Outsourcing: The Right Decision?

AT THE CORE

IN THIS ARTICLE YOU WILL LEARN

* How to determine whether to use in-house records centers or commercial records storage companies

* What three conditions should be considered when outsourcing a records center

* How to prepare a request for proposal; for commercial records centers

In his book Business @ The Speed of Thought, Bill Gates states, "An important reengineering principle is that companies should focus on their core competencies and outsource everything else." The important word here is competencies. If a company has a fully implemented records management program and each of its elements provide more cost savings and efficiencies than can be provided elsewhere, those elements should remain internal. Gates also cites several such examples of this condition in his book. This article addresses the value of outsourcing records center functions, the use of commercial records centers, and the factors to consider in deciding whether to use such an approach.

Commercial records centers have been in operation in the United States for almost 50 years. They have always represented an alternative solution for housing and managing an organization's inactive and semi-active records. Evidence of the commercial records center growth was the formation of a trade association for commercial records centers called PRISM International. This organization supports the outsourcing concept through its conferences, publications, and Web site promotion (www.prismintl.org). The continuing growth of the records storage industry suggests the health of this sector. The commercial records center, long a staple of the comprehensive information management programs, is probably the field's most publicized and most accepted form of outsourcing.

A Critical Program Element

Records centers have always been the most visible showcase for records management effectiveness. Those not yet convinced about the value of records management have been shown an orderly collection of the organization's records, neatly maintained and promptly retrieved when needed. Here is tangible evidence to management and staff that the organization's valuable store of information was receiving proper attention and management. The records center gives life and meaning to the values of retention schedules. It supports investigations and litigation. It covers the needs of general, vital, archival, and classified records. It is one of the most effective internal controls for records.

The direct program control, procedural flexibility, and in-depth search capability provided by the in-house records center has not been and perhaps never will be completely replaced by outsourcing. Nevertheless, a well managed and standards-compliant commercial records center can be a viable alternative. The primary objective of this study is making certain that the decision to use commercial facilities is supported by standards that are at least equal to, if not better than, in-house records center operations and that cost savings and efficiencies exceed those of an in-house operation. Outsourcing should never be done just for the sake of outsourcing or without clear, measurable benefits.

In the area of records center development, the U.S. National Archives and Records Administration (NARA) has been one of the most valuable sources of information available to records and information professionals. In a recent proposed amendment to regulations on the storage of federal records, NARA addressed this objective by stating, "Among the proposed changes is a new requirement that agencies maintain the same level of intellectual control over records stored in their own records centers and commercial records storage facilities, as is required in NARA records centers." (Federal Register 1999, National Archives and Records Administration, at 30 C.F.R. Parts 1220, 1222, and 1228) This ruling resulted in considerable discussion between commercial records center interests and NARA, particularly in the areas of shelving heights and room capacity. While certain content is expected to become recommended rather than mandatory, the final ruling will provide valuable safety guidelines.

Defining the Records Center

To set the stage for a comparative evaluation, the following definition of a records center is applicable to either an in-house or outsourced activity:

   A records center is a centralized area for the housing and servicing of
   inactive and semi-inactive records whose reference rate dyes not warrant
   their retention in expensive office space and equipment. The effectiveness
   of a records center is based upon: (a) its use of low-cost equipment which
   makes maximum utilization of space, (b) its ability to provide an orderly
   arrangement and control of records, and (c) its ability to employ
   procedures which assure prompt and efficient handling of records.

The major difference between an in-house or outsourced activity is that there is a fee structure for services provided by an outsourced activity.

This proposed definition is supported by physical characteristics that make records centers a meaningful part of information housing and retrieval systems. The following characteristics apply equally well to in-house or outsourced records storage systems:

Accessible location -- Close enough to operations to assure prompt and accurate access to needed records

Adequate communications -- The ability to provide multiple means (telephone, fax, e-mail, messenger, mail) of communications between records facility and service requestors

Layout -- The use of standard-size shelving (single and multi-level) and multi-functional containers to house records with ample space for personnel, records processing, and administrative needs

Structure -- Fire-resistant structures, usually stand-alone and not adjacent to flammables/non-fire resistant buildings

Lighting -- Adequate and properly spaced lighting that eliminates glares and shadows. Lighting concepts are different in commercial centers due to shelving height and number of walking levels. Most lighting sources are controlled on a sectional basis and can be used only when needed

Ventilation -- Records preservation is assured through adequately ventilated facilities with proper humidity and temperature control, generally in the relative humidity level of 50-60 percent and with a temperature range of 65 [degrees]-75 [degrees] F.

