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Illinois School Board Journal
January/February 2007

Which is best for you: outsource or in-house?

by Doug Brown and Scott Wilson

Doug Brown and Scott Wilson are co-founders of a national outsourcing advisory firm and co-authors of The Black Book of Outsourcing: How to Manage the Changes, Challenges and Opportunities.

A recent survey of decision makers in the country's top 500 school districts shows that 89 percent will increase their outsourcing budget in the next 18 months.

So just how ready is your school district for outsourcing?

Even small and medium-sized school districts outsource processes today in order to cut back on costs. But there are a few precautions districts should take before they jump into the fray:

• Consider how the decision may affect school district employees, particularly unionized personnel.
• Recognize that software and hardware licenses may have to be transferred to the service provider as outsourcing vendor.
• Realize the need to set standards and devise a way to monitor them to determine if delivery measures up to promises.
• Determine how to manage personal information on students and employees according to the Data Protection Act.
• Decide on a time frame for the contract, adding clauses to deal with contingencies, scarcity of employees, turnover, management, disaster recovery and termination of rights
• Agree on a procedure to resolve disputes.

Remember that flexibility is the key to success in school district outsourcing.

Costs, saving and outsourcing

If the district wants to consider outsourcing only for the anticipated cost savings, you might want to rethink the district's outsourcing options.

Another 2006 survey by our firm found that outsourcing school system information technology and business services results in an average savings of only 32 percent, a far cry from the 60 percent cost-reduction claims that vendors often predict.

With salaries paid to professionals, severance pay and governance costs making a huge dent in the budget, school districts are left with only 12 to 48 percent as savings.

Some good news for those who prefer quality to quantity: around 36 percent of school systems have now outsourced to enhance quality, a substantial increase over the 8 percent that did so in 2004.

Questions before outsourcing

Before any district decides to outsource, the following questions should be addressed:

• Why should the district outsource? Is it to cut costs or to improve or change business processes? Whatever the reason, it should be unanimous throughout the school administration and board.
• What should be outsourced? Only the back office business operations, the custodial or maintenance functions, or non-strategic human resources processes? Your district will need to determine its outsourcing "comfort level."
• Who should you choose to entrust with a part of your school district? Should the district choose a local start-up company that promises a personal touch or stick with a tried-and-tested national firm that has been in the market for many years? Doing business locally is always a plus for the community that must be weighed against experience in the industry.
• How will you outsource? Are you looking for customized, high-value solutions or standardized, cost-effective ones? It will take coordination to determine how internal and external personnel work together, as well as set standards to monitor and evaluate performance.
• Where should you send your operation? Services such as food service or grounds maintenance probably will employ local talent, but finance, accounting and personnel benefits administration can be handled as far away as India, closer to home in Canada, or with home-based agents in the United States. This depends on the complexity and range of the operations being outsourced, and the amount of control the district wants to maintain.

Penny wise, pound foolish

Our firm believes it's a clear case of missing the forest for the trees. Luckily, school administrators are waking up to the pitfalls of not looking beyond the low costs associated with outsourcing school business operations.

Another 2006 study found that less than half the school district executives surveyed rated improvement of business processes or service delivery (such as food service, maintenance or custodial work) high on the list of reasons for outsourcing.

While cost factors may draw them in, the same factors may prove to be their downfall when the outsourcer does not perform up to expectations. Instead of placing emphasis on low cost when choosing an outsourcing partner, school systems will gain more by looking at the bigger picture, and scrutinizing if the firm has the necessary resources and the ability to deliver.

Commitments should be based on long-term returns that benefit the business as a whole, rather than just saving on short-term costs.

Before executing multiple outsourcing agreements, school administrators should know: when to use outsourcing; how to use outsourcing tactically and strategically; what the best types of projects and processes are to outsource; how to balance alternatives; and how to select the best sourcing partner based on project scope, pricing model, risk tolerance and business outcome.

That's a full plate of required business expertise pressed on a superintendent, who also is pressured with multiple school operations, personnel matters, community issues, budget constraints and the multitude of predictable pressures and unanticipated demands on today's school's chief executives.

Ensuring outsourcing success

In several cases, school district outsourcing ventures have failed, so it is important to get a correct understanding of the process and its loopholes before venturing into a deal with a service provider.

Several factors can be responsible for an unsuccessful outsourcing deal:

• organizational shortcomings of the service provider;
• inadequate knowledge about the capabilities of the service provider at the time of finalizing the deal;
• broken processes where part of the process is retained and the other part is outsourced;
• lack of integration between processes across the vendor and the school district;
• and rigid procedures which can harm the outsourced contract.

To ensure that these adversities do not occur to your school system, certain guidelines need to be followed.

School district outsourcing assessments and readiness analyses are complex processes that must be analyzed thoroughly, with each school district making the decision using facts and data, not beliefs.

Consider approaching the market using an expression of interest approach, rather than simple discussions or a request for proposal. If you do not have the internal executive resources to assess your district's readiness or needs, ask for recommendations from a firm familiar with school district outsourcing solutions.

Finally, remember that bottom dollar is not the point — future flexibility is. No contract is perfect. Leave room to change it.