Whether or not to outsource

Ages ago, I promised some students I would send them some information on outsourcing strengths and weaknesses (sorry guys for the delay).

Unfortunately I discovered, when I eventually found the material, that it was copyright and sending it on is dodgy. So instead I thought I would include a summary here and add the references for more information.

The two primary sources of information for the following information are

  • The MBT course at the Australian School of Business (UNSW). Specifically the unit on organizational resource management; and
  • Quinn J & Hilmer F, 1994, ‘Strategic outsourcing’, Sloan Management Review, vol. 35, Summer, pp. 43-55.

The first step in working out what to outsource is to work out what your core competencies are.  These are not just a set of skills that you have. They are a combination of processes, skills, culture, IP and other components that, when combined, allow you to do something (anything) better than the rest of the market. They could be cool sounding like “embedding quality into what we do” or as vague as “making things really small”.

In theory, your company/organisation should have 3-5 core competencies that cross all your divisions and teams. If the competency only applies to one team or area then it is not actually a core competency.

Now that you know your core competencies, think like this – If I outsource something, then the skill needed to do it belongs to someone else. They will sell that service (or product) to my competitors.

Thus I should never outsource the things I plan to use to differentiate me from my competitors;

  • If I outsource part of a core competency, then I may lose that competency because I have broken the ecosystem that produces it;
  • If there are things I am not so good at, or that others can do better, then maybe they can give me better quality, faster and cheaper; and
  • If I try to do everything, I won’t have enough energy to do them all brilliantly. So it is worth getting others to take some of what I do off my hands so I can focus really effectively on the things I am best at.

These thoughts lead you to a simple rule – Know your core competencies and keep them close to your heart, and then get others to take care of the things you don’t do better than others.

Notice that this had nothing to do with saving money.

So that’s the golden rule.  But there is some more advice that the authors of the material I read have and that I have found in my own experience.

To know if others can do it better, you can ask these questions:

  • Will the transaction costs be less if I outsource than if I retain the service in-house?
  • What additional risks are created when I outsource?
  • What risks might be better managed by another organisation will a real focus in this area?
  • What skills do I need to build or retain in order to effectively work with an outsourcer in this SPECIFIC area? And what do I need to be good at to effectively monitor and benefit from the outsourced service?
  • How do I integrate the outsourced service into my other functions?
  • How will my other suppliers work with the outsourced function?
  • If I kept this in-house, what effort, attention and money would I need to spend to become or remain good at it? Is this the best use of my investment, or would that investment provide a better return elsewhere?
  • Would outsourcing this increase or decrease the complexity of what I manage?
  • If I outsource this then what skills am I losing as an organisation? Also, is there a part of my people’s development or career path that will be missing? What do I do about that?
  • What control over my destiny will I lose and does this matter?
  • Can I outsource this to actually increase my flexibility and speed? For example can I scale up and down faster? What flexibility am I sacrificing?
  • What can I learn from the outsourcer that can improve my internal processes or help in other ways?
  • Will this improve or damage my ability to do research, innovation and development?
  • Will I gain access to wider industry knowledge through the outsourcer’s expertise and relationships? If I do, how can I actually benefit from this?
  • What are the exit costs if I end the relationship? Even if I say I will review the contract every three years, will I really be able to shift suppliers or in-source again?

Answering all these questions gives you a better grasp of the situation, but remember no answer means “yes- outsource” or “no-don’t”. They all mean “how can I mitigate this, and is it worth it over all”.

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About James King

I coach organisations in how to better make use of the untapped talent they have in their people and to explore new ways of understanding and solving new and old problems I live in Sydney with my wife and daughter and have no real hobbies beyond the usual boring ones of reading, writing and watching tv.
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