Outsourcing – When is it a Good Business Model

Outsourcing – When is it a Good Business Model
Monday, June 18th, 2012 Scott Bossart

                I hear it a lot of discussions in many companies as I make my travels around the country, “We have outsourced that job”.  Different departments and job functions are being “Outsourced” all the time.  Basically someone internally in the organization has decided to hire externally to the organization a service, position, role, or function with an overall strategy to control costs and/or gain expertise to improve efficiency.  Often times this means hiring companies in other countries.  Depending on whom you talk to, and their relationship within the organization, the opinion as to whether or not it is good business can go either way.  In most cases, there is an over resounding opinion that it is designed to save the company money.  One of the biggest hurdles many companies get hung up on is with the guidelines and parameters the relationship must work within to include issue resolution.  Typically this queue gets loaded up due to gaps in training, monitoring, and performance between the outsourced companies external inputs…meaning the actual company and its associates providing the required inputs to the outsourced company performing their function or role.  If I didn’t lose you on that sentence, than we are doing good so far.  There are some companies that basically outsource everything…including the kitchen sink.  You might be surprised to know, some very large companies with very well-known brands, do not actually make anything.  They only hold the name and brands and outsource all manufacturing of their product.  However, my goal is not to try to analyze this level of outsourcing.  On the other end of the spectrum, there are also companies that basically handle everything internally and hire the necessary staff to manage it.

                Almost any job can be outsourced to a certain degree.  Some are due to an inconsistent or low work load that the organization feels can be handled better externally.  For these, there may also exist a lower level of expertise that equates to longer processing time due to its infrequent nature.  Rather than attaching or assigning these duties to an internal person, an external entity may make more sense.  Some outsourced jobs are high workloads, but routine processing tasks that lend itself to consistent and mass data flow through the organization.  For these it basically becomes a matter of robust runs rules and allowing the external entity dealing within a specialized focused staff.  In either case, it becomes a matter of answering the question if the external organization can provide a higher level of expertise at a cost that can be managed better then with an internal staff.  At the end of the day, the organization looking to outsource, typically wants that organization they hire to function and behave as if everyone was internal.  Meaning the customer will get the same care and attention from the outsourced provider as they would with the internal staff.

                The costs implications for an organization to outsource, is often times the one key factor making the final decision.  It is important for an organization to consider ALL costs involved on both sides of the coin.  This means it is important to thoroughly factor all internal costs to include what some believe are hidden costs such as benefits, related but non-productive work, regulations, etc.  True costs are the obvious ones such as labor, office space, injury costs, etc.  The costs on the other side of the coin are equally important.  These costs to consider or weigh against are associated to the potential outsourcing.  The organization being outsourced to handle these duties will have their own costs and will be billed back to your organization, obviously.  But what about the costs for internal staff which are still required to communicate with the firm?  Somewhere there has to be linkage back to the organization for performance measures, data transition, etc. which will require an individual/s assignment and labor hours spent.  The most underestimated costs are the potential for issue resolution.  This one item can become the single one ‘cost to maintain’ that UN-justifies outsourcing.  Granted, if things go right, specific people can be replaced by the outsourced organization.  However, when issues arise and it requires other staff to step into the picture, now the costs have just gone up exponentially.  Not to mention the impact of taking them away from their normal duties resulting in a domino effect.  It cannot be taken lightly and in some cases can grow very large due to mismanagement and poor short and long term planning.

                So the question remains, is it worth the costs to outsource?  This cannot be arbitrarily and is not a one size fits all answer.  Typically, where multiple plants are involved, the calculation justifications conclude yes, for the greater good of the organization as a whole.  For these the program is, also typically, rubber stamped throughout.  In some cases though, this can be a very a risky business model for those plants whose costs will go up due to the outsourced program.  Now they become less viable for long term cost control and sustainability.  In many cases with this type of program implementation, for some facilities, it can even impede improvements and could equate to loss productivity with things now being out of the facilities internal control.  It is important to ensure there is a solid and consistent set of engagement rules that include issue resolution.  Routine feedback needs to be provided in both directions that includes ongoing, long term, continuous improvement for the linkage between the organization and the outsourced organization.  This should include continual education for those providing inputs to the outsourced provider in order to head off issues.  Again, another factored cost calculation in the original plan.

In the end, it is important to NOT take outsourcing lightly and fully understand what is being outsourced both from a total costs perspective and scope of control.  If the outsource project model does not reduce every facilities’ total cost to maintain, it probably should NOT be done to every facility.  If you have been following my bog from the beginning, you will find my justification this statement.  Before outsourcing something, make certain you do thorough research in the total costs involved.  After rolling out the program, spend due diligence to ensure it is functioning as designed.  Ensure the program has built in points to revisit the details and evaluate the progress.  Many outsourced programs fail quickly due to ambiguous expectations and processes with presumed conclusions that don’t work, yet the contract locks the two organizations together in this continual loop of failure.  Ask the company you are outsourcing to, for examples of failures as well as successes, even if the failure resulted in a separation between the two companies.  Evaluate how they recovery from the failures turned out and what they thought were the biggest drivers for the successes.  Most of all…Be Objective.  Don’t get caught up from standing in the proverbial woods and not being able to see all the trees that will be affected.  I’ve only scratched the surface on this discussion.

Stay Well

Scott B.


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