By Jeff Richards
Managing Partner
In today’s highly competitive global environment, many companies are taking a close look at outsourcing. Should they outsource? And if so, why?
What exactly is outsourcing?
To answer these questions, you first need to understanding exactly what “outsourcing” is. Outsourcing is always a service, and it differs from the purchase of normal services in three material ways:
- The service is performed to a service level that is managed by the service provider.
- Some kind of time commitment exists (e.g. fixed term or continues until terminated).
- The buyer usually has some personnel offset.
Some examples may help clarify the idea.
Some things that are not “outsourcing” include purchasing and implementing an ERP system (which is a product with installation services), and staff augmentation (you manage the resource, the provider does not).
Some things that clearly are “outsourcing” include EDS operating the IT infrastructure, using Laidlaw to operate the school district’s buses or ADP handling payroll processing.
Services that can be defined either way include tax preparation and application maintenance. Each are examples of “outsourcing” if the work is ongoing (has a fixed term) and the provider manages the personnel resources.
What are some of the best reasons to outsource?
There are hundreds of reasons why companies outsource, and most companies target multiple objectives. The most common reasons to outsource fall into three main categories: finance, operations and labor. Good reasons to outsource are to:
- Improve quality, process or customer satisfaction
- Access difficult-to-source skills
- Reduce capital requirements
- Reduce human resources overhead
- Avoid investing in equipment, people or other resources
- Lower costs or facilitate low cost entry
- Provide disaster recovery and business continuity
- Improve technology
- Level resources (including labor) during peaks and troughs of demand
- Leverage international time zones
- Gain additional points of view and industry experience
- Focus on the organization’s “core” business
In fact, I would argue that the best reason to outsource a service is to focus on your core business (i.e. the reason you have customers, profits and market share) and minimize the distractions.
By far the most common reason companies investigate outsourcing is the promise of financial reward. In the final analysis, nearly every outsourcing deal provides some form of financial advantage. After all, executive management would be neglecting their fiduciary responsibilities if their outsourcing arrangement actually increased costs. In the few cases where outsourcing appears to cost more, an in-depth analysis shows the cost to be less than the internal cost to obtain the same quality, functionality or growth ability that the provider is promising.
A word of caution: focusing on lower cost alone is usually a recipe for disaster. This is because any function can be delivered at a lower cost if quality, functionality and quantity of service are ignored. The best outsourcing strategies focus on the non-financial reasons to outsource, and use financial rewards as the ultimate tie-breaker.
Conclusion
Once you have a good understanding of some of the benefits that outsourcing can bring, it’s time to evaluate which of your organization’s processes and functions are good candidates for outsourcing. I’ll cover this topic in my next blog. Stay tuned!
About Jeff Richards
As an inspirational leader with the ability to develop the “big picture” strategy then drive it down to executable tactics for implementation, Jeff leads our Professional Services team. Clients benefit from Jeff’s 25+ years of experience developing and implementing transformative business strategies.
Jeff’s experience spans both industry (including Materials, Operations and IT Management) and consulting. He developed a unique global perspective during his tenure in significant P&L management-level positions in both Asia and Europe.
About CIO Professional Services
CIO Professional Services LLC is a top-rated IT (Information Technology) consulting firm, based in the San Francisco Bay Area, specializing in strategic IT consulting and business / IT alignment. Companies come to us seeking assistance with their information technology strategy as well as to source interim CIO / CTO employees or fractional CIO / CTOs.