Strategically Speaking

In today's highly competitive global environment, many companies are asking the question “Is outsourcing right for me?” The short answer is probably a qualified yes. Some part of almost every organization could undoubtedly benefit from an outsourcing assessment, but “which part” and “why” are the hard questions.

What exactly is 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. Some kind of time commitment exists (e.g. fixed term or continues until terminated).
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 a product with installation services), FedEx delivery services (no time commitment), and staff augmentation (you manage the resource, not the provider).

Some things that are clearly outsourcing include Hewlett Packard operating the IT infrastructure, using Laidlaw to operate the school district’s buses or ADP handling payroll processing.

Services that can be defined either way include tax preparation and application maintenance. Each are outsourcing if the work is ongoing (has a fixed term) and the provider manages the personnel resources.

Reasons to Outsource

There are hundreds of reasons why companies outsource. Most companies have multiple objectives targeted. The most common reasons fall into three main categories, including finance, operations and labor. A bulleted list includes:

• To improve quality, process or customer satisfaction
• To access difficult-to-source skills
• To reduce capital requirements
• To improve cost efficiency or facilitate low cost entry
• To provide disaster recovery and business continuity
• To improve technology
• To level resources during peaks and troughs of demand
• To leverage international time zones
• To focus on “core” business

The best reason to outsource a service is to focus on your core business (the reason you have customers, profits and market share) and minimize the distractions. 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. There aren’t many (if any) outsourcing deals that did not have some form of financial advantage in the final analysis. Executive management would be neglecting fiduciary responsibilities if they outsourced a function that 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 final category is labor. Common reasons to outsource are access to difficult-source-skills, the need to scale labor, reducing human resources overhead, and to gain additional points of view and industry experience. The last point is perhaps the most important for growing companies that are focused on core business and lack the time or resources to take full advantage of advancement or technology in the common business processes.

What to Outsource

“How do you decide what to outsource?” is one of the most commonly asked questions. One approach is to place processes/functions in the matrix below. The horizontal axis is the organization’s current competency (poor on the far left and outstanding on the far right). The vertical axis is process value (generic on the bottom and competitive advantage on the top).

Matrix Structure

Current Competency (the horizontal axis) is usually well understood and is simply a rating of an organization’s competency when benchmarked with service providers. Process Value (the vertical axis) is slightly more complex. Essentially, business functions that are common to all businesses are in the bottom row; e.g. telephone services, payroll administration, IT operations, etc. If a function is specific, but common, to an industry, then it falls about half way up; e.g. fleet management for the transportation industry. Things that are unique to an individual organization that are perceived to add significant competitive advantage and are not commonly available in the industry are high on the scale, PayPal for eBay. These are the reasons a company has a market share and loyal customers.

The Cells in the Matrix

Things in the red (bottom left cell) are “no-brainer” outsourcing targets. Plainly put, an organization is not very good at them and every business needs the function. It is easy to find a provider that can do it better and usually cheaper. The yellow areas (cells surrounding the bottom left corner) need to be evaluated on the merits of the function and the corporate direction. The green areas (top row and right hand column) generally are not good outsourcing candidates. If there are performance issues with the processes in these cells then they should probably be fixed internally and leveraged, even spun off as business units.

Services, such as telephone management services, data center management or other back office functions 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 many organizations have outsourced the management and administration of telephone services?

In contrast, a customer loyalty program is unique and not generally available. 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 reduce the amount of time the company holds a unique competitive advantage that could easily offset any potential cost savings.

IT application development tied to new product introduction for an organization may reside in any of the cells in the matrix. It would depend on how strategic it is viewed and how well it is performed.

Finally, based on the above matrix, collections 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 community service policy.

Conclusion

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?”