Floor Load -- Sufficient to support weight of shelving, containers, and records

Security -- Sprinkler systems, fire extinguishers, structural considerations, compliance with national, state, and local codes and ordinances, supervised alarm systems, and documented procedures on emergency planning. The aforementioned NARA regulations provide basic standards and are valuable guidelines in this area, as is the National Fire Protection Association's NFPA 232A: Guide for Fire Protection for Archives and Records Centers, 1995 Edition.

Daily monitoring precautions include overall cleanliness, check of stored combustibles, smoking prohibitions, checks of windows and doors' working condition, systematic inspection of premises, off-hour inspections, and periodic wiring inspection.

All these standards and procedures must be part of the mental picture records managers have of their records centers regardless of whether they are responsible for the direct management of an in-house operation or for overseeing use of a commercial records center. Inspecting commercial records center sites with these factors in mind prior to contracting such services is critical, as is continuing to monitor them after the contract has been signed. This means reviewing all facilities that may be used to house an organization's records.

In the expanding commercial records center industry, large commercial records center companies may choose to put a customer's records in one or more locations. While this does not negate the ability to retrieve rapidly a client's records, the ultra-modern facility where the contract was negotiated may not be the only one being used. All possible housing locations should be inspected.

Decision Conditions

Three conditions to be considered when addressing the possible use of outsourcing a records center are outlined on the following page.

1 Establishing a company (in-house) records center operation where one has not existed before

Here, outsourcing must certainly be one of the decision-making factors. A detailed cost comparison report must be prepared. Illustrations 1 and 2 provide an example of the major items to be included in such a comparison. In an outsourcing request for proposal (RFP), Illustration 2 criteria can be requested from the vendor. They provide a meaningful starting point and will be discussed in more detail below. A good source for additional information on budgeting and cost justification is a book by William Saffady, Cost Analysis Concepts and Methods for Records Management Projects. The book provides valuable costing guidelines and formulae for the comparisons being made here.

Illustration 1

In-House Records Center Cost Considerations

Total Sq. Ft. Occupied--  Total Vol. Housed--Cu. Ft.       $ Amount

Salaries/Wages    Actual amounts paid plus fringe             --
                  benefits and overhead rate if
                  applicable

Lease Amount      If space is rented or amount charged        --
                  if company space and three is an
                  allocation charge

Depreciation      Building Constructed for records            --
                  centers, shelving equipment if
                  treated as a fixed asset.

Supplies          Records center containers,                  --
                  administrative supplies.

Utilities         Electric, HAC, water (may be                --
                  included in lease amount)

Telephone         Allocated amount for billing or             --
                  actual amount

Maintenance       Janitorial service (may be included in      --
                  lease amount), equipment maintenance

Equipment         Service equipment (ladders,                 --
                  carts, forklift), expensed when
                  purchased -- first year charge
                  only, no charge in subsequent years

Automated         Software system/equipment-first             --
 System           year charge -- if system developed
                  in-house allocated costs.

Insurance         Allocated amount                            --

Taxation          Allocated amount (may be included           --
                  in lease)

Total $                                                      $--

Total Cost/Total Cubic Foot Capacity=Cubic Foot Cost $       $--

Illustration 2

Commercial Records Center (CRC) Costs

                                                           $ Amount

Relocation        Move of records to commercial               --
                  facility if there is a charge,
                  initial charge-expense.

Data Input        Entering data into the CRC                  --
                  computer system -- initial
                  and new receipts.

Housing Costs     Rate charge to store cubic foot             --
                  of records/month (per rate charge per
                  container x in-house volume)

Destruction       Rate charge to store annually or            --
 Charges          "as requested" x estimated number
                  of boxes to be destroyed
                  annually Is there a credit
                  for paper sale?

