Steve Owens’ The Upside of Outsourcing
Over the past few years, outsourcing has become a dirty word. The word conjures up images of sweatshops in some far distant land where some faceless multinational company exploits workers. Whether or not there is any truth to these portrayals I have no idea; however, I will argue that outsourcing is responsible for the success of modern society.
In the beginning, we did everything ourselves – farmed, hunted, tool making, etc. Then one day, someone said, “I will specialize in tool making, you specialize in hunting and you specialize in farming” What happened was amazing – the modern digital world we currently live in. Outsourcing to others and specializing in what we did best was the world first and possibly best, win-win.
So if outsourcing is focusing on the one thing we can do best in the world, and we let others focus on what they do best, then I am all for it. Of course, exploiting people is wrong, but most outsourcing does not involve any exploitation – every company outsources many things: legal, raw material, building the office, office supplies, computers, software, etc. No company can be completely vertically integrated and would not survive without its vendors. It’s just that we do not think of them as “outsourced” because they have been outsourced for so long that we forget there was a time when they were not.
Outsourcing has built our modern society. Let’s stop pretending it’s a dirty word and start figuring out how to do it really well.
Being really good at outsourcing is a key competitive advantage for you and your company – especially if you’re a small company. Small companies do not have the scale to be good at everything. Typically they are much better off focusing on a few things they can truly be world class doing and outsource to others those activities that they just do not have the time, history and leadership to accomplish within some definition of excellence.
Outsourcing has many key advantages:
- Lower cost
- Higher innovation
- Lower Fixed Cost
- Higher Execution Speed
- More Focus on the Core
Generally speaking, a company that focuses on one specialization is likely to be much more productive than a company that occasionally performs that same task. The specialized company will have the scale to invest in capital equipment, leadership, and processes that aid in the creation of their specialized niche. They compete with the best in the world and must continuously adapt to the most productive means or go out of business.
Meanwhile, an internal department within an existing organization who is performing this same task has less competitive pressure (they have one captive customer), will likely under-invest (esp. If a small company) in leadership, processes, and capital and thus become less productive and more expensive than the outsourcing alternative.
Research has shown that the more diverse (education and background) the team, the more innovative the team becomes. Outsourcing is a key way to increase the idea pool (number of people exposed to the problem statement) without increasing the cost of hiring more people. Typically, service companies are exposed to many different industries, and able to “cross-pollinate” solution from one industry where the solution may be common knowledge into another industry where this same solution is completely unknown.
Lower Fixed Cost
Fixed cost is sometimes referred to as the “silent killer” of businesses as it is all too common, once fixed cost is put in place, it is then forgotten or assumed to be a necessity. Keeping fixed cost low can cure many future surprises – sudden drops in revenue, lawsuits that must be funded, economic cycles, even opportunities that require cash flow to take advantage off. Outsourcing provides a way to execute without increasing the fixed cost by hiring internal people who are not easy to jettison if the need arises.
Higher Execution Speed
Many things in business are not done on continuous bases – certain legal activities, product development, specialized production, etc. If a company decides to use internal resource for these activities, they are stuck paying for them when they are not doing productive work or spreading this work out over a long period of time. This stretching out can have consequences – for example, spreading out product development may result in the product being obsolete by the time it reaches the market. Outsourcing is a great way to execute quickly without increasing the cost by putting many people on a project for a short period as compared with few people for a long period of time.
More Focus on the Core
Of all the benefits of outsourcing, more time to focus on your core is the most valuable. The one resource that is always in the shortest supply and the highest demand is leadership -, especially in small companies. Leaders are just not that common – and why they are often the most highly enumerated people in a company. For a company to out-execute all its competitors, it must use all the available leadership supply on those activities that define its competitive advantage – its core. Diluting leadership by assigning responsibility outside the core will almost certainly reduce this competitive advantage.
Of course, all of these advantages are for not if outsourcing is not done correctly. Everyone has their favorite outsourcing horror story. Typically these stories are all about everything the outsourcing companies did wrong and little about what role the contracting company played. Even the best ideas can go wrong if not executed well – outsourcing is not some magic wand for solving a big problem with one wave from the master wizard.
Here are the most common mistake made:
Outsourcing to the lowest price: Services are a commodity just like anything else. If you buy the lowest priced car, expect to be disappointed. If you buy the lowest cost outsourcing, expect to be disappointed. Be especially careful of anyone offering prices way below market. If it sounds too good to be true, it is. Many times the lowest cost is not the best value. The old adages “the most expensive mistake I ever made was hiring a cheap lawyer” certainly rings true with many companies.
Make sure there is a fit with the company you are outsourcing to. If all their customers are giant multinational nationals, and you’re a small privately held company – keep looking. Look for cultural fit – do they communicate in the same manner we do, do our values match, etc.
Throwing it over the wall
When you outsource, it does not mean you get to forget about it. Continuous communication should be the norm.
Not Listening/Tell me what I want to hear
Remember, one of the reasons you are outsourcing is because they know more about how to get this type of work done than you – it’s their core, not yours. When it comes to outsourcing the customer is not always right – often they are wrong. If you go in with an attitude of “I am the customer, so they should do it my way” you will almost certainly end up with a company that is more than willing to tell you what you want to hear and enables you to do the wrong thing. A good outsourcing company should push back often – and you should listen and understand what they are trying to tell you.
When You’re a Hammer, Everything Looks Like a Nail
If you outsource to a specialist, make sure you are 110% positive that you need this specialization. Often laypeople have very confused ideas of how things truly work – and they do not even know it. If you hire a litigator, expect a lawsuit to be filed. Hire a good general business lawyer, and maybe a letter is written that avoids the staggering cost of litigation. If there is ever any doubt at all about the correct solution, hire a generalist first.
Outsourcing is not a dirty word — all companies outsource many things. The question is not if we should outsource, but what should we outsource and to who. Don’t be afraid to challenge the status quo – just because you have always done it this way, does not mean that is the best way to do it.
Steve Owens, Founder and CTO of Finish Line Product Development Services, has over 30 years of successful product development experience in many different industries and is a sought after adviser and speaker on the subject. Steve has founded four successful start-ups and holds over twenty five patents. Steve has worked for companies such as Halliburton and Baker Hughes. He has experience in Internet of Things, M2M, Oil and Gas, and Industrial Controls. Steve’s insight into the product development process has generated millions of dollars in revenue for start-ups and small businesses.