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 party service provider to provide services that might otherwise be performed by in-house employees of the business.

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Outsourcing risk and reward

Why outsource? A key driver for upstream companies in outsourcing functions is cost reduction. Tight margins mean upstream companies are under tremendous pressure to cut costs.

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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 and March 2014 drive down costs by simplifying, standardising and automating finance processes through the use of best practices.
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Outsourcing risk and reward

Seven Advantages of Outsourcing 1. Cost Savings:- The costs associated with an in-house employee are normally higher than the cost of an outside service provider - This is main reason for most businesses opting for outsourcing non-core functions.
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Outsourcing risk and reward

2. Quality services:- Since most 3rd party service providers excel at the services they provide, businesses are believe they are guaranteed better quality than an in-house employee would give. Additionally, any service provider will always look to give the best of services since their reputation is at stake
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Outsourcing risk and reward

3. Access to specialized skills:- Any 3rd party service provider will be expert at the service that it provides. In fact, to beat competition it has to keep honing its employees skills. Also, the service provider would build up specialized skills in it's niche area of operation. Business therefore gets access to such specialized skills.

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Outsourcing risk and reward 4. Contractual Obligation:- The liability of a service provider is higher than that of an in-house employee. This makes working with them a safer bet .

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Outsourcing risk and reward 5. Staffing issues:- By outsourcing a non-core function, your business avoids all the headache associated with recruiting and hiring staff for such non-core function.

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Outsourcing risk and reward

6. Risk Mitigation:- Non core functions may become critical & need skilled intervention, which the business may be lacking. At such times, if this function is outsourced and becomes critical in the hands of the service provider, the talent pool available at the service provider and its experience of other clients would allow it to counter any risks.
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Outsourcing risk and reward 7. Capacity Management:- Sometimes the non-core function may need additional hands to meet deadlines. In such times, its difficult for an in-house employee to tackle the pressure. However, if the function is outsourced, its the service providers headache. Also the service provider would have major expertise at its disposal, & easily overcome such issues.
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Outsourcing risk and reward

Seven Outsourcing risks 1 Cost Savings:- These may not be realised! How good is your knowledge of your current departmental costs? H ave you the data to measure these true costs with the new outsourced costs say a year later? Cost measurement is key!!
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Outsourcing risk and reward

2 Quality services In the North Sea the wave of redundancies at the majors of experienced senior staff was a boost to the contractor service providers The engineers knew their former companies inside out including the weaknesses that could be exploited by their new employers e.g in contract negotiation!
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Outsourcing risk and reward

3. Company knowledge:- An in-house employee will always have a better understanding of the nuances of a function since he/she would always have a better knowledge of the company and its business as compared to a third party.

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Outsourcing risk and reward 4. Access to specialized skills The contractors ranks were swelled with the senior staff who joined them from the oil operators. The major contractors by taking over the functions of the operators have therefore almost become operators in themselves!

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Outsourcing risk and reward 5. Contractual Obligation:- The liability of a service provider is higher than that of an in house employee. This makes working with them a safer bet for businesses

But is it? It depends on how well the company has negotiated the outsourcing contract with the service provider!
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Outsourcing risk and reward

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 contract poorly negotiated In outsourcing the jobs often highly monotonous and this makes people loathe the job after a while. This is a big factor contributing to higher turnover. March 2014

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Outsourcing risk and reward

7. Linguistic barriers:- When a function that needs call handling is outsourced to a foreign location and the first language of that nation is different from the nation which outsources the function, it may lead to low quality call handling. People can find the accent and word use difficult to understand.
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Making outsourcing work

Outsourcing risk and reward Making outsourcing work Upstream companies should consider the following steps
1.Carefully calculate the cost. Will it cost us more? (e.g If its finance dept.we are thinking to outsource what is the current cost of managing the present function?).
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Outsourcing risk and reward 2. Building consensus Outsourcing affects every level of a company from top executives to front-line managers. Outsourcing affects every level of a company from top executives to front-line managers and employees. Initial reactions to the idea may be negative due to the major changes it will bring.
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Outsourcing risk and reward 2. Building consensus (contd.) Executives concerned with strategic fit and shareholder value may view outsourcing as a risky investment. Front-line managers may fear a loss of control and adiminishing of their roles and responsibilities. Lowerlevel finance and accounting staff will likely fear the loss of their jobs.
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Outsourcing risk and reward

2. Building consensus (contd.) Outsourcing must be accepted not imposed, to succeed! You must demonstrate the benefits to gain company-wide acceptance and answer satisfactorily employees concerns.

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Outsourcing risk and reward

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 later and 2) Helps to ensure a long-term, mutually successful relationship.
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Outsourcing risk and reward

3. Choosing the right partner to outsource to

(contd.)

Re service efficiency - speak to at least three clients with similar needs and get feedback e.g: How long have you been a client? Why did you choose this provider over other vendors? How satisfied have you been with the provider? What problems have you had? 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 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.

4. Negotiating the contract Develop a good working relationship - first goal of the negotiation process. Build a flexible partnership based on mutual trust between the partners rather than a rigid enforcement of contractual terms. Ensure the contract reflects agreement on scope of services, performance and pricing.
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Outsourcing risk and reward

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 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.

Outsourcing risk and reward

4. Negotiating the contract (contd.) The outsourcing agreement should contain a detailed description of services to be performed in a Service Schedule or Statement of Work. Otherwise disputes will arise as to whether a request is within the scope of services to be provided. Services and deliverables should be carefully documented.
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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 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.

4. Negotiating the contract (contd) The outsourcing agreement should contain a detailed description of services to be performed in a Service Schedule or Statement of Work. Without this, disputes will arise as to whether a particular request is within the scope of services to be provided.
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Outsourcing risk and reward

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.

4. Negotiating the contract (contd.) Performance incentives and penalties - a vital component of any outsourcing agreement. The contract should clearly stipulate penalties for failing to meet service level requirements and provide financial rewards reed.for exceeding expectations. Finally ensure your audit rights are agreed!
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Outsourcing risk and reward

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.

Outsourcing risk and reward

Conclusion The pressure to drive down costs is constant within the upstream oil and gas sector. Outsourcing a companys activities is beneficial but only with a good understanding of what it takes to succeed at outsourcing with a well-planned strategy to achieve the planned goals.
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