Taking the outsourcing decision
Updated: Nov 18, 2020
You started a business because you are good at something and it interests you, say a bakery. After achieving initial success you started expanding your business, your product line and your team. Soon you realized that you were involved with multiple aspects of the business and you neither had the time nor the inclination to do them. If you started with baking cakes, you would soon have been involved with managing social media pages, getting customers, procuring ingredients, maintaining equipment, packaging, deliveries, finances, taxes, recruitment, training etc. With all this, your passion, baking cakes, is now just one of the dozens of responsibilities you shoulder.
Given this situation, you need a partner who can help you with your responsibilities. You can either delegate some tasks to your team or outsource it to an external partner. For a small business, delegation is difficult as the owner still needs to overlook the process, manage the risks and own the outcome. Outsourcing makes sense when your business isn’t too small to manage the function yourself nor is it too big to appoint senior and experienced management.
Outsourcing can have a significant impact on your bottom line. It can reduce overheads, bring fresh expertise to your business, and free up your time for innovation and other vital tasks. But there are risks too. You could lose control of important information, or end up with products or services that don't meet your company's quality standards.
So, how do you take this decision? In this article we explore the fundamentals of outsourcing and how to go about taking the outsourcing decision.
First of all, why outsource?
Employees are most effective when their skills and interests align with their responsibilities. A business owner is no exception.
Saves time. If you are an entrepreneur or a small business owner, you wear multiple hats. You are the Chief Officer of every function in your business. But with just 24 hours in a day and there is only so much you can do. Outsourcing frees up your time to focus on what you do best. So consider outsourcing when you are stretched for time. As a thumb-rule, outsource any non-core activity on which you spend over 18 hours in a month.
Reduces cost. Outsourcing is often cheaper than hiring an employee and it also takes away some level of uncertainty about costs. Most business owners aren’t accurately able to attribute costs to a particular activity. In general, you should consider time cost of the employee/supervisor involved, tools required, risk of doing it wrong, research or training time and the overheads. Consider outsourcing anything that an external partner can do at a reduced cost.
Lack of expertise. You goal is to run a successful business, not to be a master of all tasks. You may be able to manage writing content, manage payroll or file taxes with some online research and tools. But that is not your goal. Also, by doing these activities on your own, you will never be able to do it in the most efficient manner or keep pace with new developments around it. Think of outsourcing anything that is complicated, fast changing and not your strength.
Get (free) advice. This is the most under-rated and often ignored benefit of outsourcing. Outsourcing agencies usually don’t charge for initial consulting or sharing tips they learnt by serving other clients. An IT outsourcing agency can give advice choosing the right hardware, scrap value of old devices, when to invest in new technology etc. Just by understanding the service they provide, you can get valuable insights about running your own business.
What should you outsource (and what not)?
Progressive entrepreneurs realize the unstoppable power of outsourcing to handle aspects of their business that are essential but simply don't make sense for them to deal with personally.
The following decision matrix is often used to help with deciding how to manage each activity. All the activities can be categorized into the four buckets.
Retain (Highly critical, High impact on operations) – activities like management and core competencies, like recipe and ingredient mix for a bakery.
Strategic alliance (Highly critical, Low impact on operations) – activities like marketing can be jointly managed along with a marketing agency.
Eliminate (Not-critical, No impact on operations) – activities like MIS preparation can be automated and human intervention can be eliminated.
Outsource (Not-critical, High impact on operations) – the types of tasks that are best outsourced fall into three general categories:
Highly skilled. Analytics, financing and fund raising are such activities.
Highly repetitive tasks. Accounts payable, data entry and shipping inventory could fall into this category.
Specialized knowledge. An example is the statutory compliance for employees.
Requirements for successful outsourcing
Ideas are worth nothing unless executed... execution is worth millions. Success of outsourcing is determined by your commitment to its success.
Set objectives. Outsourcing can be either for tasks which have a defined output or effort-based tasks. For example, payroll has a defined output but content creation is an effort-based task. For tasks with defined outputs, it is worthwhile to share guidelines, deadline and summary reports. On the other hand, effort tasks are driven by results like traffic generation, engagement of the post etc.
Find the right partners/people. Aim to find partners, rather than contractors. Your partner should be able to provide insights, productivity improvements and reporting. Trained professional staff dedicated to project management and superior information systems ensure added value to your organization both in terms of performance and corporate intelligence.
Outsourcing is a strategy. The aim of outsourcing should be to increase the value of organization’s core competencies and not simply a like for like replacement. You cannot outsource all your problems or issues. Only the critical issues that distract you and your staff from important issues are the ones that should be considered for outsourcing.
Remember you get what you pay for. It is easy to outsource to the lowest bidder but that may not be the best decision. Many agencies charge more for value-added services. For example, if you are delivering cakes and snacks, a delivery partner which has live tracking will be more appreciated by customers than a delivery agent with no tracking.
Pro tip: outsource something after doing the activity yourself for a short time. It will help you understand what you are paying for and the value added by your partner. It will also help you realize what add-on services you need and the right price to be paid for these services.