It’s no secret; successful businesses concentrate on their core strengths. Outsourcing is actually a derivative of that philosophy. Outsourcing has received a bad rap, largely because it is perceived as an end-run around taxes, unions and a host of bothersome government regulations. The fact, however, is many companies outsource so that they can concentrate on core competencies.
This begs the question, “How do I know when and if I should outsource?” What follows are three indicators that outsourcing will benefit your enterprise.
1. Excessive time spent on issues unrelated to your core business
- If you find yourself in meeting after meeting discussing the pros and cons of an issue that has little or nothing to do with your widget sales, you might need to consider outsourcing. Here is an example.
- XYZ Company is a widget manufacturer. XYZ Company markets these widgets by direct mail solicitation. The growth of XYZ Company’s business has resulted in a need to expand its printing and mailing capabilities. You are in meeting after meeting, debating the pros and cons of purchasing expensive reprographics equipment and automated mailing machines. The core competency of XYZ Company is the manufacture of widgets.
Clearly, time and money would be saved by outsourcing the print and mail functions. By doing so, you avoid the cost of equipment and expertise associated with managing your own print and mail. You avoid adding staff to man the print and mail operation. You avoid the inevitable problems of maintenance and the eventual need through obsolescence to replace costly equipment in the future.
Remember, XYZ Company makes widgets. XYZ Company doesn’t benefit by going into the print and mail business.
2. Escalating costs in a specific business function unrelated to the core business
- Rising costs in a particular segment of your business may be a clue that the function should be outsourced. Here’s an example
- XYZ Company makes widgets. XYZ Company’s Credit Department has seen a 20% rise in costs over the past three quarters. An audit reveals that these costs are largely the result of escalating collection costs in the accounts receivable section. Further review shows that the Credit Department manager has added staff to keep pace with increased accounts receivable from a boom widget sales.
I would argue that outsourcing the collection of account receivables would be a better alternative to increasing payroll costs. Again, XYZ’s core business is the fabrication and sale of widgets. It is not a collection agency. As the owner or CEO, you may want to consider using the services of a factoring firm. Not only would this reduce staffing requirements, the potential to increase the cash flow of your business is high. If you would like to see the impact of factoring, you can use this free invoice factoring tool to see the merits for yourself.
3. Your business has never undertaken a cost/benefit analysis
- A cost/benefit analysis is a critical business tool. If your business has never undertaken such an analysis, may I be so bold as to suggest that you are not running your business in the most cost efficient manner possible. Here is an example of a need to do a cost benefit analysis.
- XYZ Company manufactures and sells widgets. Widget sales are flat and XYZ’s management team is considering the creation of a marketing department to boost widget sales. This is an example of an opportunity to do a cost/benefit analysis. The cost/benefit analysis is not hugely different from the tried and true method of making an important decision by listing pros and cons on a sheet of paper to put the issue in focus so that a good decision results. With a cost/benefit analysis, the pros and cons are reduced to costs; in this example, the cost of outsourcing the marketing function as compared to creating and staffing an internal marketing department.
These are simplistic examples and scenarios, but they do put outsourcing considerations on the radar, which is exactly where they should be.
Andrew Cravenho is the CEO of CBAC LLC, an innovative invoice financing exchange. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.