How to decide what to outsource
and what to keep in-house
Working nine to five may be the lives of majority of the working community more than a decade ago, however, a substantial portion of the workforce does things a little differently today. Increasingly, people are working independently and assembling multiple income streams from various part-time or contractual roles.
Welcome to the gig economy.
Gig workers include on-demand workers, contingent workers who work on project basis and freelancers. In 2016, freelancers account for up to 10% of all employed residents.i The growing gig economy is a result of the pursuit of freedom, flexibility and ownership from the Generation X and millennial workers.
For a capital-strapped startup, the rising gig economy may work on their side to lighten the upfront cash burden and move some capital expenditures (CAPEX) to operating expenses (OPEX). However, to outsource or not? That is the question.
Maximise cost savings
Outsourcing should help your business increase bottom line profit by providing cost reductions.
How to decide:
Calculate your hourly wage. If it’s taking you longer to complete the task compared to having a specialist do it at a cost, you should consider if it is worth handling it on your own. After all, time equals money.
However in your calculations, note to factor in indirect costs, such as managing the vendors, travel for meetings, and communication.
Control your core competency
The main purpose and advantage of outsourcing is to free up your time to focus on the core aspects of your business. Therefore, you should only outsource activities that aren’t central to generating profits or your competitive success.
How to decide:
Retain control over the areas that define your business’ unique selling points. If the function requires you to divulge your trade secret, don’t entrust it to outsiders. It will be equivalent to leaking your secret recipe, and puts your competitive advantage in danger.
Minimise the uncertainties
Outsourcing is not without risk. Handling over internal operations to an external team should help you boost productivity and efficiency, instead of disrupting your business operations.
How to decide:
It’s going to take time and effort to find suitable vendors, so don’t rush into locking yourself to one. Contact and meet up with several parties to compare and contrast their strengths and offerings before you decide the best match to what you need.
Analyse the vendor’s resources, expertise and working values and ensure that they can manage the tasks successfully, and deliver the output on time and with quality.
“If you’re going to outsource, make sure to pick the right vendors early on so that you can stay with them long term,” said Justin Lombardo, Chief Learning Officer of Baptist Health in Florida. “Moving them from vendor to partner is critical. You can’t be flitting around and buying on a project base that’s lowest cost.” ii
Outsourcing Decision Matrix iii
Originally conceived by Dornier in 1998, this simple and effective tool can help you make your outsource-or-not decision in three easy steps:
How to use:
1. Analyse its strategic importance
Does the task relate to your core competence? Is it part of your unique selling point? Does it contribute to your competitive advantage? How does this task affect your customers’ experience with your brand?
2. Determine its contribution to operational performance
What is the impact of the task on your daily operations? How important is it? Will your business be affected if it is delayed or disrupted?
3. Plot it on the Decision Matrix
Discuss and assess the above with your management team to come to a consensus and unbiased analysis. Based on the results, position the task on the Decision Matrix.
What it means
Form a Strategic Alliance — Tasks with significant strategic importance but do not contribute much to your operational performance do not need to be managed in-house. Form a strategic alliance with a trustworthy and reliable partner that allows you to relieve some workload but retain partial control.
Retain — If the task is of high strategic importance and your daily operations are dependent on it, do not outsource it. This helps you retain maximum control over the key operations of your business.
Eliminate — On the opposite end, if the task is of low strategic importance and does not contribute meaningfully to your business, consider eliminating it to save on your resources.
Outsource — It is likely more cost-effective for tasks that are not strategically important but are important for successful performance of operations to be outsourced to specialised companies so you can focus your valuable time on core tasks.
Outsourcing may not be the most straightforward solution, but ultimately, it should help your business boost productivity, achieve better resource management and become more competitive.