Outsourcing as strategy: associations are aligning outsourcing activities with overall association objectives to enhance mission and service to members.

THINKING STRATEGICALLY ABOUT OUTSOURCING means first and foremost thinking it through, says management consultant Maurice Greaver, author of Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives (1999, AMA-COM). "To align outsourcing with your organization's overall corporate strategies, those working on an outsourcing initiative must first determine how outsourcing is reflected or should be reflected in the organization's core documents, including its strategic plan and annual operating plan." That's especially critical if your organization is engaged in transformation projects, such as reengineering, he adds, so that outsourcing won't end up duplicating or conflicting with other organizational activities and projects.

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In his experience, too many organizations want to skip midway through the process and begin calling vendors to see what they can offer. "Much of the work that goes into planning an outsourcing initiative--exploring strategy and implications and analyzing current and future costs and performance--must take place before you interact with potential providers," says Greaver. "Until that point, you don't even know whether outsourcing will make sense for your organization."

In this article, association executives discuss the strategy behind and implications of their outsourcing decisions.

Addressing the why

Until recently, the American Society of Mechanical Engineers (400 staff; $68 million annual operating budget), New York City, never considered outsourcing in a truly strategic manner, says Executive Director Virgil Carter. During the past 12 months, however, ASME has completed a strategic planning initiative and has entered into a 15-month operational planning period to implement structural and operational changes by July 2005. Some of those changes will include options for outsourcing to consolidate activities and implement operational efficiencies as well as to better serve members through a variety of strategic partnerships. For Carter, outsourcing is situational, not formulaic. "Deciding whether it makes sense to outsource an activity is usually best resolved by looking at internal capabilities compared to strategic objectives and core competencies and then determining whether the best value-added response will result from using in-house or outside resources."

Jim Thalhuber, president of Nonprofit Solutions, an association management company based in St. Paul, Minnesota, agrees. Decisions about outsourcing should include deliberative, organizationwide discussion, he says. To that end, he developed an "Outsourcing Quotient Quiz" (available at www.amonline.org) to help associations and potential clients assess whether they are ready to outsource, whether a particular program is a good candidate for outsourcing, and whether a potential supplier would make a good fit.

But questions about whether to outsource, what to send out, and to whom must be preceded by why you want to outsource in the first place.

Why do most organizations choose to outsource? According to the 2003 Outsourcing Index--an annual bench-marking study of the outsourcing trends of corporations, government agencies, and nonprofit organizations conducted by The Outsourcing Institute, Jericho, New York--the majority of the 1,911 responding organizations are motivated as much by improving company focus (55 percent) as by reducing or controlling costs (55 percent), followed by gaining access to top-notch talent or technology (37 percent) and freeing resources for other purposes (36 percent).

These are largely the reasons for outsourcing cited by the executives interviewed for this article. (For a counterpoint to outsourcing as a business strategy, see "The Opposite of Outsourcing," page 44.) For instance, according to Nancy Urbanowicz, executive director of the Academy of Management (12 1/2 staff; $4.2 million annual operating budget), Briarcliff Manor, New York, the academy uses outsourcing for three primary reasons: to eliminate a large amount of clerical processing work from the headquarters office; to avoid bringing work in-house that would require a specialty skill; and to avoid doing inadequately what a service provider can do better, even if it is more expensive.

"Cost savings is not always the goal," says Urbanowicz. Moving the organization forward is, in fact, what she considers to be the greatest strategic value of outsourcing for her association. "Outsourcing has played a large role in what we see as a natural evolution for a headquarters office. We've seen our role shift from processing transactions and barely keeping the association afloat ... to being able to improve upon existing services and support," she says. "Our next step is to become fully engaged in creating new services for members."

