How to Outsource

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Over the last week, I have had several discussions about the challenges to successful outsourcing. One person was dealing with manufacturing products in China; another was managing outsourced server maintenance and operations; yet a third had a financial technology management service provider.

In all the cases, the question was the same: how do you know when it is good to outsource, and how do you make it succeed?

Successfully outsourcing anything is far beyond the scope of a single article. However, we can explore at a high level some key issues to consider in a series of articles.

Number One Rule: Outsourcing Will Not Solve Your Problems

Let me repeat it. Outsourcing will not solve your problems. If you have issues with communications between marketing and production, or operations and R&D, outsourcing any component will not solve a single one of these problems. In the right conditions, outsourcing can make a process faster, lower cost, more precise, more regulatorily compliant, or some combination of the above, but it cannot solve performance problems.

Just as automation does not fix broken processes, it just makes them "fail faster", so outsourcing exacerbates rather than mitigates internal issues.

The logical conclusion, then, is that in order to have even an opportunity to successfully outsource, you need to fix your internal issues first.

  1. Your communications between groups must be perfect.
  2. Your handoffs must be accurate.
  3. Your expectation-setting must be agreed, understood and well-processed.
  4. Your financial measurements must be accurate and agreed.

Unfortunately, outsourcing will eliminate several critical elements of communication:

  • Culture: Your outsourcer will not share your internal culture. They do not think about delivering for your customers, but rather to you. You may measure cars delivered per month; they measure tickets responded. You have spent a generation building your internal culture; they have spent just as long building a very different one.
  • Language: Your outsourcer will not speak your language. This might be true in a literal sense, for example if a British company outsources table manufacturing to China, but it most certainly will be true in a culture sense. They do not understand your metrics, lingo and long history.
  • Relationships: Your outsourcer will not have the relationships that have been built up inside your company. Much of the grease in the engine of a company is the relationships that exist to smooth over misunderstandings or get things moving. When the group that used to be internal now is external, those presumed relationships no longer exist.

If you want to consider outsourcing a process, you need first to define the parameters of communication and interaction... every single one of them.

Until all of the culture, language, relationships, from within communications are replaced with clear syntax, explicit points of contact, and defined channels, among others, an outsource is guaranteed to fail.

Let's look at an example from the one service that just about every modern company outsources: payroll.

  1. Language: While there may be a language common to all payroll providers, HR managers and CFOs, there is no language unique to payroll in each company. Every American payroll provider and company knows what gross and net, federal/state/local tax rates, FICA and FUTA, direct deposit, pay stub and live check all mean.
  2. Contact: Every payroll provider, whether old stalwarts like ADP or smaller nimble ones like SurePayroll, allows its customers to define a single point of contact and a key process for approving, suspending or updating payroll. There is no alternate process, no way to go "out of band", and no need to depend upon them.
  3. Channels: Every payroll provider has a clearly defined process for telephone support with password, Web access and, sometimes, mobile app.

Payroll management is a great candidate for outsourcing, as it is crucial, yet varies little from company to company and provides zero competitive advantage. Its long history of being provided by outsourcers has created a clear, clean model for successful outsourcing.

Summary

Outsourcing will not solve your problems, but it may provide cost advantage once you solve them. The first steps to successful outsource evaluation are:

  1. Identify good candidates.
  2. Solve the problems internally.
  3. Define the language of communication, channels and processes while the group is internal.
  4. Evaluate the outsource. When you have optimized the processes, benefits of the outsource may or may not be worth it.

Ask us to help you evaluate your candidates for outsourcing, fix your existing outsourcing issues, and, more importantly, optimize your existing operations so you can truly determine where the benefits will be.