To Outsource or not-to-Outsource

In today’s business environment, it is hard to not have been impacted in some way by outsourcing. Either you yourself have been impacted or someone you know has been impacted. It is the business environment that we live in and while the politics around it can get messy, I would rather stay away from that. At its core, I believe that outsourcing certain business functions makes tremendous sense when viewed and implemented through a strategic lens.

One of the first mistakes made when a company decides to outsource functions is not having an understanding what they are trying to accomplish through outsourcing. The days of outsourcing purely for cost-savings are long gone. The second mistake made, the one we will address here, is outsourcing the wrong functions. So how does one determine which functions represent good outsourcing candidates? Let me propose a simple framework to assist in determining what to outsource. While the framework is simple, the analysis that goes into utilizing the framework is anything but.

In looking at the business functions (and here I include technology functions as business functions) we look at them across two dimensions – How good are you at the function and How critical is the function to your business. Let’s look at the first dimension – How good are you at the function. To determine this there needs to be a benchmark – preferably against a competitor – to help you determine where you stand. The benchmark could be cost or quality based, time to market based, or customer satisfaction based but it needs to be measurable and comparable. The second dimension – How critical is the function to your business – should be viewed as the ability of the function to differentiate you in the market to your customers. While many functions are necessary, only some of those are business critical. The perfect example of this is payroll. Payroll is a necessary business function but it does not differentiate you in the market. Trust me, none of your sales team is talking about your ability to complete payroll during a sales call. While it needs to be accurate and timely it hardly generates additional revenue.

Now let’s view the business functions across those dimensions. If the function falls in the upper right hand quadrant – highly critical and you are best in class – the function should be maintained in-house. If, on the other hand, it is highly critical and you are terrible at it you have two choices – invest to improve your capability to perform the function or find someone else who can do it better. You get the picture – and if you don’t here is a picture for you.

Too often companies decide what to outsource based on only one of these dimensions – business criticality and if the function is business critical then they refuse to outsource it. If it is truly critical in that it differentiates you from the competition and you are really good at it then it is a good decision. If not, then you could be making a mistake.