Just like growing families who are stretched managing households, careers, school, sports and relatives, growing companies can be stretched by inadequate infrastructure and capability.
Whether a family or a business, both should stop and think; what are they good at, how can they do better, and what can they lose?
In other words, outsourcing functions or activities that could free up resources or deliver specific expertise and give you a competitive advantage is what this guide is all about.
Outsourcing, simply defined, is paying someone external to your organisation to perform one of your business roles, processes or tasks, to achieve benefits.
This could lead to improved:
• cost management
• internal control
• risk management
• access to technology or skills, previously not available due to cost or scale
• resources allocated to focus on core activities
However, many outsourcing opportunities are swept under the carpet because:
• we fear change – why change what currently works, it’s too risky, it has worked for the last 20, 50 or 100 years
• we don’t know what we don’t know – many soldier on with inadequate skills, processes and technology without knowing any better
• we are too busy – we only react to change and manage issues as they arise
• we like control – for some, outsourcing can represent a loss of perceived control.
Does this sound like you? Read on.
Maybe someone else should fix the roof
A growing company needs to make some tough decisions. It’s like being a good parent. Sometimes you can’t do it all and need outside help, but kissing the kids goodnight – now that’s definitely an inside job.
It’s the same in business.
The key is working out what you do and what you can get someone else to do without compromising the business and allowing you to focus on the bigger picture.
Some big questions to consider:
• what is at the heart of our strategy and is it supported by rock solid competencies?
• are we investing and leveraging our core competencies sufficiently to compete effectively?
• are we outsourcing not only day to day work but some of the strategic stuff as well?
After considering these questions, you can identify what competencies you need to protect, leverage and develop as well as identify activities that would be performed better by someone else.
Think of the home front. You could pay a tiler to fix the roof or attempt to do it yourself, fall off, break a leg and not be able to ferry the kids to Saturday sport for three months.
In the broader scheme of things fixing the roof wasn’t core to the family’s activities, but taking the kids to sport is – one of these could definitely have been outsourced.
It’s the same in business. When you think outsourcing, think creatively. There is often a compelling case for outsourcing core activities such as strategic planning, project management, customer service, sales and the like. And sometimes there’s not.
Outsourcing won’t fix poor planning
Growth depends on two things: the industry you’re in and where you sit in that industry.
Competitive advantage comes through either delivering greater value at a premium price (a differentiation strategy) or comparable value at a lower price (a cost leadership strategy) (see Figure 1).
Irrespective of what strategy you adopt, you’ve got to underpin it with durable and unique competencies that deliver a competitive advantage which in turn takes you down the road to growth.
It’s also crucial to understand what makes you different and better than your competitors and to what extent these skills or resources need to be finetuned or replaced to meet the future needs of the business.
Your business planning needs to look three to five years in advance and include a stocktake of your real abilities, or what resources and skills you need to develop and keep in-house.
Once you have this mastered, you can look at what things could be done better by outsourcing. This in turn will give you more resources to focus on what you should be doing.
Remember, do not outsource problems or you will pay big time.
What is core and what is not
Laundry is core to hygiene yet some families outsource the washing to a laundry and drycleaner. Now, imagine this family has severe skin allergies. It’s more likely to do its own washing using carefully selected hypoallergenic detergents and outsource the ironing. For that family, doing the washing at home is a core competency, ironing is not.
The following external market tests will help you determine your businesses’ core competency:
Is it hard to copy?
Examples are patents, geographic location and competencies that have been built up over time.
How quickly will it devalue?
To qualify as core the competency must be durable over time. A classic suit from a respected fashion designer is durable. A shirt from the local discounter is not.
Is the competency inextricably bound to the business?
Not if it is tied to an individual who could leave the company or a supply contract that could be terminated.
Can the competency be quickly bettered?
Examples are new technologies which emerge very quickly and outdate existing solutions. This is critical if your business relies on this to deliver good products or services.
Whose competencies are better?
Corporate strategy built on a core competence is headed for disaster if competitors, with better skills, are pursuing the same strategy.
