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When Outsourcing Makes Sense "Outsourcing" is a term that has worked its way in to the everyday language of business. Some times it means something as simple hiring an outside firm to work on a project basis. Other times it means something much more dramatic, often with strategic implications to the business, such as closing a distribution center and hiring a third party logistics provider to manage the process. Regardless of the reasons a company has for outsourcing, it has become an increasingly common tool used by businesses to manage costs, increase revenue and free them to focus on their core competencies. When does outsourcing make sense? There are a variety of elements that must be factored in to answering this question:
A small biotechnology firm that I work with has outsourced a number of activities critical to its business including research and development, legal and human resources. Why? Because the core competencies of this particular organization are effectively meeting the standards of the patent registration process, apply for and receiving research grant monies and lastly, developing relationships with potential marketers and distributors of its products. It would be unrealistic given the current financial structure of the company to hire a full-time staff of research scientists and patent attorneys. What the company has done, however, is found that it can tap in to the resources it needs to help it build its business with a "just in time" model for the use intellectual capital. Hiring specific experience for a limited time on a project basis can also make abundant sense when a company is met with an unexpected event. A large distributor with whom I work recently engaged us for a very specific hiring project that required swift response and a solid understanding of labor laws. Hiring an outsource firm to supplement their very thinly staffed HR team, allowed this company to rapidly expand, then contract the resources they needed to meet this particular hiring challenge. "Permanent" outsourcing of services provided by supply chain management companies can provide effective solutions to the inventory management, distribution and tracking issues facing companies such as manufacturers, software developers and the like. When time money and resources can be applied with a higher rate of return to product development then actually physically moving the product to market, outsourcing can make sense.
Sharing a capital asset with other companies is another method of outsourcing. Examples include: IT infrastructure; distribution/warehouse space; corporate jets; job-shops. The outsourcing can be in the form of a fee paid to the provider of a service, such as in the case of IT outsourcing. In other cases, there is a literal fractional ownership, as in the increasing popular model of private jet ownership. Regardless of whether the method is fee based or actual ownership, there are significant advantages of having access to high cost assets without carrying the weight on the company's balance sheet. A local manufacturing company, looking for ways to control costs in the face of declining margins chose to outsource the management of its local area network to a firm specializing in that area. The infrastructure required to support this one small company, could have supported a company six to eight times its size. By using a firm that has many clients, the infrastructure costs are, in essence, spread over an amalgamation of companies six to eight times its size. The cost reductions are significant, and the service levels equal to or better than having staff on site to manage the LAN.
In a growth cycle, it is often difficult to calibrate how many new resources are needed, when they will be needed and whether or not they will be needed both long-term and full time. Outsourcing can be an excellent tool to support growth while maintaining control of costs, particularly in administrative functions. I have had the opportunity to work with a number of rapidly growing organizations and have experienced first hand how cost effective and practical using outside resources can be to help manage growth. Areas such as human resources, marketing and public relations, legal and accounting and other professional services are the easiest and often most reasonable to outsource during a growth phase. As the company's growth cycle stabilizes and the organization matures, it becomes evident which positions then need to become "in-sourced". The challenge is often greater for those positions that are directly related to product development, production and day-to-day operations. Regardless, a healthcare provider with which I am familiar has used, with a great degree of success, a product and service development executive on a contract outsourced basis. Once it has been determined that outsourcing makes sense, there are several critical factors that must be managed by the company's management team: Ensuring that the estimated costs stay within acceptable limits; retaining the ability to control the business strategy and managerial authority; back-up planning and resources in the event of the failure of the outside source to perform. Outsourcing, like any other tool, can be highly effective when used strategically and managed effectively... and like many other tools, works best when the objectives, accountabilities, deliverables and measures are aligned to meet the performance goals of the business. |