New Study Shows That Outsourcing Media Activities Outside of Its “Core Competencies” Can Not Only Save Money But Also Improve Operational Performance

Philip M. Stone July 24, 2006

Traditional media is caught in a bind: advertising is basically flat, costs are going up, and with so much cost-cutting going on there are questions of how much fat is left on the bone and whether organizations are not already cutting into the meat.

But one smart way to save costs, and get an operational boost at the same time, is to agree there are certain business functions that others can do better, and probably at less cost. Take accounting functions, for instance, do they really have to be done in-house or can it not be done better and less expensively by hiring outside experts whose expertise is solely in accounting?

A fascinating new report, Outsourcing, published by the World Association of Newspapers (WAN) makes the conclusion that outsourcing does work if it is done right, but it may not be as simple as it might seem.

Doing it right are the all-important words. According to a McKinsey report in February 2005 nearly 50% of all outsourcing arrangements did not deliver what their sponsors had hoped.

Outsourcing is not new to the media. As the report mentions, the BBC hopes to save some £50 million pounds by outsourcing some of its human resources functions to a third party. Capita, in a 10-year, £100 million contract.

The WAN report studied in 2005 the top 10 key newspaper departments of  any newspaper – big or small –  and concluded that distribution was the single most outsourced function, followed by printing and IT.

But whereas above we have mentioned HR and accountancy as two areas that seem logical outsource choices, the study found those were the very two functions least likely to be outsourced by newspapers.

“This is perhaps surprising because they could not be considered as core competencies for a publishing company,” the report concludes.

Editorial functions are something a media company could well say  are within its realm of competency and not to be done by outsiders, but there is surprising amount of partial editorial outsourcing going on, particularly in South America and Asia, according to the report.

The study takes particular note of Reuters setting up its own outsourcing center in Bangalore, India. Starting with just six reporters in the summer of 2004, the report now says that the Bangalore operation has grown to 300 and will eventually have 1,500. Naturally that didn’t go down well with the Newspaper Guild in the US that claims Reuters was replacing skilled US and Canadian workers with lower paid, less experienced journalists from other countries.

But in truth there were certain jobs being done by journalists in the US and other places that didn’t really involve high journalistic skills and it is those that have been transferred to India, leaving the highly skilled US and Canadian workforce to concentrate on those activities that do need those qualified skills.

CEO Tom Glocer is quoted in the report saying in a staff memo, “Work gets done where it can be done most effectively and efficiently …and it helps free up people and capital to do different, more sophisticated work”

And that editorial outsourcing trend might just be catching. Dow Jones, publisher of the Wall Street Journal, now seems to have gotten the same message. In announcing a complete review of editorial procedures last week it said it was looking to ways of reducing the cost of producing what it calls “commoditized” content -- such as regular stock market reports -- to allow editorial resources to concentrate on unique, differentiating content – exactly what the Reuters goal was.  It was not that long ago that CEO Richard Zannino was cracking jokes about not covering New York from India.

And Dow Jones is also into outsourcing – announcing also last week a deal to outsource back office functionalities that the company says will save it about $15 million annually starting next year.

On a geographic basis, it seems some functions are more popular to be outsourced in some parts of the world than they are in others. For instance, for advertising, 21% of Asian newspapers are fully outsourcing their ad sales whereas that is true with just 8% in Europe and 23% in North America. And of those that do, it is the smaller newspapers, not the large ones.  Circulation is something the Europeans don’t like to outsource – 65% of European respondents said they had no plans to outsource circulation activities whereas the number drops to 56% in North America and 32% in Asia.

All in all the survey found that 12% of the respondents have fully outsourced major functions while 37% have partially outsourced. So there’s a lot of room to do more, but there is great reluctance by newspapers to do so. “No plans to outsource” still ranked the highest comment in every one of the 10 major functions.

Asia showed the highest level of outsourcing, followed by Europe. In Asia and Europe the main reason for outsourcing was so they could focus on core activities, whereas in the US it was cost savings.

As the report concludes, “Newspaper publishers are willing to embrace outsourcing but do not see it as a solution to problems in every area. The decisions are driven by a desire to focus on core activity and save costs with the biggest fear being loss of control.”

But today, with so much pressure on maintaining those 20% newspaper profit margins, and so much emphasis going into reducing staff, cutting newsprint usage, and even thinking of taking ads on the front page, perhaps the time has come to take a good look within to see if there are not parts of the business that others could do at a lower price and more efficiently.

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