The Benefits of Outsourcing the Company

I have always been an advocate of IT outsourcing but over the last several years it has become apparent that services available from many sources has made outsourcing of other business processes a viable option, as well.

I was talking with a friend recently and had an epiphany regarding this subject: Just like IT, there are dozens of business processes that are necessary to manage and grow a business, but they are not adding any value to the product or service the company produces. For example, one might think that a clothing manufacturer was in the business of making dresses, however when you really look at their business they are in the dress design and marketing business.

Every business process that is not directly associated with designing and marketing dresses is a non-value-add process. The accounting for purchasing material, paying suppliers, receiving payments, etc., is ancillary to the business of dress design and marketing. Based on this example, those business processes should be examined as possible candidates for outsourcing to a partner whose business is making accounting processes as efficient as possible.

When you look at the business case for outsourcing, if you only look at the direct cost you realize that hiring people and putting them in place to do a particular business process may cost less. However, looking at the bigger picture — including the opportunity costs — gives you a more realistic picture of the cost of outsourcing.

For example, if you have a manager who is focused on managing a group and the concomitant time it takes to do the paperwork of hiring, firing, resolving issues, etc., that manager may not be looking at ways to either reduce cost by making the process more efficient or looking at opportunities to increase productivity that will go straight to the bottom line. You might even get lucky and find a partner that can do the right job for even less than you can do it yourself.

Organizationally, you will want to rethink what your organization looks like. In a traditional organization structure the executive management team oversees the work of a set of middle managers who in turn oversee the work of individual contributors in various business units. Under an outsourced environment, you still have the executive management team, but they may have fewer employed middle managers and may be overseeing the work of one or more outsourced vendor/partners who are in turn managing the individuals at the partner company.

As a business you have the flexibility to have more or fewer employees by only hiring and firing, which can prove costly given added training costs and benefits or severance packages. With an outsourced environment you can flex up or down depending on your business cycle much more easily by negotiating that variance into the contract. With multiple vendors vying for the business you can flex even more and cost/value considerations are easier to determine.

Given the premise that the non-value-add business processes are outsourced, what does that do to the way you hire managers? Today, you may look for someone who has particular expertise in the business process that you want them to manage. That is still true in an outsourced environment, but there is another skill that is critical, that of vendor or partner management.

You’re asking a manager to oversee the work of a group over which he or she has no direct control. The skill in communicating the needs of your company and gaining the cooperation of someone outside the company is crucial to the success of the business. Outsourcing also means that your managers will be focusing on improved metrics, benchmarking and performance evaluation, which leads to more efficient processes, which, in turn, leads to more time available to focus on recapturing lost opportunities.

Outsourcing the company is an option that many businesses should consider given the flexibility and potential return to the bottom line.

Mike Scheuerman is an independent consultant with more than 26 years experience in strategic business planning and implementation. His experience from the computer room to the boardroom provides a broad-spectrum view of how technology can be integrated with and contributes significantly to business strategy. Mike can be reached at [email protected] [email protected].