Outsourcing: Different Horses are Better for Different Courses
Outsourcing may be the only tool available to businesses that offers one the ability to not only improve operating efficiencies and results but also the opportunity to cut costs and free up capital and critical time that could be put to more beneficial uses in other core areas. Businesses are starting to embrace outsourcing as the flexibility it provides is one of their best tools for survival in an uncertain and competitive world, demanding agility.
Set the right level of oversight and control (bureaucracy) for the particular activity, remove the internal friction, and reduce opportunity costs with the outsourcing of low risk activities.
Strategy and operations experts such as Michael Porter, Peter Drucker, Stephen Denning and others have found that by identifying and focusing on core competencies (commonly referred to as the process of Focused Excellence) and retaining others to perform the non-core but essential processes or aspects of their business; they begin to see dramatic changes. With the ability to outsource these non-core processes, the company can tap into greater competence, ideas and energy – not because the supplier is smarter but because it provides specialized expertise and resources, thinking at greater depths, about the non essential process, more frequently. In this way, the Company can tap into creativity and new ideas and thereby leverage the specialized expertise and resources while freeing up its own time and resources to focus on its own core competencies and profit centers.
Businesses large and small struggle with the increased friction resulting from the need to control more and more aspects of a growing business or portfolio, largely as a result of the perceived risk of same. Commonly referred to as bureaucracy and overhead, this results in a competitive disadvantage slowing a company’s ability to timely respond to market changes, distracting them from focusing on and excelling at their core competencies, and eliminate those inefficient and ineffective processes. Reducing bureaucracy offers clear cost advantages, improves effectiveness and expands the experience and learning process. It helps companies become more adaptable, responsive, innovative and inspiring. Control is not necessarily lost in an outsourcing relationship, only the means of control has changed. When outsourcing, the process is owned by the supplier who is held accountable, while the results are dictated by the owner. Peter Drucker is often credited with the statement, “Quality in a service is what the customer gets as opposed to what the supplier provides”.
As per the chart above, as risk increases so necessarily too does the need for internal controls. However, by setting the right level of oversight/control (bureaucracy) for the particular activity, companies can effectively remove much of the related internal friction and thereby reduce opportunity costs with outsourcing of lower risk / lower control activities.
If there is somebody out there that can do it better, faster or cheaper then why keep the work in house ? Adopting small, independent and laser focused teams who can complete projects in a limited amount of time is a distinct strategic advantage. Developing the skill sets and culture to embrace outsourcing is critical to survival and will accrue substantial benefits in the new world order demanding agility.
Why Outsource?
Improve Quality
Minimize/reduce/mitigate risks
Free up internal resources for other purposes
Gain flexibility and agility
Access other capabilities and capacities not otherwise available
More minds thinking more frequently about a particular element of the business strategy
Reduce & control operating costs
Improve focus
Reduce cycle time
Turn fixed costs into variable costs
Stabilize and unstable situation
Engage outside expertise
Key Elements to a successful Outsourcing experience
Clearly defined scope and process. Focus on results and encourage collaboration
Compensation agreed upon and tied to performance
Anticipation of changes with flexibility built into the plan
Short term engagement with provisions for extensions and renegotiations
Work with a partnership mentality, align motivation and objectives
Establish key performance metrics and a dashboard for monitoring progress
Meet regularly with a predefined agenda – no surprises