Retrievals,       Rate charge x estimated activity.           --
 Refiles          These items are generally billed at
Interfiles        the same rate. If not, line
                  show each item.

Courier           Generally a surcharge to actual             --
 Service          cost x estimated number of
                  requirements

Permanent         Charge for boxes charged out and not        --
 Removal          to be returned x estimated number. Make
                  certain this does not apply to total
                  removal if vendor is changed.

Extended          Hourly charge for such service x            --
 Searches         estimated need

Transportation    Charge rate for regular and emergency       --
                  pickups and deliveries. Is there a mile
                  limitation before added charges?
                  After-hour charges? Applicable
                  labor charge?

Charge            Charge rate (per size) x estimated          --
 for Boxes        number to be used

Computer          Charge rate if special reports are          --
 Charges          required. Basic agreement should cover
                  standard provided reports, frequency,
                  and delivery date.

Communications    Telephone, fax charges                      --

Total                                                        $--

Total Cost/Total Cubic Foot Capacity=Cubic Foot Cost         $--

2 Transferring an in-house records center to a commercial records center

An organization-designed and -operated records center can operate as efficiently and as cost effectively as a commercial records center. Where there is a company-operated records center in existence, an outsourcing study can be based upon a more realistic comparison of costs and operating benefits. It is important to note that amounts already expended are not counted as comparative costs or as savings (building and equipment already purchased). If the center is an integral part of a comprehensive and successful records management program, the decision as to whether to outsource or not will receive more careful analysis from management. Management's awareness and support of a program generally results in a better understanding of cost benefits -- not always expressed in dollars alone (e.g., service satisfaction) -- and operating efficiencies from an internal center. Rather than a cost burden, they may well view the in-house center as an information asset. It also means the records manager has a major role in the decision-making process. An uninformed management and a passive records manager can prove to be an open door to a poor decision regarding outsourcing.

3 Combining the use of an in-house records center with a commercial records center

This approach takes advantage of low storage costs offered by a commercial records center for relatively inactive records. This helps organization-owned facilities by reducing or eliminating requirements for additional and costly space. Heavily referenced materials can be retained in the organization's on-site records center and will not be subject to service charges that are higher dollar items in commercial centers. On the other hand, one may not receive as attractive a storage rate if services are limited.

"Outsourcing is a commitment that must be clearly understood, accepted by all levels of management, and fully supportive of the internal records management policy."

Accepting this precept is virtually a guarantee of successful outsourcing. A decision must be made that provides contractual confidence and a long-term involvement. Changing back to an in-house center or moving from one vendor to another can be costly. The transition from an in-house program to outside sources, particularly when a records center program has been in operation, should be transparent to its users. Changes must be clearly explained and any program or procedural changes clearly documented. The records manager's role has a new dimension since responsibility shifts from a direct managing responsibility to an overseeing one. This change can mean many changes from a prior administrative direction.

Comparative Analysis

Every decision requires careful evaluation of the advantages and disadvantages of alternative approaches. Rather than list them as such, let us examine the general nature of these factors and how they figure in the analysis.

Reduction of head count and space costs. Outsourcing has been a way to temper workforce expansions and reduce overhead costs. Shifting these costs cab be significant in terms of labor costs and benefits -- if there is an actual reduction in headcount. Internal labor requirements may only result in shifting the employees -- and their cost -- to other jobs in the organization even if such positions are not normally available. Space cost savings are real if a cost is actually eliminated or the space will be used for other needed purposes. If it is an owned building, there is no savings here unless the building is sold or the space replaces a planned construction.

Competitive pricing. The large number of commercial centers operating today offers an excellent opportunity for competitive pricing. This means more than a comparison of one commercial records center to another. There is also comparing costs to an existing or proposed internal center. The preparation of an in-house cost package is essential to complete a proper comparison. This includes costs on everything from personnel to utilities -- every cost incurred as if the center were a totally independent entity. Since outsourcing companies generally charge a basic per-box storage fee plus service costs (e.g., pickups, deliveries, box destructions), those costs are based upon unit-costs for every activity performed. Some commercial companies will bundle services, providing a lower, fixed service cost for a predetermined volume of activity, with additional surcharges for any services over those numbers. Others require the customer to maintain a minimum percentage of initial storage. All pricing methods will require constant monitoring.

