Cutting costs is a goal of many CEO’s and managers, and outsourcing is a popular method for doing so. It has been dragged through the mud thanks to stateside job losses and poor English spoken by overseas call centers, but when it’s properly done, it can be beneficial to the outsourcer, the contractor, and the customer.
Outsourcing strictly to find the cheapest possible way to operate will likely create headaches and could backfire in the big picture. It’s therefore very important to find outside contractors for good, sound reasons. Following are some circumstances that could make outsourcing a good move:
The Desire For Simplicity
Some companies just prefer to keep it simple. They have built their business on a single product or service, and they want the lion’s share of their resources to be used directly in the process of providing it to customers. When shipping companies want to deal only with their basic processes, they find companies for truck factoring to handle the logistics of locating jobs, measuring costs, and paying the company for the shipment. The trucking company doesn’t have to do credit checks on customers or wait weeks for payment. The factoring company takes care of that.
So when the business model is to project the company as a lean, mean producer of a good, getting some of the work out of the house and into the hands of specialists can build brand value and save on overhead. Firms like this include those who market themselves as a quaint little cottage industry. Their simplicity is part of their brand; imagine buying a garment billed as being sewn by local craftspeople in a historic building, with just one computer in the place. It builds a nice, folksy image, and preserving that is easier when some functions are farmed out.
The Growth Phase
A start-from-scratch business usually experiences a fairly protracted stage when it’s not a big business yet but has outgrown its small business status. This is usually when a few employees have been hired after being entrepreneur-run for a time.
At this point, the firm begins to have some fairly specialized needs in certain areas that extend beyond their actual provision of the good or service for which they are known. However, the demand for this work isn’t high enough to hire someone full-time, and utilizing a part-time employee is not practical because they may not be available when needed.
Shipping is a classic example. In its earliest days, a business will use a commercial shipping company to handle their small volume of packages. As they grow, their output exceeds what a normal route driver can collect, and they have a choice between establishing their own fleet and finding a shipping company for the work.
In certain cases, the former may be best. Year-round sales and a need to be seen directly by the consumer can justify purchasing or leasing trucks and putting them on the road, covered with advertising. Beer companies have this well in hand. Their product isn’t seasonal, and their consumers are everywhere. So it pays off for them.
When shipping volumes fluctuate through the year or the potential market isn’t represented by so many people, things can be different.
High Levels of Specialization
Still other companies may have sufficient size and resources to employ full-time personnel for ancillary tasks, but the level of specialization may be so high that they struggle to find and retain workers. A perfect example of this is any firm that does international business. The ins and outs of customs, tariffs, exchange rates, and the like require a very skilled staff in accounts receivable, and if inputs are imported, there may be a need for those skills in payables as well.
And the products don’t have to cross borders to meet this test. After 9/11 and the Oklahoma City bombing, many goods are strictly regulated for handling and sales. These regulations evolve continuously, keeping the learning curve steep and the practicality low of keeping up using your own staff.
We’ve looked at lots of different approaches here. But the underlying theme is this: Constantly examine the functions you perform that extend beyond your actual production, and when it’s justified, don’t be afraid to outsource.