As experts in the procurement industry, we have a wealth of experience regarding outsourcing methods. We’ve seen companies nail it when it comes to their process, and when they don’t, companies have suffered massive losses due to ignoring best practices or were outsourcing the wrong way.
Not sure if you’re outsourcing the right way? Consider this article your go-to guide for outsourcing and knowing when to insource.
What to outsource?
Knowing what to outsource or keep in-house makes all the difference, and some large organizations still manage to get it wrong. We know figuring it out isn’t a walk in the park, but referring to this ‘Outsource Matrix’ can help identify the services your company should outsource.
The activities that provide your business with its competitive advantage are your core activities and are considered ‘Strategic Importance. Activities performed daily that the business relies on to run successfully are called activities ‘Contributing to Operational Performance’.
Suppose you have an activity within the upper right quadrant (high strategic importance but low contribution value to the operational performance). In that case, we advise forming a ‘Strategic Alliance’.
Example: The partnership between Uber and Spotify. Passengers can stream their Spotify playlist during a ride, making the experience more personal. Since Uber incentivizes the drivers through a rate-based system, drivers are encouraged to subscribe to Spotify Premium to deliver a better experience. Neither company’s competitors offer such services, giving both companies a competitive advantage in their respective industries. This alliance has given both Spotify and Uber access to wider audiences they may not have had successful outreach to before as an added benefit.
Where an activity is highly strategic and has equally high contribution value to operational performance, it’s best to keep it in-house.
Example: A car manufacturer should retain its assembly line because this activity is integral to both the strategic importance of providing cars to customers and essential in the daily operations of the manufacturing plant. It makes sense to retain all activities related to the assembly line.
When an activity provides low strategic importance and has a low contribution value to business operation, it may be time to eliminate it. This quadrant leaves room for interpretation, however. Sometimes, instead of stopping this activity entirely, it may be worth it to outsource it. Understanding the ‘why’ behind this activity can help inform your decision.
Example: It’s not uncommon for companies to host a daycare facility to support working parents. While this activity has low value on either axis of the Outsource Matrix, it’s worth noting that its value lies in attracting and retaining highly qualified talent that can view this as a reason to join or stay at your company.
When an activity is not of strategic importance but has high operational performance, it’s time to outsource.
Example: Alibaba is an e-commerce giant based in China. Due to its location, its manufacturing and resource costs have remained low. However, skills needed to scale, like web development, weren’t available in this region, so it outsourced to the United States, leading to astronomical growth.
Who to outsource to?
Outsourcing it’s not a one-off action. It’s a long-term relationship with an external supplier. Understanding this concept helps you identify the critical criteria in selecting the right supplier to work with.
While one of the main advantages of outsourcing is cost savings, the supplier(s) in question must be proven experts in their field. A crucial part of outsourcing success is ensuring that you outsource to a supplier that provides expertise, or at least expertise greater than your own. This requires comprehensive research to understand which suppliers have the requisite skills.
Economies of Scale
Even if you find suppliers that match the requisite skills your company wishes to outsource, it isn’t of much value if the route is expensive or doesn’t generate economies of scale for your business. This can be especially applicable when making small quantity purchases and managing the procurement process.
Before sourcing an outsourcing partner, you must first define your expectations and understand how outsourcing can be a potential solution to achieving your business goals. It’s safe to say that no one will know your business better than you, so the more specific your requirements are, the easier it is to communicate your needs with a partner and have them met.
One such criterion is market reputation. Outsourcing should never be a compromise on quality. This is why transparency through the supply chain is vital in selecting a partner that has a history of adhering to deadlines, is easy to work with, and communicates clearly.
Compliance and data privacy govern many processes for specific industries, including how a company manages its outsourcing. It would be unfortunate in selecting a vendor based on their expertise or low costs only to run into hefty fines down the road because the products or services they provided deviated from compliance laws or posed a risk to your data privacy.
When done right, outsourcing promises many benefits.
Cost-Effectiveness – Efficient outsourcing can mean a reduction in the overall number of fully employed staff, the size of your office space (in some cases, outsourcing can eliminate the need for a physical office space at all), and the number of utilities used.
Resources – Rather than investing valuable time, money, and space on essential hardware and other resources, you can leverage the expertise provided by 3rd-parties. Many companies see the benefit of outsourcing a big-ticket item like IT services. Storing, running, and maintaining on-premise servers and employing a full-time IT staff can be costly. By outsourcing these, companies can still enjoy the benefits of consistent IT support without investment.
Improved focus – The rule of thumb when outsourcing is only to outsource the services and products that are not considered the core to your business. Your core activities are what your customer identifies you and your company with. It’s essential to allocate enough time to improve these products and services while allowing a third party to handle your non-core activities. When outsourcing an activity that used to be done in-house, you have effectively made more time to focus on the actions essential to your business.
Despite the abundance of advantages outsourcing provides, here are possible disadvantages to consider.
Loss of control – There’s no way around it. Choosing to outsource a service or product means you lose control over how that product or service is made or delivered. This requires a level of trust in your outsource partner to stay on top of quality control.
Miscommunication – Sometimes, things can get lost in translation, whether you outsource to a local partner or a vendor overseas. It’s imperative to leave no room for interpretation when creating a Request for Proposal (RFP) documentation because the resulting loss of time and money due to miscommunication can set your business back.
Moral Dilemma – You’ve found the ideal outsourcing partner because of their low costs, efficiency and consistency, only to find out that today employ child labor to provide these services. Need we say more?
When to insource
Sometimes outsourcing isn’t the answer, and knowing when to insource instead can help save your organization time and money.
We can tell you to avoid outsourcing your core products and services right off the bat. Outsourcing cannot replicate your in-house expertise around your product or service, and while retaining these resources may be expensive, it’s usually worth it in the long run.
Successfully navigating outsourcing, insourcing, and business spend management can be complex, but it doesn’t have to be. At Procurement Express, we aim to make in-company purchasing effortless. Beyond the tools we offer to help our customers, we understand the value of good advice.
Want more guidance on all things procurement? Check out our other educational resources or book a call with one of our specialists ready to help you manage your procurement process and make project spending easier.