Overall cost allocation. A great advantage of outsourcing is that it provides a detailed cost figure for handling an organization's inactive records. Every charge incurred is broken down in the invoice. Of course, any costs that may still be incurred by the company outside the commercial center billing (certain transportation charges, internal controls, and the like) must be added for a clear cost picture. Accurate cost determination is sometimes difficult in an in-house operation due to (a) the possibility that several organizations (e.g., facilities, general services) will be involved in the operation, and (b) some costs are only allocated as a general expense. Many company-operated records centers allocate costs only to branches because of the added accounting requirement.

Introduction of new ideas. Outsourcing exposes the client to the experience the commercial records centers have gained from working with many companies. This could be fertile ground for new ideas and technologies. Commercial centers have also benefited from practices used in company centers that are now among their customers.

Improved performance. Dissatisfaction with service can be a chief factor in an organization's decision to move from an in-house operation to outsourcing. This condition can be determined best by a periodic survey of customer opinions. If negative reactions cannot be corrected, then a change may be in order. Such surveys are equally important when outsourcing and are a critical part of such arrangements. Commercial records center personnel know their business, but in-house trained records center personnel cannot wholly be replaced by those in a commercial records center and get the same knowledgeable service. This will become evident in extended searches.

Automated systems. Commercial records centers have built-in software systems for the management of outsourced records. This can be very beneficial if an organization has never had such a program. It is, however, a system that is used equally for all its clients. If a potential client-company has a system in place that it uses for its scheduling and vital records as well as an in-house records center, conversion to a commercial center's system could create significant problems. Generally, a company may have to sacrifice some of the benefits its own program provided. A commercial records center's software program is generally a back-store system, concerned primarily with stored records, rather than a storefront system that includes schedule analysis, filing systems, equipment usage, and the like. There are, however, new software packages now being offered that improve the office/commercial records center computer connections. The driving force behind many of these packages is DOD Standard 5015.2-STD (Design Criteria Standard for Electronic Records Management Software Applications). Retention schedule management normally remains an in-house responsibility.

The Request for Proposal

All the aforementioned factors must be taken into account when preparing a request for proposal (RFP) for commercial records centers. The RFP, as well as the final contract, must be the combined effort of the records manager, that person's immediate superior, the procurement staff, and the legal department. The following items are critical to the RFP analysis:

Type of records involved. This means records covered by the proposal (inactive, archives, vital, classified) and volume of each type. There are different charges for different type of records since each category is usually handled differently. Some, for example, may require vaulting; others will not.

Period covered. It is a commitment, as noted earlier, and something that is not easily changed. Allow sufficient time to smooth out all possible problems with an agreed-upon rate for the duration of the contract, as well as a cancellation clause "with justification." This is the place to identify -- and hopefully avoid -- problematic charges (i.e., permanent removal fees) and to clarify other closure requirements (inventory listings, bar coding control, charge-out records, empty container inventory).

Initial records pickup/data entry. Who will pay these charges? Clearly identify locations where records are to be picked up. Both sides can benefit if the vendor can download a system the organization has to the vendor's computer system. If that cannot be done, there is generally a charge for initial data entry. Verification of the data transferred by an audit of the pre-transfer data with a post-transfer inventory report is critical.

Service requirements. List the services required (e.g., storage, reference, delivery, inventory, chargeouts, access, destruction, copies, faxes). Special handling services also may be required. Provide related statistical data for subsequent cost evaluation. Vendors should detail their pricing breakdown by using an outline similar to that shown in Illustration 2.

Reports requirements. Type(s) of reports needed as well as frequency of submittal with specific dates of submittal. The customer specifies the format the reports are to take as well as the sequence of data. If this is not clear at the beginning, the customer will have to take what is provided. The formats in the advertising brochure may not be what is needed. Verification of the comparisons made of reporting formats is important.

If there is an existing in-house system, print out a set of the reports normally generated, mount them on a display board, and compare them to what the vendor can provide. If the data can be downloaded and the vendor can accommodate all the required information, so much the better. A complete apples-for-apples transition, however, is rarely achievable.

