Outsourcing -- do or don't?
Recently I read a number of blog posts about outsourcing:
When should you do it?
Why should you do it?
What are the best ways to do it?
What is outsourcing?
It is one of those terms that helps cause confusion. We all assume we know what it means, but as it turns out, each of us carries around our own definition which often doesn’t match how other people define it.
Even though the idea of “outsourcing” certainly includes your “supply chain”, we’re going to intentionally limit our definition of “outsourcing” to a situation where you:
Are contemplating moving a business function or capability you currently perform in-house to an outside provider
Need to add capabilities to your business’ tool-kit
Need to expand or supplement capabilities you already have
Why do people outsource?
Organizations will look to outsourcing when business leaders believe:
They can save money
They can add/remove capabilities as though they were a commodity with little differentiation between providers - external or internal
They need services in small bites and can’t afford to buy the entire “sandwich”
They lack needed expertise
Each of these reasons are valid in different circumstances. Let’s look at them one by one.
Saving Money and Real Costs
Proponents of outsourcing invariably adopt of mantra that outsourcing “saves money.” While saving money is important, saving a dollar on its own isn’t going to add to your top line.
Saving money alone isn’t going to fuel growth of your business.
Saving money alone can only help preserve what you have already made or built. It’s what you do with the money you save that makes a difference and can help boost your topline.
The problem with the way outsourcing proponents talk about “saving money” is that it is often measured only in identifiable dollars and cents. Too often the argument for “saving money” ignores hidden or hard to identify costs like these:
Cost of service and response delays
Costs of lower quality driven by low cost provider selection
Costs of overly restrictive contracts
Cost of losing a sense of shared destiny with the service provider
Before you decide on your outsourcing approach, make sure you have a reasonable and complete picture of how much it costs and what costs you avoid with your current approach. Things like:
Total payroll and benefits
Impact of the internal function on other parts of the company
Internal function response rates
Internal function time to resolve
Degree to which risk is mitigated through the internal function
Involvement of the to-be-outsourced function with delivery, client-facing activities, and quality control
Role the function plays in your corporate culture
Now try to put a dollar value on those activities and contributions. For instance, what is it worth to you and your business to have a 10 minute response time, or a 15 minute time to repair, or a 2% failure rate. What is the value of those? What would that cost you?
These will be important factors in laying out your service and performance expectations for potential outsource providers as well as giving you good benchmarks to evaluate if outsourcing really is better.
Add/Remove Commodity Services and Capabilities
Often decision makers, especially old school of thought decision makers, perceive services like IT and tech support as a commodity. You know, one tech support person is just like the other. One Accountant is just like the other. One production worker is just like the other. This thinking usually stems from the idea that roles and people are commodities, interchangeable and undifferentiated.
That type of thinking tends to ignore the value of sustained collaboration, team, the motivating influence of culture and shared outcomes. Outsourcing got its start there. Coupled with a desire to save money and a commodity approach to services, this attitude leads to run away outsourcing. An outsourcing and off-shoring gold rush where businesses seemed to outsource everything. Credit cards customer service to Russia, Tech Support to India and Malaysia, call centers to Ireland, etc.
The drive to save money and outsource all services seen as a commodity lead to some pretty embarrassing situations with clients and customers, impeded productivity, reduced quality. As services were outsourced, quickly driven by a cost savings mantra, businesses quickly discovered that outsourced services outsourced were not necessarily a commodity and that outsourcing doesn’t always lead to saved money.
Driven by short term thinking, decision makers were often blinded by the desire to drive costs out of their organizations, that they often ignored the strategic value or the non-quantifiables that made a function less a commodity and more of a differentiator.
Be sure your thinking is clear. Is the area or function you are looking to outsource actually a commodity in your organization? What does it add? How much will it cost to replace? What if you outsource and find that you shouldn’t have outsourced? What then. Certainly there are commodity services and functions in an organizations - be sure you honestly and broadly consider this within your particular context, expectations, and past experience. Try to differentiate between fact driven conclusions and wishful thinking.
Evaluate and consider the role a service or function plays in your productivity, resilience, agility, and quality of output. Make sure you understand if it is or is not a commodity. Review the role of the service of function from a strategic and from an operations perspective.
Small Bites rather than the full “Sandwich”
Seems like everyday a client or customer asks for features or services that you don’t currently provide. These usually just an extension or tweak to your product or service. The problem is that you don’t necessarily have that capability. For instance a customer who has asked for a website based on your core application, but also wants it to integrate with XYZ inventory system. What do you do?
Perhaps the feature is a good one and even has value to most of your customer base. It could even be a strategic addition to your product or service offering. To add the capability however you’d have to invest in staff and tech - not something you can do right now. You’ve never done this before AND you’re not even sure how to do it.
Outsourcing is the solution in this case. If the addition of the capability is a success, you’ll need to then decide if you want to buy the whole sandwich by making investment in bringing the function, production or expertize in house OR expanding the use of your outsourcing provider.
Startups will often face this dilemma in the tech category. They have a great idea for an application or a website but lack the tech know how to get it done. Outsourcing is the natural tack to choose: it gets you started quickly.
A loosely structured contract or an underfunded one will probably end up leading to trouble. There will likely be disputes about cost, features, deliverables and ultimately perhaps even ownership of the product or intellectual property. Development projects like this tend to meander from feature to feature or design to design as the real needs are uncovered. It will most likely cost you more than you anticipate.
Whatever you do in this circumstance, make sure you have a strong contract that protects your information, methods, and processes. It should also clearly identifies you as the owner of the tech and the idea. Stay involved in the process. If you end up not moving the function in house, with a solid contract, mutual protections, and work history in place, you’ll have the basis to build and expand on the partnership as you need it.
If you aren’t going to buy the entire sandwich, make sure the parts you do buy are professionally prepared, right sized and structured so that after delivery of every bit you can change sources if you feel compelled to.
Having a qualified project manager or liaison person who will work with your suppliers will be vital. They are too important - hire the project manager. A competent project manager will be a resource you can bring in on so many efforts.
Lacking the Needed Expertise
When it comes to technical, legal, Six Sigma, financial, or other compliance related work - most small organizations lack the in-house expertise to address their needs. In House hiring experts in many of these subjects is just cost prohibitive, or they aren’t needed very often, perhaps monthly, quarterly, etc. If the business process and context is such that these people aren’t needed every day, and their skills are hard to find/pay for - outsourcing these specialized functions make great sense. Again - pay close attention to your contracts, who owns what, and what type of indemnification clauses are in your contract.
These types of arrangements, much like the sandwich arrangement can work to everyone’s benefit. Especially if the expertise is needed on a fairly regular basis and not necessarily for projects.
Of course if find someone who is competent in many areas - for a small business - that person might be a great resource addition. Hire them.
The lack of expertise and the decision to hire or not hire them is impacted by the strategic and operational value they add. If the skills and services they provide are strategic - meaning they require a great deal of intimate knowledge of your business or processes, that they directly impact the quality of your service or client deliverable, or they hold a significant amount of process knowledge and control not replicated somewhere else in your organization: think twice before you continue or start outsourcing this role. Is there a way to bring it in-house.
Key Decision Factors
In summary, the decision to outsource a function, projects, or expertise is not an easy decision. It depends heavily on your business process, your clients, availability of talent, your product, and the complexity of what you do.
Outsourcing can be a great benefit to your organization. Be sure you know why you are outsourcing, that you have broadened your thinking to ponder non-quantifiables, and that have both a near and long term perspective.
Here are some dimensions to think through before making an outsourcing decision.