Outsourcing

What outsourcing is

Outsourcing (الإسناد الخارجي) is an arrangement in which an organisation entrusts one of its activities to another party, which performs that activity for it under a contract, instead of the organisation performing it with its employees.

The activity stays part of what the organisation needs done. What changes is who does it and on what basis. Before the arrangement, the work is carried out by people the organisation employs. After it, the work is carried out by another party, and the link between the organisation and that work is a contract with the party that performs it.

Which activities outsourcing suits, and which it does not

The practical rule for choosing what to outsource is to hand over what is necessary but not differentiating. That means an activity the organisation cannot do without, but whose excellent performance makes no difference to the customer. The activity has to be done, and done properly, yet doing it better than others does not change why a customer chooses the organisation.

What the organisation’s distinctiveness rests on is kept in house. The reason is the effect outsourcing has on knowledge. When such an activity is outsourced, the knowledge of how to perform it moves outside the organisation, and it moves gradually, until it becomes hard to recover. The experience gained from doing the work builds up with the other party, not with the organisation.

The costs compared in an outsourcing decision

The comparison in an outsourcing decision is not between the employee’s wage and the price of the contract alone. Each side of the comparison carries more than its headline figure.

• The internal cost. It includes the wage, the benefits, the equipment, the training and the management time spent on the activity.
• The cost of outsourcing. It includes the value of the contract, the cost of managing the contract, the cost of the transition to it and the cost of leaving it later.

Among these items, leaving out the cost of exit in particular is what can make an outsourcing decision hard to reverse. When the decision rests on the cost of entering the arrangement and running it, the cost of leaving it appears only when the organisation wants to bring the activity back or move it to another party.

What does not move with an outsourced activity

Outsourcing transfers the performance of the activity. It does not transfer the organisation’s responsibility for the result, either towards its customers or towards the bodies that regulate it. The organisation remains answerable for what is done in its name, whoever does it.

That is why an outsourcing contract is built on three things:

• Measurable service levels. They state what the other party is to deliver in terms that can be checked, so that performance can be judged against the contract and not against an impression.
• A right of access and audit. It allows the organisation to look into how the activity is being performed and to review it.
• Clear arrangements for protecting data. They are needed where the activity involves the data of employees or customers passing through it.

On the third point, the Saudi Personal Data Protection Law (نظام حماية البيانات الشخصية), or PDPL, uses two roles. Article 1 of the PDPL defines the controller (جهة التحكم) as the party that determines the purpose of processing personal data and the manner of it, whether it carries out the processing itself or through a processor (جهة المعالجة). Article 8 of the PDPL provides that a controller choosing a processor must choose one that provides the guarantees needed to apply the PDPL and its Implementing Regulations, and must verify that the processor complies; that choice does not relieve the controller of its responsibilities. Article 8 of the PDPL leaves the detailed provisions on processors to the Implementing Regulations. How an organisation handles the data it holds on its staff is covered under employee data privacy.

Outsourcing and the workforce

An outsourcing decision is a human resources decision as much as an operational one. It has three effects on the workforce:

• The composition of the team. It changes with the decision.
• Skills. They move outside the organisation, together with the activity in which they were used.
• Workforce planning. It is affected by the decision. The approved and funded posts that follow from that planning are described under headcount plan.

The employment position of the workers in the outsourced activity is subject to what the Saudi Labor Law (نظام العمل) and its regulations provide. It is therefore not handled as an internal administrative arrangement that the organisation settles on its own terms.

Outsourcing also has a statutory meaning in Saudi Arabia. Royal Decree M/44 added to Article 2 of the Labor Law a definition of outsourcing (الإسناد): the service of providing a worker to work for a party other than the employer, through an establishment licensed for that purpose. Article 30(1) of the Labor Law, as amended by Royal Decree M/44, prohibits practising that outsourcing activity without a licence from the Ministry of Human Resources and Social Development. The statutory definition concerns the provision of a worker. The definition given at the start concerns an activity performed by another party under a contract. The arrangements under which a worker of one establishment works for another establishment, including those under the Ajeer programme (أجير), are set out under employee secondment.

How outsourcing differs from a flexible workforce

A flexible workforce (القوى العاملة المرنة) deals with fluctuations in demand by redirecting the organisation’s existing capabilities. When demand rises in one area, people and skills that the organisation already has are moved to meet it. Outsourcing moves the activity outside the organisation entirely.

The difference lies in where the knowledge ends up. A flexible workforce keeps the knowledge inside the organisation. Outsourcing trades that knowledge for the ability to concentrate on the activities that remain in house.

The other arrangements under which people do work for an organisation without being on its register of workers are compared under contingent workforce.

This is an explanation of the concept and of the statutory provisions cited, not legal advice.