Inventory Count. Confirm the beginning inventory volume. Commercial records centers use varying measurements for counting volume. The traditional cubic-foot container (10" x 12" x 15"), counted as a cubic foot in virtually every in-house operation, is measured more precisely by commercial centers as 1.2 cubic feet. A 100,000-cubic-foot holding of an organization's records could amount to 120,000 cubic feet when stored and billed by a commercial center. An engineering container (4" x 4" x 45") may be counted as .40 cubic feet. The commercial measurement, however, could be .90 cubic feet. An X-ray or magnetic tape container (18" x 6" x 15"), counted as one cubic foot internally, may be counted as 1.5 cubic feet in a commercial center. Commercial operations have containers of various sizes. If a package or bundle cannot fit into a given box, it will be put into a box of the next largest measurement. In one instance, 30 bundles of illustrations were placed on a shelf normally containing 12 boxes (12 cubic feet) in an in-house operation. Yet the commercial center measurement for billing was 48 cubic feet. When negotiating a contract, these measurements must be clarified and the beginning volume carefully verified.

Volume is a critical element in determining costs. If an in-house operation has been using the standard cubic foot measurement, a count should be made based upon the 1.2 cubic foot measurements. This may prove significant in achieving cost comparisons.

Transportation services. Specify the type of delivery service required, including frequency and delivery points. Charges may be made per stop. Review these costs closely, as well as the delivery costs for single- and multiple-box deliveries, special deliveries, after-hours deliveries, emergencies, and the like.

Safety and Security Requirements. Identify and specify the organization's requirements for-safety and security and then measure them against those provided by the commercial center. The organization must create and apply its own checklist and make comparisons during a physical walk-through of the commercial facility. Check the insurance replacement value provided by the vendor; it may not be adequate to the outsourcing organization.

Performance reports. Require a procedure for measuring performance by the commercial center. Balance this with periodic reports from users on their experiences and their level of satisfaction with the vendor's facility and performance.

Service charges. Make certain that all pricing rates are specified for storage of various records types (inactive, vital, archival, classified), various media (magnetic, optical, microforms), servicing (new receipts, retrievals, refiling, inter-filing, file tracking, permanent removal, faxing, destruction), supplies (boxes, folders, labels), and transportation (regular, emergency, after hours, surcharges for courier services, delivery distance restrictions), as well as special charges or computer report charges.

Conversion costs. Commercial records centers' costing practices are not uniform; they are negotiable depending upon volume, services provided, and category of records. Having records picked up and keyed into the vendor's system may incur a charge, or, as the vendor is able to project the residual revenue of a large accession of records, there may be no charge for this transition. Regardless of who pays -- or forgoes -- the costs, it is the customer's responsibility to check containers or packages as they are moved. It is the vendor's responsibility to provide an inventory of records received and reconcile any discrepancies. And there will be discrepancies.

Termination costs. This is perhaps one of the most controversial elements of outsourcing. Termination clauses and resulting penalties must be clearly stated in the contract and understood by both parties. The term hostage fees has been misused and overused. The basis for termination of services and penalties, if any, must be acceptable to all parties. Penalties may apply to the vendor or the customer based upon the contractual commitments. There should be no surcharge for changing vendors after the completion of the contract period. It is understood that the customer will pay the cost to move the records to another facility, but these costs should be within the normal contract charges. Surcharge costs, if any, should be part of the initial cost analysis when comparing in-house to commercial center usage. An important part of any termination is termination assistance. The customer wants to be assured that the vendor will provide enough resources -- and at a fair price -- to affect any orderly transition to a new service provider (Raysman and Brown 1999).

There are also standard requirements that must be considered, such as insurance, billing procedures, disclosure agreements, access (timely availability and workable quarters for customers to review their records at the records center), clearances, and property ownership. Here, an article by Michael J. Faber, "Selecting an Offsite Commercial Records Center" is very useful (Faber 1997). It complements comments made in this study.