Assessing cost-effectiveness

While cost savings, cost avoidance, and revenue generation may not be the primary goals, they can be tangible benefits of outsourcing, says Urbanowicz. Her staff used to handle more than 2,000 requests per year for copyright clearance. "We were overwhelmed by it, slow at it, and a curious thing used to happen: Callers would routinely ask us for favors and try to negotiate fees," she says. "It was as though they knew we were handling this out of our hip pocket somewhat informally. When we turned the function over to the Copyright Clearance Center, our revenues doubled." According to Urbanowicz, the center had the builtin legitimacy to handle the task, set forth routines, collect payment without argument, and collect on elusive foreign royalties that academy staff could never seem to do on their own.

On the other hand, cost savings is not guaranteed--even when expected, warns Urbanowicz. "When we outsourced mailing list sales to a professional broker, we knew how much revenue we were generating, what it was costing us, how many purchasers we had, and who they were. We assumed the broker could do better than we did, since we never advertised," she says. "And it seemed logical to assume that if we were part of a widely distributed catalog that more attention would be drawn to our list. We were wrong." Instead, revenues dipped because of the increased fees and the inability of the list broker to generate new sales. Even so, says Urbanowicz, the payback for the academy, which can't easily be calculated in dollars, is that staff was able to eliminate a nuisance function. "By eliminating this task, we were better able to concentrate on functions more central to the business we are in, such as following up on expired members and renewals," she says.

According to Vivianna Guzman, chief financial officer of the American Management Association (400 staff; $125 million annual operating budget), New York City, assessing the cost-effectiveness of outsourcing may entail several analyses, including financial analysis, benchmarking, gap analysis, performance statistics, and contract management. "Outsourcing as a business decision is generally based on a combination of these factors and consideration of other operational implications that may ripple from an outsourcing decision, such as the ability of the organization to remain streamlined," says Guzman.

In the context of current business realities, outsourcing must--on some level--make financial sense, either directly through cost savings or indirectly via decreased association workload as well as staffing, says Carter of the American Society of Mechanical Engineers. But cost-effectiveness is not solely dollar-oriented. "You have to ask what will bring optimum effectiveness as well as optimum efficiency," he says.

Considering core competencies

Dee Ann Walker, president of Walker Management Group, Nashville, and chair of the AMCinstitute, Westmont, Illinois, notes an increased demand and willingness by associations to hire association management companies for strategic planning and management of high-level decisions with association boards--an indicator that associations are outsourcing core functions. But what about outsourcing core competencies? The answer may not be as obvious as you think.

"If core competencies are defined as those specific areas of service, knowledge, and expertise that a company considers vital to its success, as a rule, organizations would not outsource a core competency," says Guzman. But there are always exceptions to every rule, she says. "If the value add of the organization to its constituency is creating a communication vehicle for individuals or organizations with a common interest, in today's technologically advanced environment, you can conceive that an organization could fully outsource every task needed to provide such a platform," she says.

In this and other instances, it may be difficult to separate the core competency from how it is delivered. While education is absolutely core to the American Management Association's mission, it would be impossible for the association to keep on its payroll the broad range of subject-matter experts it would need and to keep them trained at the leading edge in their fields, says Guzman. That is why a significant portion of AMA's outsourcing expenditures are fees paid to speakers at AMA seminars and workshops throughout the United States.

Specifying expected outcomes

According to Thalhuber of Nonprofit Solutions, selecting the right outsourcing partner depends in part on how well an association specifies the results it wants. During the past five years, he has noticed an increased sophistication in the kinds of questions potential clients are asking. "As associations become more comfortable with the concept of outsourcing, they are coming in with greater knowledge about what measures and outcomes they need." That's a breakthrough for both parties because it removes the guesswork about performance requirements, he says.

Here are examples of how executives are quantifying performance:

Use internal measures. If your association is performing an activity in-house, most likely you already have a set of key performance metrics and outcomes that you either want to replicate or improve upon through outsourcing, says Guzman. When AMA outsourced the printing of its educational classroom materials, performance measures it considered included the total cost per notebook delivered to the classroom; the error rate (maximum allowable errors of notebooks arriving at the right place); the turnaround time; and the quality of the printing and binding.

