and communicated to the contractor,and through selecting the right contractor to meet theseneeds.

Appendix A

OUTSOURCING: PICKING THE RIGHT PARTNER

Napier University Outsourcing Research Group and L.E.E.L.

Section 1. About you y

1. Company: yyyyyyy 2. Name: yyyyyyyy. 3. Position: yyyyyyy..

4. Department/Unit: yyyy 5. Employees: .yyyyyy 6. Turnover yyyyyyy.

Section 2. About your outsourcing y

Outsourcing can be defined as ‘using an outside organisation to carry out activities previously carried out within thecompany’.

1. By this definition, please indicate the approximate number of outsourcing contracts your organisation hasawarded in the last 5 years. Please indicate the activity outsourced, and how many were awarded to local Edinburghand Lothian-based companies. If you have not outsourced any activities please indicate this and return to the addressshown on the back.

Number of contracts awarded in Total Lothian UK International

Manufacturing/operations

Maintenance

Technical development

Finance/accounting

Information systems

Marketing

Human resources

Logistics

Catering

Cleaning

Security


2. Approximately what percentage of your turnover is outsourced? %3. In what year did you first outsource4. In the future do you believe the number of activities you outsource will: Increase/Stay Constant/Decrease

Section 3. An outsourced activity y.In this section, we would like you to consider a recent outsourcing project, which your organisation has undertaken.5. Which activity was outsourced:6. Year commenced:7. Approximate size: d pa.8. To what extent do you agree that the following were important motivations behind the decision to outsource this

activity:2=Strongly agree 1=Agree 0=Neutral �1=Disagree �2=Strongly disagree

+2 +1 0 �1 �2

To reduce costs

To increase focus on core business activities

To improve service

To form a strategic relationship for the future

To share or reduce risk

To access capabilities

9. If you used a formal procedure for the selection of your outsourcer, please give a brief description for example,was a scoring system used; were formal assessment procedures used; was a consultant employed).

10. Please indicate how important the following methods were in identifying outsourcing candidates:5=Very important 4=Important 3=Quite important 2=Not very important 1=Not at all important

5 4 3 2 1

Worked with them before

Advertisements

Reputation/recommendations

Internet sites

Trade press/journals

Trade fairs/conferences

Direct approach from candidate

Through local enterprise company etc.

11. Please indicate the geographical range of the candidates you considered, and indicate the location of the chosenorganisation:

No. of candidates Chosen organisation

Lothian region

Local (within 30 miles)

Scotland

UK

European

Global


12. In making your selection, how important were the following possible selection criteria?5=Very important 4=Important 3=Quite important 2=Not very important 1=Not at all important

5 4 3 2 1

Cost

Service quality

Technical capability

Management strength

Cultural compatibility

Locality

Commitment to contract

Mutual trust

Reputation and track record

13. Please rank the importance of the following activities in assessing potential outsourcers, with ‘1’ being the mostimportant:

References Review of staff abilities

Meetings and interviews Trial project

Financial audit Management system audit

Review of equipment Third party certification

Review of technical expertise

14. Did the chosen outsourcer meet your expectations in the following areas:+2=Greatly exceeded +1=Slightly exceeded 0=Expectations met �1=Slightly disappointed �2=Greatly

disappointed

N.A.=Had no prior expectations

+2 +1 0 �1 �2 NA

Cost

Service quality

Technical capability

Management strength

Cultural compatibility

Commitment to contract


References

Alexander, M., Young, D., 1996. Outsourcing: wheres the value. Long

Range Planning 29 (5), 728–730.

Bailey, W.J., 1997. The Selection of Collaboration Technology

Development Partners. Ph. D. Thesis, Napier University, Edin-

burgh.

Bailey, W.J., Masson, R., Raeside, R., 1998. Choosing successful

technology development partners: a best practice model. Interna-

tional Journal of Technology Management 15 (1), 124–138.

Bedford, R., 1996. OutsourcingFa supplier’s view. Purchasing and

Supply Management 21, 13–15.

Butler, C., 1997. Why the outside is looking in: outsourcing trends in

Europe. The European 22.

Choi, T.Y., Hartley, J.L., 1996. An exploration of supplier selection

practices across the supply chain. Journal of Operations Manage-

ment 14 (4), 333–343.

Coulson-Thomas, C. (Ed.) 1997. Winning Major Bids ... the Critical

Success Factors. Policy Publications, Bedford.

Erens, F., Stoffelen, R., van de Ven, F., Wilderman, L., 1996. Alliances

and networks: the next generation. Proceedings from the Sixth

International Forum on Technology Management, Amsterdam,

pp. 77–88.

Hammer, M., Champy, J., 1993. Reengineering the Corporation a

Manifesto for Business Revolution. Brealey, London.

Handy, C., 1989. The Age of Unreason. Hutchinson, London.

Hendry, J., 1995. Culture, community and networks: the hidden cost

of outsourcing. European Management Journal 13 (2), 193–200.

Miles, R., Snow, C., 1986. Network organizations: new concepts for

new forms. California Management Review 28 (3), 62–73.

Milne, S., 1997. Making Markets Work. Contracts, Competition and

Co-operation, E.S.R.C, London.

Nichols, J., 1998. To Outsource or to Insource. Presentation to the

Financial Services Purchasing Forum Outsourcing Sub-Group,

October, Nottingham.

Pagnocelli, D., 1994. Outsourcing scientific and technological activ-

ities. Proceedings of the Third International Conference on Systems

Integration, Vol. 1, pp. 276–285.

Prahalad, C., Hamel, G., 1990. The core competence of the

corporation. Harvard Business Review 63, 79–91.

Quinn, J.B., Hilmer, F.G., 1994. Strategic outsourcing. Sloan

Management Review 40, 43–55.

Scottish Enterprise, ScotlandFThe Facts, web page, http://www.sco-

tent.co.uk/stf.htm, 1998.

Scottish Office. 1997. Scottish Abstract of Statistics, HMSO,

Edinburgh.

Willcocks, L., Lacity, M., Fitzgerald, G., 1995. Information

Technology Outsourcing in Europe and the USA:

Assessment Issues. International Journal of Information Manage-

ment 15 (5), 333–351.

15. Please indicate the benefits and the problems of the outsourcing agreement:+2 Great Benefit +1=Slight Benefit 0=No Difference �1=Slight Problem �2=Great Problem

+2 +1 0 �1 �2

Overall satisfaction

Reducing costs

Increasing management focus

Increasing quality of service

Accessing external capabilities

Industrial relations

Loss of control of activity

Opportunist exploitation by supplier

Legal problems

Confidentiality problems

16. If possible, please estimate the cost savings achieved by outsourcing, as a percentage of total original cost ofperforming the activity in-house: yyyyyy. %

Thank you very much for your help. Please return completed questionnaires to: Dr William Bailey, Dept. M.M.S.E.,Napier University, 10 Colinton Road, Edinburgh, EH10 5DT (Tel.: 0131-455-2271) Or return by Fax: 0131-455-2264.


Documents

Outsourcing in Edinburgh and Lothians