National/International Contracts

Commercial record centers today parallel the familiar concept of mom-and-pop stores and supermarkets. There are local and regional centers, and there are companies that have centers throughout the United States. The recent merger of the two largest nationwide commercial records centers will have a significant impact on the competitive negotiations for such operations. Commercial records centers are also well established in countries throughout the world (mainly in Australia, Canada, Brazil, England, and on the European mainland). This latter group can be important for those companies having international operations

Many are familiar with the concept behind mom-and-pop operations: close at hand, direct contact, personal attention, system flexibility. A higher price may be paid for such features, but many will do it because of those desirable characteristics. Business organizations with operations in many different states have a volume bargaining power for national agreements. Some have opted for their own central in-house facility, operating as a self-sufficient operation and billing their operating costs to using divisions of the company. Others have entered into national-level agreements with commercial companies.

An approach to providing national coverage and yet maintaining the mom-and-pop characteristics is the National Records Centers Consortium (NRCC). The consortium is a group of independently owned and operated records storage facilities that have joined together to provide records managers a multi-market or national-account alternative to the dominant companies in the market. All the approaches and evaluations covered in this study are equally applicable to any commercial records center approach.

Larger commercial records centers are continually absorbing smaller ones. Records managers who outsource their records center operations must keep abreast of these activities. Changes in ownership could result in changes in operating policies and procedures. These may occur even if pricing remains the same. In the event of a takeover, existing contracts must be critically examined to assure that existing contract commitments are honored or that renegotiations are undertaken for possible improvements.

Conclusions

Outsourcing arrangements are typically very complex transactions to structure and successfully negotiate; the potential legal and financial ramifications are always less familiar to the first-time customer than they are to the experienced outsourcing vendor. Given these significant hurdles, companies considering outsourcing should be prepared to evaluate and address all aspects of the arrangement, including all scope, price, and performance issues. In addition, companies should be prepared to proactively manage the outsourcing vendor throughout the term of the outsourcing relationship (Oser and Rutchic 1999).

It is the records manager's responsibility to assure that the most cost-effective and efficient systems are used in the management of the organization's records. This is true for current office requirements as well as inactive and semi-active records. Records managers have the option of establishing and maintaining their own records center or outsourcing this function. Regardless of which approach they take, they must have a full command of all the factors that need to be considered in operating a records center, as well as the role it plays in the inter-functional relationships of the overall records management program.

Records managers must be proactive. Too many outsourcing decisions are made independently by management, and records managers are concerned about projecting a sour-grapes attitude if they oppose such a change. Ultimately, records managers are the only ones that can make outsourcing work effectively. They are the only ones that can audit its cost effectiveness and efficiency.

Outsourcing has weakened many programs by being presented to upper management as a panacea to problems that internal program support cannot or will not address. The growth of the outsourcing concept for records centers has been fanned by a failure of management to understand fully or to justify the records management function's need, a failure to assess the legal value of new technologies, and a failure to evaluate the benefits from a comprehensive records management program.

The negotiable nature of commercial records center arrangements and the understandable privacy of such arrangements limits an open-ended discussion of specific case study comparisons. Occasional articles on both successful in-house and outsourced records center operations would help to support the need for definitive analysis of the two approaches. Whatever decision is made, it should reflect the pride an organization has in the records center's appearance, its operations, and its cost effectiveness.

If a primer on setting up a record center is needed as a guideline, there are some helpful sources available.

Mary F. Robek, Gerald F. Brown, and David O. Stephens. Information and Records Management, 5th ed. Westerville, OH: Glencoe/McGraw Hill, 1995.

William Benedon. Records Management. New York: Prentice-Hall, 1969.

References

Gates, Bill and Collins Hemingway. Business @ The Speed of Thought. New York: Warner Books, 1999.

Faber, Michael J. "Selecting An Offsite Commercial Records Center." Records Management Quarterly 34 (January 1997): 28-32.

Federal Register. 30 April 1999. 23510-23516.

Oser, Aaron M. and David H. Rutchic. "Successfully Outsourcing IT Operations." New York Law Journal, 10 May 1999.

Raysman, Richard and Peter Brown. "Key Issues in Technology Outsourcing Agreements."

Saffady, William. Cost Analysis Concepts and Methods for Records Management Projects. Prairie Village, KS: ARMA International, 1998.

William Benedon, CRM, FAL is president of Benedon and Associates of Encino, California. He has 49 years of experience in the field of information management and specializes in corporate records management, automated records systems, and the teaching of information management. He holds an M.B.A. from New York University. The author may be contacted at [e-mail].