Is Outsourcing 'A Three-Legged Stool'?!

Abstract

The paper develops Umesh Bhatia's idea that service receivers should consider outsourcing from three perspectives (legs of a three-legged stool): costs, quality and risk. Benefits of outsourcing should derive from all of the three legs. Thus, good outsourcing contract should lead to costs reductions, quality improvement and risk mitigation. Although this paper is based on the example of accounting services, our considerations are of general validity. We believe a three-legged stool approach could serve as a useful analytical tool helping in making decisions whether to outsource a certain function, with which vendor the relationship should be established as well as in evaluating current outsourcing contracts. A three-legged stool as an analytical tool concerning outsourcing could be compared to its counterparts in other areas of managerial decisions, like SWOT matrix in strategic management or BCG matrix in product portfolio management. We warn against perceiving outsourcing only from the perspective of costs i.e. comparing costs of outsourcing (payments to the vendor) only to costs reductions being a result of an outsourcing application. However, agreeing that these reductions are very important benefits, we indicate the areas of savings which emerge as a result of accounting outsourcing application. We point out, often underestimated, benefits on quality improvement (which concerns not only the function outsourced but also functions connected with it and the company as a whole). Then we present factors potentially affecting (mitigating or increasing) the company's risk and conclude that good outsourcing contracts lower the risk. In the paper we present also a formal way to estimate money value of net benefits from an outsourcing contract. The presented equations are based on the DCF formula of calculating the value of the company.