by Tom Montgomery

Created on: April 09, 2010

The theory behind outsourcing is enabling the organization to focus on its core business or businesses while hiring "experts" to manage and operate non-core functions thus creating cost savings, efficiency, and flexibility. The most common areas for outsourcing are human resources (benefits, recruiting, etc.), IT, maintenance, and call center. Depending on the business’ size and complexity, other areas are supply chain (procurement, distribution, logistics, etc.) and even manufacturing.

Having been engaged in the outsourcing of services for businesses for over 20 years, I have seen companies turn a blind eye to the advantages as well as other companies embrace outsourcing to the point where it becomes detrimental to their business model. The best approach is a carefully measured, strategic plan where the decision is made based on sound financial analysis, a partnership mentality, and long term thinking in regards to its mission and principles.

1) Sound Financial Analysis – Outsourcing companies can make the case to most businesses that they need to outsource some product or service. Outsourcing companies spend a tremendous amount on marketing efforts and even team up with consulting firms to convince companies that outsourcing is the only way to go! But the smart companies will always listen, but verify by conducting their own cost analysis as to the benefits of the proposal. Questions to ask are: Is this a short-term gain or long-term reduction? Is this a core function of our business? How will it effect our employees and our customers? What are my competitors doing in this area? NEVER rush into an outsourcing decision without sound financials to back it up!

2) Partnership Mentality – Outsourcing functions can bring about significant changes within an organization. What if it doesn’t work out? There will be a lot of "I told you so!" throughout the company, which is never good for morale and undermines leadership confidence. Therefore, the outsourcing agreement must be a partnership mentality. In my experience, it is very important for the outsourcing company to be very transparent in its operations and go the extra mile in forging productive relationships within the company. Structure the agreement so that an element of risk / reward is involved and make it well known throughout the organization that the outsourcing company’s success in related to the overall company’s success. When a true "partnership" agreement is formed, both companies benefit by working toward common goals.

3) Long Term Results – The decision to outsource a service or product has to be based on long-term thinking, not short-term gains. While immediate impacts to the bottom line are many times significant, the long-term impacts are much more important. What happens if our business grows beyond expectations? What happens is there is an unexpected drop in business activity? Of course results should not be based solely on profits either. Long-term thinking forces the company to review impacts to its mission and guiding principles. If these are compromised in the long run, then outsourcing should be reconsidered.

In summary, outsourcing can bring benefits to companies of various sizes and/or markets. Outsourcing certain functions can allow growing companies to be flexible and responsive as they expand. Larger companies benefit by the efficiencies and economies of scales creating leverage to lower costs. But whether large or small, expanding or contracting, companies MUST do their due diligence when considering outsourcing. Taking this measured approach will ensure the benefits of outsourcing without sacrificing its customers, employees, or long term sustainability.

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