When scaling your business, you can have time, or you can have money – but you can’t have both. A common growing pain for business leaders is the feeling of your resources being pulled in several directions, with limited time to get the work done. Days get shorter and resources get tapped. At some point, every successful entrepreneur arrives at this crossroad. The key to high performance is then asking , “W here do I spend my resources and where do I spend my time? ”
Over the years, businesses in a similar predicament, having reached their current capabilities or looking to rev up their performance, have asked another question: why should we consider outsourcing IT, HR, Accounting, etc.? My initial response is, “Let’s first focus on the general question: why outsource at all?”
The most common answer: by outsourcing, your business gets access to a broader range of professionals and expertise. This is probably a true statement. A company that specializes in a particular service most likely has a higher concentration of professional expertise than a company that doesn’t.
Another common answer: by outsourcing, the business can remove non-core activities from your daily management so that your company can now focus more of its energy and time to your core business. This is also most likely a true statement. By outsourcing, a business would free up internal resources to have more time to focus on the core business vs. non-core activities.
While these are good answers, a business leader could be putting their business at risk if a decision was merely based upon access to professionals and freeing up time.
My advice to business leaders who are considering outsourcing business activities is to ask themselves three critical questions:
- Do these business functions differentiate us or give us a competitive advantage in the market?
- How important is it to mitigate the risk if it isn’t done correctly or in a timely fashion?
- Does the cost of managing it internally exceed the value it brings to the organization?
Competitive Advantage
Creating a competitive advantage in the market is critical to differentiating and building a successful company. Thus, a key element to consider when considering outsourcing is what impact will outsourcing have on your competitive advantage in the marketplace? Conversely, will outsourcing an activity have a negative impact on the business?
Unfortunately, a large retail chain may not have considered this when they chose to outsource their online shopping experience. The retail industry has been directly impacted by e-commerce and online shopping trends. As such, brick and mortar stores have had to try and adapt to the changing retail landscape by establishing an online presence to compete. Toys “R” Us had a decision to make. Should they build their own online store and fulfillment system or outsource to a company that specializes in online sales? They made their decision, and in 2000 announced their 10-year partnership with Amazon. While it initially was a great success, over time, it was a decision that contributed to their bankruptcy and failure. Toys “R” Us did not create an autonomous online presence and was directly competing with all other toys sold through Amazon.
Alternatively, the competitive advantage could have been the case of Procter & Gamble. Competing within a fast-paced and rapidly-changing consumer market, the personal health company faces the pressure of getting new products out ahead of its rivals in order to be successful. P&G, therefore, decided to outsource some of its research and development activities, which boosted productivity by 60% and generated more than $10 billion in revenue from over 400 new products. Today, about half of P&G’s innovation comes from external collaboration.
Mitigating Risk
Every business leader must manage risk to drive their organization forward. Some risks are easily identified and others more subtle. Outsourcing can help businesses better manage and mitigate risk in those areas that they may not be as sophisticated. A few of the more common risks are: financial risk, competency risk, and competitive risk.
Financial risk is the amount of exposure a business has to increased expenses, potential loss of revenue, and allocation of resources. For example, spending money on new systems, which could quickly become outdated and expensive to maintain.
Competency risk is not knowing what you don’t know. A business must continually grow their capability or else face the risk of a wreck – some are repairable, others put you out of business. For example, you may consider hiring more experienced professionals from large firms to strengthen your team.
Competitive risk is asking yourself, am I investing in areas that don’t bring additional value, or am I investing in areas that help the company drive revenue? For example, the rule of 10:1 states that a 1 percent increase in effectiveness can improve profits by 10 percent. Investing in your effectiveness can add capacity and profits to the bottom line.
These three risks can be tied together. By investing in people and knowledge for competency, you may put a strain on financials, and, in turn, you could possibly be investing resources in the wrong area, which is a competitive risk. The key is to identify your current levels of effectiveness and then identify and implement those initiatives and activities that will have the quickest and most significant impact on your organization.
Management Costs
Unless it gives you a competitive advantage, you may be spending resources in the wrong areas. Moreover, if it takes significant time, money and resources to mitigate the risks, then outsourcing brings unmatched value.
For instance, if you’re investing your own resources into operations instead of new products, you may lose out to competitors because your internal focus wasn’t on the area that drives revenue and growth for your company. Take, for example, a law firm that wants to manage their own IT infrastructure. They could easily spend twice as much on finding the right people and systems—plus maintenance costs—than if they hired an outside firm. An outside firm could provide both and keep up with technology updates at a much lower, controlled cost.
A better illustration of this concept is taking place in international airports today. If you’ve gone through U.S. Customs in the past year, you will have noticed the rows of digital kiosks that allow people to sidestep a much longer customs line simply by being able to scan your passport, collect a few questions about your trip, and snap a quick photo of you. U.S. Customs has now created a Mobile Passport App which disrupts the current and costly systems in place. Those same kiosks are now collecting dust as mobile technology has found a way to reduce the cost of maintaining kiosks. A simple software update on one application versus thousands of kiosks is much more cost effective and time efficient.
The pace of technology grows at such a rapid rate that your business may have systems in place that will be replaced within the year by something cutting edge, rendering your system much more expensive to operate for “less-than” results.
So again, the question of outsourcing is a game of give and take with where you invest your time and money. The cost of one investment takes away from another, so you need to view the value of your business activities through three perspectives: is there a competitive advantage, will it help us mitigate risks, and does the cost of managing it ourselves exceed the value it brings our business?
