Is Outsourcing Right for Me?

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.