Start with a needs assessment. When the American Agricultural Economics Association (8 staff; $1.2 million annual operating budget), Ames, Iowa, moved its academic journals to a commerical publisher five years ago, staff looked for not only print and distribution expertise, but also other specific criteria that they felt were needed to remain strong in their field. "We needed a publisher that would move us online and provide online access for members, libraries, and library consortia, and we wanted a publisher with experience in economics journals," says Donna F. Dunn, executive director. "Identifying those items in advance allowed us to ask pertinent questions and kept us focused as we went through the process of reading proposals."

Ask the right questions. An outsourced activity for which the Academy of Management was able to quantify expected results was its subscription management function. Could the vendor process orders in a timely fashion? Improve our cash flow by completing the task and issuing payment to us sooner than we could process and deposit checks? Produce better management reports on subscriber renewal patterns? Stem the erosion of subscriptions? Provide mechanisms for offering our subscriptions online? "The answer to all of these questions had to be yes," says Urbanowicz.

Do your due diligence. Due diligence is needed in evaluating any outsourcing relationship, says the American Society of Mechanical Engineer's Carter. The association's existing membership records management system was custom written in-house for association computers. After extensive analysis, the association decided to replace this system with an off-the-shelf system that it would work with a vendor to customize. "The vendor worked with us to conduct a fit analysis--a detailed surveying by the vendor of what the majority of our managers said they needed and wanted from a software management system," says Carter. "The vendor then compared this to the capability of our existing software and to software that could be customized for our purposes and came back to us with a performance and price analysis so that we could choose whether we did in fact want all the components we initially said we wanted." The end result: a highly articulated roadmap of expectations that make clear performance measures and product criteria. Especially with complex and expensive systems, this kind of "cascading" due diligence process is critical for success, says Carter.

Evaluating results

Once you do establish outsourcing partnerships, assessing the results you need from a provider should be an ongoing activity, says Guzman. The American Management Association outsources its travel agency services and expects stellar, 24/7 assistance on behalf of its speakers to ensure that they arrive on time to provide educational workshops and seminars across the country. "Developments in technology, in particular, always require you to consider how processes and partnerships should evolve," she says. AMA will always need 24-hour service to handle complex and last-minute travel arrangements and security issues, but because of growing acceptance of the Internet, the association wants to incorporate an efficient online booking tool through which most travel purchases can take place. When AMA's current travel services contract expires, the development of such a tool will become part of the contract, whether the association renews its existing relationship or re-bids, says Guzman.

According to Martin Delahay, AMA vice president for strategic sourcing and facilities, the time to begin evaluating a provider's performance is shortly after the contract is implemented. He prefers to implement short-term (one-year, renewable) contracts for two reasons: 1) presumably, they keep providers operating at their highest level of performance at all times, and 2) they allow the association to continually rethink its needs based on emerging markets, breakthrough technologies, or shifts in organizational priorities or finances. "While it's very important to establish a sense of partnership and trust with providers, it's also vital for the association to remain nimble," he says.

To stay nimble, outsourcing will no doubt remain a key business strategy for associations domestically and internationally for years to come. As such, developing a comprehensive outsourcing strategy hinges on staying attuned to changing association priorities and core competencies, says Greaver, author of Strategic Outsourcing. "In the same way that auto manufacturers are today envisioning the new gadgetry and safety features that will attract tomorrow's drivers, organizations must consider what their current and future members and customers will need." The tricky part, he says, is keeping the pulse of your association's future core competencies--which may not currently exist--and projecting how those will fit with the evolution of your industry or profession so that you can readjust any and all of your current business practices and processes to deliver on those needs.

Secure Expertise

DONNA F. DUNN, AAEA EXECUTIVE DIRECTOR, admits that she was something of an outsourcing instigator when she arrived on staff six years ago. Her primary motivations at that time centered on updating the look of the association's journal and its production processes. Today, outsourcing activities account for about 10 percent of the association's budget and span human resources, computer technology, meetings logistics, and journal publishing. "For us outsourcing has been an evolutionary process as we've considered different functions on a case-by-case basis," she says.

