Outsourcing: Simple Cost-down or Strategic Advantage?
We’ve all read the outsourcing stories where an entire manufacturing group or customer service division was outsourced to save money with disastrous effect. Without question, outsourcing has seen some low points over the years. But, it CAN provide benefit to a company and its employees when done correctly. Outsourcing is a sound, responsible management concept for any business type or size.
A thorough cost/benefit analysis is key to understanding whether outsourcing is a prudent decision for the business. As with any strategy, the positive and negative effects of outsourcing must be evaluated and should include both direct and indirect impact. In the end, outsourcing needs to provide a long-term strategic advantage that extends beyond just short-term cost savings.
I know of one manufacturing company that outsourced their software development to reduce labor costs only to bring it back inhouse two-years later because maintainability and scalability were lacking. The aggressive revision cycles of the products weren’t considered when the outsourcing decision was made. They definitely forewent any labor savings with the operational reset and the resulting product delays.
Likewise, I know of another manufacturer that outsourced their painting operations for multiple reasons. First, outsourcing the operations allowed them to remove an expensive, disparate part of their operations. Secondly, it freed up operating capital and resources to reinvest back into the business. Lastly, it allowed them to offer customers MORE paint options as the outsourced partner had much broader capabilities and expertise. In the end, this was a strategic win for the organization and their customers.
The difference in the two outcomes can be attributed to competent due diligence and better strategic fit.
“The other part of outsourcing is this: it simply says where the work can be done outside better than it can be done inside, we should do it.” - Alphonso Jackson
Understanding that outsourcing cannot be taking lightly, here are a couple of reasons you may want to continue down the outsourcing path:
Cost Savings - This is the most common reason for outsourcing. In simple economic terms, outsourcing can add to the bottom line by reducing both variable and direct costs.
Can outsourcing eliminate or reduce operational expenses, staffing costs, or a significant capital investment for equipment? If the answer is “Yes”, then great, time to move on to the next step. Along with the cost reduction advantages, consideration must also be given to the quality effect, extensibility, indirect overhead and strategic alignment. Changes that lower costs but increase complexity in other areas of the business should be carefully considered before making the decision to go forward.
Added Capabilities or Expertise – Let’s face it, your organization probably has some challenges that distract the business from its core mission. Do payroll and benefits management take an excessive amount of time? Would the marketing team from some expert assistance in lead generation? Outsourcing partial or full responsibilities in such functional areas could provide significant overall value to the company even if a direct cost savings isn’t realized.
For example, if a marketing consultant costs $25K more a year but delivers $250K in increased revenue wouldn’t that be a good investment? Outsourcing shouldn’t always be about cost reduction.
Time to Focus on Core Business – Refocused attention is a major advantage of outsourcing. Successful outsourcing allows owners, managers, and employees to better focus on the core competencies of their unique business. Outsourcing can decrease the time spent in non-core areas giving owners and managers more time to devote to business growth.
Have you and your management team ever walked into the office at 8am with key objectives for the day only to leave late into the evening with only 20% complete? The ‘necessary’ distractions of a business can introduce detrimental long-term effects. Ensure your team stays focused on the items important to business growth.
Reduced Liability – Some functional areas carry with them a certain amount of liability such as payroll, taxes, regulatory compliance, etc. Outsourcing these functions can possibly reduce liability exposure as more focus and experienced team members are brought into the fold.
The power of outsourcing is a combination of economic benefit, operations efficiency, and business empowerment. Outsourcing can be a valuable part of the any management toolbox, but only when used correctly.
Jeff Cloutier is the founder of OnTarget Strategy in Boulder, Colorado. We help businesses grow through improved business and marketing strategy, execution, and delivery. Want to talk more? Reach out to us here.