Internal Service Providers vs External Service Providers

Here is a situation that keeps repeating itself everywhere I turn: internal vs external services.

When I am talking about service providers, I mean the activities that help the company run, but add no value to the product the customer buys. Things like HR, IT, Facilities Management, Finance, etc. There is a specific situation that plays itself out over-and-over again with these internal organizations.

A service–let’s use the example of payroll–is needed to pay employees of the company. When the company is starting out, employees are simply paid by the president or another random person working in the company. As the company grows, the workload increases and an office manager is hired to take care of these things. Over time an HR department is stood up with several related functions, payroll just being one of them.

Then, the company really starts to focus on their margin. Competition has stood up and offering the same cool ideas and the company needs to figure out how to cut costs to keep their prices down. The days of being the fat, dumb, and happy big kid on the block are gone. Normally cuts come from the services that support the company–places like HR. After all, they are non-value added in a lean environment, right and these people have been with the company for several years and now make pretty good salaries. Basically, they are a drain, and we need to keep them to a minimum.

Oh, the plight of the service organization…can’t live without em, but don’t want to pay them.

Because they are lean and mean (and maybe mad), the services that they always provided to the company start to get harder to accomplish. The company is growing, but their office is not. The results of their work suffer and it takes longer for them to do stuff. The company (internal customers) starts to get frustrated with the poor service. In some cases the company has become so big that no one even knows how this service is even done or who does it.

In order to keep up, the payroll service starts creating self-service capabilities to ease their workload. Essentially they start outsourcing what they do to the customer. They sell this as a positive thing, but it adds time and complexity to the employee and removes the level of expertise that the service was hired for. Imagine the frustration that is setting in.

Next, the internal customer, frustrated with long waits, lack of and poor service, and having to do many things themselves, decides to take matters in its own hands. The thing is, now the company is so big, that everyone has their own budget and can do what they want. So, factions of the company hire their own payroll person or even department. Of course this person doesn’t do everything but they start taking on the roles that the official department should be doing, but isn’t being very effective at. At first, the original payroll department doesn’t have a problem with this…good for them. But then people start questioning what they do, versus what this new person is doing and why are they even needed?

Next step, the payroll department figures out that payroll is their job and demand that the people doing the work in the company all work under the same department. There is a big effort to consolidate all these new positions paid for by the internal customers and the payroll department becomes big enough to handle the workload again. The problem is, these employees are now part of the payroll department and service everyone under the same flawed systems that was causing the problem in the first place. Internal customers quickly get upset because they lost their personalized service and the company decides, in its annual planning activity, that the payroll department is a good place to cut staff because it has become “too big.”

Again, the frustration sets in, and the next thing you know ABC Payroll Services, an outsourced payroll service, finds its way into the company. It might be a small engagement at first. In some cases, the payroll department itself might outsource non-core, busy-work functions to them. The thing is, they specialize in payroll, do it for many companies, and have cheaper labor that less benefits. Suddenly everyone is questioning the value (i.e., cost and ROI) the payroll department brings when this new and very efficient and effective service provider is doing such a good job for very little money.

To save money, the payroll executive decides to quietly outsource their whole department, saving a job for themselves to “oversee” the activity.

Are you an internal service provider to a company? What value do you bring to your company? Have you outsourced yourselves through customer self service? Are you already challenged by someone else doing part of your work?

This story is played out over-and-over again with every type of service in companies. There are ways to combat this, but many do not see them. Consider the situation above and what the service provider could do to make sure this doesn’t happen.


About johnrknotts
John Knotts is a results-oriented business professional leader, manager, and supervisor with experience from the military, small business, several nonprofits, and is currently a management consultant. Working out of the San Antonio, Texas, he retired from the Air Force in July 2008 and worked with Booz Allen Hamilton from the end of October 2008 to December 2011. Now he is a Strategic Business Adviser with USAA. John leads large and small strategic transformations and has extensive experience in the areas of change management, strategic planning, process improvement, strategic communication and marketing, strategic human capital and resource management, education and training, facilitation, organizational design and development, modeling and simulation, financial and budget analysis, activity based costing and management, quality management, competitive sourcing and privatization, leadership development, and business development.

One Response to Internal Service Providers vs External Service Providers

  1. Very interesting.
    But it is true with every aspect of life! This is called CHANGE. Change is not necessarily to correct the things but most of the time moving things and winning favorable results in short terms only.

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