Tuesday, August 07, 2007

To Source or Outsource that is the question….

Although not as philosophical as Hamlet’s grappling in the garden with his whole sense of being, the issue of outsourcing is a difficult one for many organizations. In today’s competitive world, organizations have to increase revenues and cut costs, the goal – a lean mean profit machine. Today’s in-tune organization already realizes that the only way to grow the revenue is through a global presence, or increasing an already established global presence. These organizations are now turning to reducing their costs and the immediate thought is through ‘outsourcing’.

The concept of outsourcing is not new by any stretch of the imagination. In the academic world of accounting it took on a different moniker “build vs. buy”. Regardless, it is the same animal! Should I do it myself our have someone else do it for me? That becomes the question. Delving into the academics of classical economics, the answer becomes easy – outsource. That is all based on different people groups having a selective advantage of production or a certain product/service. However, in reality this isn’t the case. Academics only skims the surface of the complex nature of economics. Although countries have a certain selective advantage for certain production outputs, they also have a potential selective advantage for outputs; for which they may be trying to achieve. Therefore classical economics breaks down.

It doesn’t take much research to see that sometimes outsourcing makes both companies amazingly profitable and other times is simply a recipe for disaster. The question now begs, what is right for my organization? The answer depends so much on the culture of your organization. It is YOUR culture that will determine YOUR success in outsourcing. There is no doubt, outsourcing, when properly executed and managed, will reduce costs!

The first step in successful outsourcing is to determine your current cost of managing the proposed process. This requires taking a very objective look at the process and related processes. The second step, which carries much more difficulty, is to find a group that can take on your outsourced work. Sounds easy enough – NOT. This group must not only come in with a lower cost than you currently incur with in your organization. They must provide as good, and I say, better coverage than you are able to provide in-house. If they can, you must ask yourself – how do they do it? That is a valid question, because why aren’t you achieving that level of success, after all you currently control the entire process. Do they achieve better coverage and lower cost by economies of scale or is it simply a shell game? If you have achieved success, in your search, by this stage, then the next step is to put together an agreement that clearly outlines expectations of both sides and penalties for failure. Finally, probably the most important and most difficult – have a feedback mechanism to make sure the outsourced firm is doing what they have contracted to do to the level of quality agreed upon. This must be your own benchmarking tool and not theirs. It is easy for them to stand at the podium and say “we are doing a great job”.

Outsourcing can be a daunting task on many levels. However, for every success story there is a horror story. It is new territory for most organizations and requires a considerable amount of homework and management for it to be successful. However, if it becomes successful, it will be lucrative for both parties. The one thing firms have to keep in the forefront of their minds, the question really isn’t to source or outsource. But rather, how to increase efficiency and effectiveness while reducing costs? With this as the focal point, outsourcing is simply another option, just like changing to more efficient business processes or relocating the support infrastructure to a low cost location.

So don’t lock yourself into the question of source or outsource – set your sights on economy, efficiency and effectiveness and see where the analysis takes you. You may be able to reap a huge benefit, from a minor change in the current process.

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