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As is the case for many associations, AAEA staff have entertained each new option for outsourcing with cost savings in mind. But along the way, Dunn and her staff have likewise benefited from higher levels of expertise that the association could not have achieved without adding staff. "To be experts in a particular area, you can't expect staff to work on something part time or in their spare time and have the same level of proficiency as someone who performs that function full time," says Dunn. That's what finally convinced her to hand over human resources to a professional employer organization. "When we started to look at the total package, we realized we didn't have the time or knowledge in-house to maintain payroll, to search for new benefits and the best deals on medical insurance, or to provide ongoing staff training."

Among Dunn's list of questions when assessing outsourcing possibilities: What do we need? Do we have the expertise in-house? If not, can we learn the skills in a manner that makes it efficient for us to acquire that expertise--and what would we have to give up to do so? If we can't efficiently do this in-house, is it cost-effective to send it out?

PROFILE

American Agricultural Economics Association (AAEA), Ames, Iowa

Staff size: 8

Annual operating budget: $1.2 million

Membership: 3,000 individuals (economics professors)

Test an Emerging Market

SINCE 2000, USGBC HAS GROWN FROM 3 full-time employees to 37, with projections to add another 19 staff members by the end of this year. Membership has likewise exploded, essentially doubling in earlier years and more recently growing at an annual rate of about 75 percent. In addition, USGBC's projected budget of $17 million for 2004 is up from $9 million in 2003.

In large part, the council can attribute its astounding growth to its strategic use of outsourcing to develop core products for an emerging market and to test whether those products would generate long-term support for a staff infrastructure, says Terri Stewart, vice president of finance and operations. For example, the council's launch of its annual Greenbuild conference in 2002 has generated significant revenue and excitement within the industry, growing from 4,200 attendees the first year to more than 5,200 in 2003. "Currently, we still outsource the bulk of our logistics for our annual conference," says Stewart. Not knowing how successful the conference would be, the association did not want to invest up front in a new database to handle the logistics of the conference or to recruit and train staff. While those internal resources will come eventually, outsourcing allowed the success of the conference to build on its own merits rather than from necessity to support a staff infrastructure.

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Says Stewart, "Our strategy is to always look at outsourcing first, in part because of the learning curve of employees, and in part so that we can remain scalable, nimble, and lean--without the burden of excess overhead--and able to respond to whatever the market demands." To assess cost-effectiveness as it relates to outsourcing and hiring new staff, the council considers, among other things, the longevity of a project, office space costs and availability, and the level of required expertise. (See sidebar, "Implications of Outsourcing Versus Staffing Up.")

PROFILE

U.S. Green Building Council (USGBC), Washington, D.C.

Staff size: 37

Annual operating budget: $17 million

Membership: 4,400 company members

Provide Best in Class

ACCORDING TO VIVIANNA GUZMAN, AMA chief financial officer, nearly half--about $60 million--of AMA's annual operating budget purchases third-party goods and services in fulfillment of the association's mission and member services. The other $65 million is spent internally for equipment, systems technology, office expenses, and salaries and benefits.

Education is absolutely core to AMA's mission, says Guzman. A significant portion of AMA's outsourcing expenditures pay fees to speakers at AMA seminars and workshops throughout the United States. "The speakers are subject-matter experts whose day-to-day business experiences are critical for maintaining the hands-on leading edge in their fields. It would be impossible to in-source such services," she says.

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For the most part, that's what outsourcing decisions boil down to for AMA: Who can provide best in class? Two years ago, AMA outsourced mail and copy services because it recognized that expertise was readily available as a core competency elsewhere. The association could have dedicated the necessary resources to maintain the latest equipment, technology, and proficiency in those areas, but the association didn't deem it a priority to invest internally to maintain that particular service at its highest level.

