What to Outsource and What Not to

chillibreeze writer — Arun Tumati

Outsourcing is generally referred to as having an external agency/company do a specific function or task. In today’s world this term has almost become synonymous with globalization. It has become a part of strategy of any and every organization. As much as it is tempting to fall into the trap of outsourcing, it is important that organizations realize what to outsource and what not to.

Typically, outsourcing is done for two reasons, cost or expertise, unless otherwise exceptionally there are reasons like focus on core aspects of business or pursue a collaborative business model. Lack of expertise is sometimes handled by bringing in consultants to do the task, but cost could be a concern. And with increasingly visible pressure to cut down costs and get things done cheaper, organizations have no choice other than to find ways to achieve the same, even if it means to outsource and let go certain traditional business practices.

Almost every organization strategy dreams of increasing the efficiency while reducing the costs, so that they remain competitive or get more profitable or both. This business imperative drives the managers to look at closely their buy or build or collaborate (with partners) decisions. Even though there are few thumb rules to make these kinds of decisions, they are seldom fit-all solutions. There are standard suggestions to tell what to buy and what to build and what to work with a partner. But each organization faces its own challenges, parameters, and complexities to make these decisions. Add outsourcing and it adds more confusion to the existing decision parameters and every decision to be taken becomes a mammoth task to plan and predict.

Today, look at most of the outsourcing contracts, they are typical customer-vendor relationships. A task is given to the outsourcing vendor and vendor delivers just that. It seldom goes beyond. Unlike in a partnership model, both the organizations collaborate to bring in expertise to build the product or service. Outsourcing hasn’t taken that approach in most of the cases and strictly remains in the realm of task getting done through external agency. Other than commercial benefits, the vendor nor the outsourcing organization builds any value from mutual business practices or process models. So the first point to ponder is how both the organizations can mutually benefit in building a valuable proposition when they work together in an outsourcing arrangement. This also helps in deciding what to outsource.

All said and done, outsourcing is heavily dependent on who the vendors available are and what their capabilities are. It is critical for an organization to understand the vendor’s capability and spread of services they provide before making any outsourcing decision. Ideally it makes a lot of sense to outsource for the value brought by both the parties. An organization outsourcing task A to a vendor should extract the expertise, efficiency and operational excellence from the vendor and for the vendor, task A should add new ways of improving their process, knowledge and create new trends in handling similar tasks in a better way. This way there is value seen for both the organizations that will mutually benefit. Cost and other tactical advantages, if at all they exist, should be secondary benefits or derived benefits in nature.

With globalization in the forefront, outsourcing can as well be to a different geographical location to take advantage of the merits of that location. It could be resources, expertise or cost, but even in this case, there has to be a mutually benefiting value in the equation. Unless there is a value based vision in the outsourcing, the commitment to outsource will not be strong enough to build the relationship and reap all the benefits.

When two organizations work in this manner to increase each other’s value, the association will gain new meaning and outsourcing will create lot more opportunities for both the parties to increase their focus and productivity in their lines of businesses. Most often organizations decide to look at support functions such as HR, Finance, IT etc to outsource. As they are not line functions, there is a tendency to believe that the outsourcing risks are minimized. Nevertheless, it is still possible to find the right vendor who has excelled in that function and can bring in value much more than the organization itself handling the function. Picking a vendor who has the resources and best practices, learning from other engagements/industry, tools, processes, infrastructure or even skill-sets will bring in much more value than just the cost advantage.

In cases where the line function activities are outsourced, there is a slightly different approach to keep the intellectual property intact. Other than that, the concept of value addition still holds good even in this case. Other than the strategic aspects of the line business, typically, rest of the functions could be outsourced, provided organizations find the right vendor and build the right expectations in terms of mutual benefits that the relationship should bring to the table.

Here are few questions to ask before an organization decides to outsource something:

Is there a vendor who is an expert in the function/task which is to be outsourced? Expert vendor has to have the tools, processes, resources, best practices, etc.
Are there cultural challenges due to geographical locations which the vendor had faced? Is there any learning that could be applied in defining the engagement?
Does the vendor have strong leadership team whose expertise can be deployed?
Are the value additions by vendor clearly documented before the decision?
Does the outsourcing function/task bring a risk to the organization’s competitiveness?
Finally, is there a cost advantage?

If the responses are positive in most of the questions above, there is a good candidate for outsourcing. Do not outsource something only for the cost advantage, overlooking all the effects the outsourcing deal might have to the organization.

Outsourcing has to grow beyond cost benefits and reap the process, operational and ROI excellence. As long as there are tasks/functions that can leverage these benefits from outsourcing, organizations can outsource.

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—About our writer:

Arun says, "I am an engineer by profession and always thought I was born to be one until I learnt that I could do things which are usually considered as an art like writing poetry, learning music etc. Still dreaming of writing a book some day and truly believe that the hope of tomorrow never dies."

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