Outsourcing can cover a myriad of business activities, but those most frequently considered are the back-office functions of accounting, IT and Human Resources/Recruiting, especially at micro to mid-sized companies. A quick study of Deloitte’s “Global Outsourcing Survey” for 2016 and 2018 demonstrates the maturation of outsourcing strategy. While these surveys include mostly very large participant companies, it is clear that outsourcing is now seen as a vehicle for significant strategic advantage by “buying” available capabilities to realize advantages faster than developing strategic “assets”.
Several drivers in this maturation are greater cloud computing resources and Robotic Process Automation (RPA), the “doing” of processes, as compared with the machine “thinking” of “Artificial Intelligence” (AI). So, with this overall view of the current state of outsourcing, how do companies that are not Fortune 500 companies decide whether outsourcing is a strategy worth adopting? Clearly, a number of company-specific factors enter into this decision.
Let’s start with the Silicon Valley labor market. While the stock market and economic indicators show signs of skittishness and some say we’re starting to see softening of the housing market, the fact remains that it is very expensive to live here and the labor market is tight. Finding qualified candidates is a chore and they cost a lot. Valued employees are making the choice to relocate to areas where it is less expensive to live. Outsourcing can provide stabilization when essential positions are difficult to staff in a traditional employee arrangement.
Another factor in our tight labor market is that employees cost a lot, especially given that benefits can add 25% (or more) to the wages of employees. Outsourcing can often cost 30% less, with the ability to tap into lower cost labor markets, even without sourcing offshore. In addition, when a company is scaling up, specific skills may be needed but not fulltime, so access to a larger talent pool is a strategic benefit.
Further, if you or your top management team are spending too much time managing back-office functions that are distracting you from core business endeavors, outsourcing these functions can leverage your management time and keep you on track executing your strategies. Business efforts in all areas are more targeted.
What are some of the pitfalls with outsourcing? After all, if none, everyone would do it.
First of all, loss of some control on quality, coupled with communication issues. Nothing is more effective than being able to walk up to a person’ desk and talk to them. “Management By Walking Around”, coined by Tom Peters in the 80’s is still hard to beat for keeping up with your employees.
Another risk is cybersecurity when outsourcing is performed from remote locations. Not only are your own safeguards important, but so are the cyber practices of your outsource partner. This is where carefully negotiating service contract terms can help you manage these risks, as well as potential troublesome areas like service levels and quality control, and assumption of liability to third parties.
Finally, an important factor not to forget is the impact of outsourcing on company culture. Strongly positive work culture is an intangible tool in your arsenal of competitive advantages. While hard to put a price on that value, it is not something to take for granted if you have developed a positive working atmosphere at your company. Employees may feel threatened by the addition of outsourced resources, or may feel better supported by having more time to perform their tasks. They may miss the day-to-day interpersonal relationships, or be happy to save time and energy by not interacting with high maintenance workmates. It all depends on your particular employee group, but communication is key in any situation so that your valued employees continue to feel supported and part of a high-functioning team.
Outsourcing can make sense in many situations, but carefully managing the outsourcing process and arrangements is imperative to reap the potential benefits.