Conversely, AMA has decided that certain functions should be run internally and not outsourced. For instance, AMA leases and operates executive conference centers in New York City, Chicago, Atlanta, San Francisco, and Washington, D.C. Combined, these represent 300,000 square feet of meeting space--and 300,000 square feet of fixed costs for the association, says Guzman. Although outsourcing alternatives exist, AMA chose to keep the function in-house because the association could not find any providers that offered training facilities and services with the level of expertise AMA had achieved and that its members had come to expect.

PROFILE

American Management Association (AMA), New York City

Staff size: 400

Annual operating budget: $125 million

Membership: 25,000 individuals (management professionals) and 3,000 company members

Want more information on this topic? Check out the "Outtakes and Exclusives" and "Link to Learn" areas at www.amonline.org.

RELATED ARTICLE: Implications of Outsourcing Versus Staffing Up

During the past decade, staffing at the Academy of Management, Briarcliff Manor, New York, has increased from 4 to 12 1/2 full-time employees. In 1994, the academy outsourced the copyediting of its journals. Today it outsources nine separate functions related primarily to journal and list management and fulfillment. "For us, outsourcing has not eliminated positions. Rather, it has allowed us to carefully grow the headquarters in the right direction," says Nancy Urbanowicz, the academy's executive director.

"Whether to outsource is the first question we ask before proposing the addition of new staff. And in our heavily volunteer-driven association, it's also the first question we ask when volunteers become overloaded and need help," she says. "But we are also aware the decision to outsource must always be intentional and careful. It's not a panacea, but well placed, outsourcing can be a godsend."

After relying almost exclusively on outsourcing to test an emerging market, the U.S. Green Building Council, Washington, D.C., has a new challenge: staffing up quickly, albeit smartly, to maintain and enhance quality of service and products to members. Terri Stewart, USGBC vice president of finance and operations, is currently working on a three-year staffing plan. She says the council will continue to rely heavily on outsourcing even as the association grows. And certain functions will remain outsourced, period. For instance, while staffing has increased in connection with product development, consultants will always play a key role, says Stewart. "I don't know that we would ever get to the point that it would make financial sense to build up staff to bring that completely in-house, in part because we need very targeted expertise for the shorter term to develop specific products." Likewise for providing certification services, for which having that third-party certification is key to maintaining the integrity of the certification process, she says.

While outsourcing provides the flexibility to bring on team members and let them go as needed, one downside is that outsourced staff often are not working solely for your association, says Stewart.

At the American Agricultural Economics Association (AAEA), Ames, lowa, "we look at outsourcing as we would any investment in staff or technology," says Executive Director Donna F. Dunn. "We don't see it as a quick in-and-out operation."

When AAEA staff decided to outsource meeting facilitation, they did so with the intent to work with the same consultant for many years. Likewise with human resources functions. "Hiring someone and then letting them go is a negative experience for the entire staff," says Dunn. "While eliminating a contract with a firm is less disruptive to staff, it can be equally disruptive to their workloads." And though the association would end an outsourcing relationship if the product or service were not meeting the association's expectations, it would not do so lightly--and certainly not without working with the provider to make any necessary adjustments for a productive and valuable working relationship, Dunn adds.

As Urbanowicz notes, out-of-house does not imply out-of-mind. Developing and managing vendor relationships is an essential component of the job description for any employee overseeing the task. "It's one thing to outsource ad sales, but working with that vendor to establish goals, develop leads, and pursue new opportunities adds a whole different dimension to that staff member's job." When the academy outsourced subscription fulfillment, it eliminated the administrative work associated with processing 5,000 orders annually. "That meant we could turn our sights to higher-level activity such as building our subscriber base," says Urbanowicz. But, she admits, that required a completely different mind-set and skill set. One lesson she has internalized is that outsourcing often creates the need for staffing adjustments or professional development. Don't short-change the need to coach staff in thinking about their jobs in a new way--to go from doing to managing and developing, she says. "That's not a transition all employees can make or make easily."

Karla B. Hignite is a freelance writer based in Colorado Springs, Colorado. E-mail: [e-mail].