Outsource or keep it in-house?
Outsourcing certain tasks and processes is a good choice for many businesses. Handing over to experts in specific areas can save you money and reduce the possibility of mistakes caused by ignorance or less-than-optimal infrastructure. It also frees up other limited resources like time and energy, so you and your team can focus on the core aspects of your business.
By the very nature of outsourcing though, you lose a certain amount of control over those contracted-out tasks, exposing you to potential risk. For example, you may have to deal with quality challenges or leaks in confidentiality. Taking all these aspects into account is important when you’re considering outsourcing.
How to choose what processes to outsource
There are many ways to decide what to outsource and what to keep in-house. The process and decision-making framework below will help you consider your options from the most important perspectives.
Step 1: Understand your objectives
Before you go any further, you need to be very clear on what you want to achieve. Try to identify your goal using specific figures. For example, perhaps you want to:
- Reduce costs: If so, by how much?
- Scale or grow your business without adding unsustainable overheads: What are your projected growth numbers vs the costs you are willing to add to achieve this growth?
- Increase efficiency without increasing costs: What percentage increase are you looking for?
- Free up your time: How many more hours would you like to use elsewhere?
Step 2: Make a list of outsourcing possibilities
As we’ve seen here, there are many areas you could outsource. Start by making a full list of all the possibilities for your specific business, so you can apply your thinking to each one individually.
Step 3: Plot these on the decision-making matrix
Plot each possibility on the diagram below, based on its strategic and operational importance:
Strategically important areas are the ones that give your business its edge. Perhaps they help make your company unique or they provide a competitive advantage in your marketplace.
Contribution to operational performance
These are the tasks that help your business run smoothly. On the flip side, if they’re not done correctly, they can cause great disruption to the daily flow of operations.
Step 4: Establish the outsourcing quadrants
The quadrant each activity lands up in will give you a good idea of whether to eliminate, outsource or retain it, or to consider a strategic partnership. The activities in quadrants 1 and 3 are the ones you should consider outsourcing, albeit in different ways.
The Outsourcing Decision Matrix
Quadrant 1: Outsource to a trusted partner
These activities are strategically important but not critical to operational efficiency. Responsibility for them could be shared with a trusted partner who specialises in that particular area.
Example: You might consider forming an alliance with branding and marketing experts, who would then consult you at every stage of the process for input and sign-off.
Quadrant 2: Retain in-house
These activities differentiate you from your competitors and are normally referred to as ‘core competencies’. They are strategically important and have a huge effect on operations. As such, they are high risk and you will want to have them as much under your control as possible.
Example: For your e-commerce business, this could be manufacturing an unusual product that you are well known for.
Quadrant 3: Outsource completely
These tasks may not be anything unique i.e. they’re not of strategic importance, but they do need to be done in order for your e-commerce business to run smoothly.
Example: Processing orders, then picking and packing products needs to be done regularly and correctly, as does shipping. Payroll is another example.
Quadrant 4: Eliminate
If a task isn’t obviously strategically important or contributing directly to the day-to-day running of your business, you may be able to eliminate it. Think hard before you do though, as it may have an indirect effect. This quadrant can often be less specifically about outsourcing, and more about running a tight, well managed ship.
Example: Are you or your employees focusing on something that is not adding value to your business from a strategic or operational perspective? Some big companies have got rid of in-house canteens or subsidised crèches, with mixed results.
Step 5: Identify possible service providers
For quadrants 1 and 3, gather the details of service providers you feel could deliver on your required services. For each one, approach them to ensure you fully understand their services and fees. You could also ask them to quote for your specific needs.
Step 6: Run your numbers for outsourced vs in-house processes
This step is possibly the most important one, and it’s also likely to be the most detailed and time-consuming. It’s vital to properly assess your internal processes, and compare these with what an external service provider could do for you.
Running cost comparisons for doing the job in-house vs outsourcing it will tell you how much you will save – or how much extra it will cost you (although there may be other benefits that make up for that). Be sure to consider the following aspects:
a) Direct benefits
These are the obvious financial aspects. Some will be fairly simple to assess while others may be more difficult. For example, if you are outsourcing:
- The cost per unit may be slightly higher or lower.
- You may need fewer staff members, so your salary costs will be lower.
- The contractor may take more or less time to do the job than you would, which will affect how much you can produce in a given time.
- An expert contractor may do the job to a higher standard, which could have better results or allow you to charge more for the final product or service.
b) Indirect or related benefits
Indirect benefits are the opportunities that open up when you outsource some tasks or processes. For example:
- You may be able to move some employees to other areas of the business where they can provide more value.
- The floor space previously taken up by the activity that is outsourced becomes available to be used for something else.
- If doing the task in-house has involved a lot of energy or problem-solving, you will be freeing up that energy and focus to apply it more productively elsewhere.
There are always risks involved on both sides of the equation and it’s important to take these into account too. The kinds of questions to ask here are:
- What would the impact be if the business to which you are outsourcing were to close down?
- How open will your employees be to changing the process they are used to?
- How much proprietary information will you need to share with the contractor?
- Could outsourcing the task possibly lead to more issues (and if it is outsourced, would these still be your problem)?
Across all of these categories, there will probably also be other factors, specific to your business or industry, that need to be taken into account.
Try to put a monetary value on every one of the aspects involved, even if some of it involves guestimation. Going through this process also helps to reduce the impact of any emotional triggers that may come up, for you or others, as you consider outsourcing.
Once you’ve completed the comparison and then referred back again to your specific goals, you should be much closer to deciding what makes the most sense for your business.
The bottom line…
Considering what to outsource is an important process. It’s well worth speding the time to evaluate the cost, risks and impact of contracting out some of your company’s activities.