Many of us are tired of hearing that the economy is heading into a recession. The trouble is that businesses can either make good strategic decisions and grow through tough times or risk becoming a victim of the down economy.
An important exercise in any type of an economy is to study your business and separate your activities into two categories — core and other. Then decide if any of the non-core activities make sense to outsource.
Determining your core business activities or core competencies is not always straight forward. eCoach.com defines core competencies as the most significant value-creating skills within your corporation and key areas of expertise which are distinctive to your company and critical to the company’s long-term growth.
Many organizations are advancing rapidly, making it virtually impossible to maintain best-in-world competencies in all areas. There can be important strategic advantages for paying an outside expert in non-core functions.
“Creating your own competitive edge becomes easier when you are more willing to outsource non-core business activities that don’t offer a competitive advantage. Outsourcing becomes a management tool,” said Kevin Knebl, district manager of ADP Total Source. “Very few organizations can stay competitive by relying solely on their own internal resources. Most outsource something, whether it’s lawn care, payroll, legal services, etc.”
The trouble is that many middle market companies wait too long.
“If companies wait to consider an outsourcing strategy until they are forced to by economic realities, they often make irrational short-term decisions,” said Jack Buffington, director of Lower Valley Operations at MoslonCoors and author of “An Easy Out: Corporate America’s Addiction to Outsourcing.” “This can lead to outsourcing more than a company should.”
When companies take the time to look at outsourcing the right way, they typically make good decisions. In today’s fast paced business environment, that means decisions need to be methodical and fast.
Buffington said you can be fast and wrong or slow and right. “The trick is to be fast and right.”
Agile middle market companies have to be able to respond quickly to all the changes happening around them. It is very powerful when you understand the changing strategic market pressures and the business itself to create a road map to get the business where it needs to be. Buffington calls this predictive management.
“I require my managers to continuously look at the business,” he said. “We’ll make big strategic decision and the very next day I ask my managers to look at things in the future and help determine what we need to do next.”
Cost savings is often held up as the primary reason for outsourcing. However, promised cost savings can be difficult to fully realize.
Savings might be reinvested into other areas of the company to help build the business or passed on to the customer by lowering costs and making products more competitive. And, some companies pass on the savings to shareholders in the form of dividends.
“Thinking I can save X percent of my costs is always a sucker’s bet,” Buffington said. “The better approach is to optimize both top and bottom line growth. If you only look at the bottom line you can chase pennies at the expense of lost sales opportunities, or worse, destroy markets.”
A large beauty products manufacturer outsourced manufacturing to Brazil and China strictly to save costs. In the end, costs went up, service quality went down and sales were lost.
One benefit of outsourcing, however, is shared liability.
For example, many middle market companies outsource their tax planning and preparation needs. The CPA firm now has a fiduciary relationship with the company and shares the responsibility for those filings. If issues arise, they also are on the hook.
Another often overlooked reason for outsourcing is opportunity costs. These are more difficult to quantify, but are no less important to consider.
“What is the value of freeing up 15 hours a week of a key team member’s time to be spent on more strategic endeavors?” Knebl asked.
Smart companies see outsourcing as a strategic advantage by looking at it differently, Buffington said.
Top leadership is being educated by middle managers about what makes a good outsourcing decision versus a bad outsourcing decision. Top executives are too far away from day-to-day operations to make informed decisions without that kind of input.
Knebl said that middle market companies that are considering outsourcing should take a hard look at the real cost of handling the activities in-house compared to the cost estimate provided by the outsourcing company. Make sure you understand if there is a net savings or a net investment.
Both scenarios could be sound strategic decisions. But, it is important to go into the relationship with the right expectations.
Ann Snortland, principal of Snortland Communications, is the spokeswoman for the Peak Venture Group Middle-Market Entrepreneurs. She can be reached at firstname.lastname@example.org.