There is a difference between procuring a service and outsourcing which needs to be understood. A good example of a commonly procured service is computer maintenance. It is essentially commoditised and involves none of your own intellectual property or resources, and rarely any especial knowledge of your business. At the other extreme, if you engage a manufacturing partner to manufacture a key product this is true outsourcing and is likely to involve substantial knowledge, and resource, transfer.

There are, of course, many similarities. Is recruitment a procured service or outsourcing? It can vary but it is more likely to be a procured service. If you decided to change supplier you could approach any of the major recruitment consultancies and expect them to be up and running quickly. You would be just another client to the new recruitment agency. They would need to take time to understand your requirements and culture, but that is part of their own core services: you do not need to teach them. In short, there is very little "lock in".

Non-contractual lock-in

The labels one uses (procured or outsourced service) are largely irrelevant. The key is the degree of non-contractual lock-in. Before signing an exclusive contract most business pause and seriously consider whether that is a commitment they wish to make. The danger with outsourcing is that it can in practical terms create arrangements which are effectively exclusive and carry a high degree of dependence and lock in.

In the UK, a major multinational was one of the first to outsource the administration of the administration of their pension scheme. They retained little internal knowledge of the processes or detailed calculations. Some years later there were problems with the standard of service and a decision was taken to bring the service back in house. Recruitment was a major task, but the really massive project was knowledge re-capture and systems development.

How easily could this contract be re-let?

That is the key question which any organisation outsourcing a service needs to consider before signing a contract. If the answer is "only with great difficulty" then your supplier is holding a hand of aces whenever you need to negotiate a new contract or a revision in contractual terms. If you lack the resources or knowledge to take the contract back in house, and no other supplier has them "off the shelf", then there is substantial lock-in. If a supplier knows that moving the contract away from them would cost you £2m, they can easily afford to inflate their charges to you by £1m knowing that you have little alternative but to pay.

Strategies for avoiding lock-in

There are a number of ways you can reduce or avoid being locked-in because of the knowledge or resources transferred. Firstly, you can (and should) write terms relating to exit into the original contract. Care has to be taken, however. There is no point writing in a clause that you have the right to take on all staff involved in delivering the service unless you also specify the location at which they will be employed. For instance, if you outsource a service requiring 50 staff and the supplier transfers those staff to Mumbai that may make sense to a business services provider employing thousands of staff in Mumbai, but taking on 50 staff in Mumbai would be impractical for you at the end of the contract if you have no other presence in Mumbai. You may be able to use an alternative service provider based in Mumbai, but this would limit the potential suppliers, again putting potential upward pressure on the likely bids at renewal. The issue would be substantially worse if your supplier had moved service to somewhere like Chonburi in Thailand where there are no alternative service suppliers: effectively they are creating a lock in. Writing contractual exit clauses into outsourcing contracts requires the input of both specialist lawyers and outsourcing specialists.

The (and/or) alternative is to either retain some capability in house, or split the outsourcing between two or more providers. Depending on the service this may or may not be possible. For instance if a product helpline was outsourced, it is impractical to give customers in the same geographic region to different numbers to call; however, it would be possible either to use different helpline providers for different countries or states. Either supplier could in future take on further regions. A better solution might be to retain the call handling infrastructure in house (or outsource it under a separate contract) and distribute calls between multiple providers, perhaps rewarding the supplier with the best service record with the greatest proportion of calls. There is a cost associated with such measures, which may be prohibitive; however, in the longer term the increased ability to put suppliers under commercial pressure when renegotiating may largely offset this.