Outsourcing is an important strategy for business success, yet leaders must be clear about the why, the tradeoffs, and the risks. One of the most powerful ways to improve your product development or service levels, focus your organization on critical tasks, and shape your budget is to outsource services and parts of projects to people who can do it better or for less cost than you can internally.
The biggest challenges come when leaders make “narrow” decisions about outsourcing, not thinking of the larger economic or organizational culture issues. For example, outsourcing can create inefficiencies and more unproductive downtime for your employees, which is often missed on the Excel sheet demonstrating the cost savings of a contractual service level. Outsourcing can also affect your brand and your interaction with customers.
Since you read this far, you’re a smart leader who wants to make smart decisions. Here are the questions you should ask (and answer) before outsourcing any task or service:
What problem am I trying to solve?
Be crystal-clear about what problem you need to solve. “I need to cut my XYZ costs” is not specific. Think broadly about the whole scope of the problem, and the interrelated parts. It’s never problem vs. no-problem; you’re going to have to choose which problems you prefer to have. Develop a bias to solve specific problems with specific solutions. When the unanticipated new problems emerge (and they will) you’ll be able to adapt and create new solutions more easily.
What am I optimizing for?
There are multiple dimensions to any service, including cost, timing, quality, scope, standardization, customer intimacy, and more. What dimension is most important? What is next after that? Optimize for these in order. You cannot optimize on all dimensions simultaneously; you must accept trade-offs. Make sure that any outsourcing effort respects the same priority of dimensions that are important for your business.
What premium am I willing to pay for ________?
Outsourcing always comes at some premium, and not only money. Outsourcing often, but not always, creates additional direct costs. How much is it worth to free up people and time to work on things you consider more valuable? How much is additional quality that a professional service can produce worth? What cost difference can you happily accept? What’s the impact of losing internal control over some process or service?
Don’t forget to think through premium costs in terms of time, scope, speed, quality, standardization, consistency, customization, geography and logistics, and control levels. Not everything is uniform over time. Standardization and consistency are worthwhile in many situations, but not all. Faster response time usually costs more up front; what is speed worth to you overall? What are the premium costs for slower but less expensive? What’s the value of higher quality deliverables? What control are you willing to surrender?
10% premiums are usually no-brainer decisions because there are many ways to get more than 10% value back. It should take longer to evaluate 25%, 50%, and 250% premiums.
Think through this premium question before you get into any contract negotiations. You should always know the upper limits of a good-for-you deal.
How does this help my organization?
Ideally you can focus your team on the highest-value, most satisfying work, and deliver superior results for your customers, employees, and business owners. It’s foolish to only think about cutting costs when deciding what to outsource and how. Consider outsourcing anything which:
- You’re not good at, or far worse than a reasonable-costing service
- Necessary-but-unpleasant work that doesn’t thrill your team
- Processes which can be optimized with minimal impact to customer service
There are cultural implications to shifting work from employees to anyone else. What pride-of-ownership might be lost, and how could you redirect attention to better work? If you have to cut positions to make the outsourcing economical, what affect does this have on your employee group overall? How can we retain the best practices we’ve developed internally as we pass work along to others? How could we benefit from better skills and practices that an external service provides?
You also need to deal with the financial realities of any increased operating costs in your budget and cashflow tracking. The narrative of “outsourcing is always better and cheaper” is naïve.
How does this help my customers?
No customer, no business. How will this outsourcing help you deliver superior product or service to your customers? If you’re planning on reducing COGS or internal service levels to employees to reduce costs, what is the indirect impact over time to your customers? It there something about a process or effort that you’re doing internally which is part of your brand or unique selling proposition? Does this outsourcing affect your interaction with your customers? Be wary of outsourcing anything which touches the core of your business.
Again, here’s the list of questions. Answer these and you’ll make better decisions about what you outsource, to whom, and why.
What problem am I trying to solve?
What am I optimizing for?
What premium am I willing to pay for ________?
How does this help my organization?
How does this help my customers?
Leave a Reply