Making the right decisions
There are things that go to the very core of every business so deciding what to keep, what to develop and what to outsource can be tricky at best. Before you free up much needed resources to concentrate on distinguishing aspects of business that will drive growth, you need to do a spring clean (see Figure 2) to:
Assess strategic priorities
Can you achieve your goals without ownership and fully operate over certain activities? Many companies outsource warehousing and distribution activities. These are essential to the success of the businesses yet don’t necessarily have to be in-house.
Examine supply options
Are there people or organisations out there that can perform this function well, with better skills, technology and experience?
It is their core business: for example, processing large payrolls.
Do a cost benefit analysis
What are the benefits of outsourcing versus keeping the function in-house, including all direct and indirect costs?
Most importantly, no company is too large or too small to consider outsourcing. In fact outsourcing can help fast growing companies match the performance of big brother without the expense and delay of acquiring and managing expensive resources. It can also provide some level of comfort to financiers and other third parties when an experienced provider delivers the outsourcing.
But beware ... growing companies tend to fall into the trap of not:
• clearly defining the desired outcomes and how these will be measured
• checking out the provider thoroughly, obtaining references and talking to their customers
• taking into account the dynamics of a long term relationship
• planning for joint success
• signing the right sort of contract
• planning up front as to how the relationship might end
• treating the provider as “one of us”
• managing the intervention.
Strategic or conventional?
We’ve said it before and we’ll keep saying it: you can’t separate core competencies from strategic outsourcing, like the whites from the coloured when washing. It’s just not that simple. In fact protecting, leveraging and developing core competencies are central to any strategic outsourcing decision so bear in mind a few key points:
Protect your uniqueness:
• establish a legal or regulatory framework around your competencies (for example: patent or copyright your products or production methods)
• continually reinvest in your core competencies to improve them (for example: allocate higher budgets to R&D and human capital)
• Leverage the knowledge and ‘know how’ you’ve learnt over a long period of time.
Leverage and exploit core competencies by:
• extending your strategy into an unpredictable future so you can drive growth
• constantly benchmarking, validating and testing core competencies
• keeping a sharp eye on customers’ needs, competitors’ strategies and industry dynamics
• shedding or obtaining resources as and when required, while managing costs
• not overestimating the transferability of core competencies into new markets.
You can also develop core competencies through:
• incubation – which involves charging a dedicated in-house team with developing a particular competency over a certain period of time
• evolution – through a larger scale change program designed to produce tangible results
• acquisition – when the time and effort involved with incubation and evolution is just too hard, although it’s important to realise acquisition is not without risk and challenge.
Above all, recognise what you should and shouldn’t outsource (see Figure 3).
Creating outsourcing partnerships
You’ve got to carefully structure and manage the outsourcing relationship. Establishing the rules of engagement at the outset is crucial to making the relationship work; so get to work and keep on it. It’s like setting the ground rules at home really. Managing the outsourcing relationship is a competency in itself.
As you will note in Figure 5 a strategic fit indicates how integrated a relationship can be, and the level of readiness in the organisation gives a good indication as to where you should begin a relationship.
It’s not that different to employing a cleaner. You need to know what you want cleaned, how you want it cleaned, when you want it cleaned, how much it is going to cost and that it can be done without sending the household into a spin. Not doing this often results in disappointment, frustration and ultimately a parting of ways with a loss of time and money. These are the things you’ve got to incorporate into the relationship agreement so you can keep a good handle on what you’re getting, how you’re getting it and how much you’re paying for it. Nor should you only measure financials and service levels. You need to address intangibles such as how you are going to deal with the inevitable conflicts within the relationship, complaints or breakdowns in service delivery, and what happens at the end of the contract. If you don’t, it could be chaos. Ultimately a reasonable service level agreement ensures both parties understand what is expected of them and puts a framework around acceptable levels of delivery.
And just as you chat with the kids about their day at school, there needs to be effective formal and informal communication in place to ensure any current or emerging issues are addressed early so they don’t undermine the relationship.
This Guide is part six of a series. It is used here with permission.
Part one is about Strategic Planning and is here »
Part two is about Alliances and is here »
Part three is about Managing Risk and is here »
Part four is about Raising capital in New Zealand and is here »
Part six is about Marketing and is here »