Everybody is doing it. Regardless of industry, regardless of functional role, there is a constant pressure for organizations to at least consider the notion of outsourcing pieces of their business (and the roles and people that belong to these).
The reasons for considering outsourcing are many, and often-times this decision does make economic and business sense.
But not always.
I have seen companies outsource functions to their great detriment.
Going in, the case for outsourcing is often: a) reduction in opex by paying a third party less than what the outsourced service is costing the company (in terms of staff pay; office space; and associated expenses) b) reduction in depreciation charges by having the third party provide capital equipment used in providing the outsourced service c) improved business focus (by outsourcing functions and business units viewed as peripheral to the core business) and d) improved business bench strength (since the outsourcing provider employs many people performing the service being provided). a) and b) are easily quantifiable.
There are trade-offs though in outsourcing, and it is these that typically are tough to quantify and often-times under-estimated. Where these are greater than believed, a company may at best end up with no net gain, and may in fact even incur negative benefits over time.
What are these trade-offs and how can a company protect itself from achieving a zero sum game outcome?
Trade-offs:
e) Loss of entry level positions. Organizations need places to house new and junior employees. Predicting the future potential of recent University graduates is extremely difficult given their limited work and volunteer experience. It is only by testing these recent grads in entry level (and lower paid) positions that organizations develop talent and create an employment cost effective culture of promotion from within. If all of the entry level positions are gone or even if they are gone in the support groups, organizations will spend more to buy talent on the street, and will only then get a sense of fit, after the fact.
f) Loss of productivity. Outsourcing firms make their money in part by leveraging off of the talent they employ on behalf of clients. They have them handle larger workloads; more clients; and have them deliver only the services agreed to in the contract. These same employees though, if employed by the employer, typically handle many more diverse tasks, are much more flexible in terms of taking on new, temporary, or changed roles, and do so at a lower cost when all is factored into the equation.
g) Sense of Camaraderie. Entry level and support employees often times are those who most contribute to the organization being an enjoyable place to work. They organize, participate in, and encourage participation in company events. Without them, these events don't happen or come across as sterile and forced.
h) Loss of control. There are no unimportant functions in a successful business. Yes, moving software development and call centre activities to India or China or the Philippines may provide substantial dollar savings vs. handling these in Canada (even after travel and communications and training and staffing costs are factored in). There is however a degree of loss of control that occurs, due to cultural, time zone, frequency of contact differences that can result in potentially large risks to the business. One has only to look at the Barings Bank failure and wonder if the trader had been based in the U.K., there would have been the same freedom to execute and hide trading activity.
How then to ensure that outsourcing decisions are made prudently?
1. Consult with the experts. No, not the outsourcing providers (although they provide valuable market research). Consult with your in-house experts and listen carefully to them. It is ok to determine that pieces of the business need to deliver a certain % gross margin or operate at a certain % of opex. If you have competent leaders in the areas you've targeted for improvement, they will figure out and be motivated to help you achieve this, and their solutions may or may not lead to an outsourcing arrangement.
2. Ensure that you understand and have articulated what your business value proposition and resulting organizational structure to deliver on this is, and that you've checked any proposed outsourcing against these to avoid acting in opposition to these principles. If for example, high client service is a key to success, and a support function works closely with a client facing function to deliver this, it may not make sense to outsource the support function.
3. Discount projected outsourcing savings by approximately 25% and increase projected costs of outsourcing by 25%. If the numbers still make sense, and there are no checkmarks against key risks to the business, then look to outsource.
4. Review the outsourcing agreement regularly. Don't just look at the dollars, but ensure that there is an honest feedback process in place with internal users of the outsourced service to validate that the overall benefits of the outsourcing still outweigh all of the tangible and intangible costs of same.
In the end, there is always a case for considering outsourcing. Like any other business decision though, it must be considered thoroughly, and through the right lens. Otherwise, the risks of a zero sum game outcome grow substantially.