Is Outsourcing Right for Me?

By Jeff Richards

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In today’s highly competitive global environment many emerging companies are asking the question “Is outsourcing right for me?” The short answer is probably a qualified yes. It is likely that some part of your organization could benefit from an outsourcing assessment, but “which part” and “why” are hard questions.

To make sure we’re all thinking about the same thing let’s start with a definition of outsourcing.

First outsourcing is always a service. Second outsourcing differs from the purchase of normal services in three material ways: 1) the service is performed to a service level that is managed by the service provider, 2) there is some kind of time commitment (i.e. fixed term or continues until terminated), and 3) the buyer usually has some personnel offset.

Some examples may help clarify the idea. Some things that are not outsourcing are: purchasing and implementing an ERP system (it is really a product with installation services), FedEx delivery services (no time commitment), staff augmentation (you manage the resource not the provider).

Some things that are clearly outsourcing include: EDS operating your IT infrastructure, using Laidlaw to operate the school district’s buses, and ADP doing your payroll processing. Some services that can go either way include tax preparation and application maintenance—they are outsourcing if the work is ongoing (has a fixed term) and the provider manages the personnel resources.

What to Outsource

One of the most commonly asked questions is, “How do you decide what to outsource?”

One approach is to place processes/functions in a three-by-three matrix. The horizontal axis is the organization’s delivery capability (poor on the far left and outstanding on the far right.) The vertical axis is business drivers (common on the bottom and competitive advantage on the top.)

The horizontal axis (delivery capability) is usually well understood and is simply a rating of competency when benchmarked with service providers. The vertical axis (business drivers) is slightly more complex.

Essentially business functions that are common to all businesses fall at the bottom. If a function is unique to an industry, then it falls about half way up. Things that are unique to an individual organization, that are not commonly available in the industry, and perceived to add significant competitive advantage are high on the scale.

The thought process is that things in the bottom left are “no-brainer” outsourcing targets. Plainly put, you aren’t very good at them and every business needs the function so it is easy to find someone that can do it better than you (and usually cheaper).

The cells surrounding the bottom left corner need to be evaluated on the merits of the function and the corporate direction. The top row and right hand column generally are not good outsourcing candidates. A service such as managing your telephones might appear in the lower left hand corner. The organization performs these tasks poorly when compared to similar service providers, and they are generic to all industries. This means that managing telephone services should be considered an outsourcing target.

Is it any wonder that many organizations have in fact outsourced the management and administration of their telephone services?

In contrast, a customer loyalty program in the retail grocery industry is unique and not generally available (at least as of the writing of this document). If a company were to perfect such a program, become competent at delivery, and attain positive results it would be placed in the upper right of the matrix.

Outsourcing the application would probably decrease the amount of time that the company holds a unique competitive advantage which could easily offset any potential cost savings.

Finally, for example, collections for a hospital should probably be evaluated for outsourcing. Some of the factors that might play into a decision are the collection rate, cost of collection, and the hospital’s community service policy.

Just because a hospital has a very pro-patient write-off policy doesn’t mean the collections function can’t be outsourced. There are providers who specialize in helping patients obtain funding which actually increases hospital collections while developing a very positive patient relationship.

Reasons to Outsource

There are hundreds of reasons why companies outsource and most companies have multiple objectives they want to achieve. The most common reasons fall into three main categories: finance, operations, and labor.

By far the most common reason companies investigate outsourcing is the promise of financial reward. Some of the more common financial rewards are lower cost, reduced capital requirements, improved cash flow, investment avoidance and turning assets into cash.

I am not aware of any outsourcing deal that, in the final analysis, didn’t have some form of financial advantage. Executive management would be shirking their fiduciary responsibilities if they outsourced a function that simply cost more.

In the few cases where outsourcing appears to cost more, an in-depth analysis shows the cost to be less than the internal cost to obtain the same quality, functionality or growth ability that the provider is promising.

A word of caution: Focusing on lower cost alone is usually a recipe for disaster. This is because any function can be delivered at a lower cost, if quality, functionality and quantity of service are ignored. The best outsourcing strategies focus on the non-financial reasons to outsource and use financial rewards as the ultimate tie breaker.

The second category of reasons falls into the realm of operations. Some of the more common reasons include: improved quality and customer satisfaction, better utilization of technology, leverage of international time zones and operations, and to keep the company focused on the core business.

The final category of reasons is labor. Common reasons to outsource are access to difficult-source-skills, the need to scale labor, to reduce human resources overhead, and to gain additional points of view and industry experience.

Perhaps this last point is the most important for small, growing companies who are focused on their core business and lack the time or resources to take full advantage of advancement or technology in the common business processes.

Evaluating outsourcing nearly always leads to improved business processes, either through internal improvements or outsourcing. So while outsourcing is not for every company, nearly all companies will benefit from periodically asking the question “Is outsourcing right for me?”

Jeff Richards is a partner at Tatum, LLC, an executive services and consulting firm with over 700 partners and principals in 33 offices nationwide. With 25 years of experience, Richards leads Tatum's national Sourcing Solutions practice. He can be contacted at jeff.richards@tatumll.com.