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Outsourcing - Is it Worth the Cost?

General Business News

September 2004

Outsourcing - Is it Worth the Cost?

In our article last month, we discussed the relative merits of outsourcing - an often-misused phrase. Contrary to current political rhetoric, outsourcing is not a diabolical plot cooked up by business to send American jobs to exploited workers in India for the enrichment of a few rich business owners. If you want to get technical, the process of shipping jobs to overseas workers is more properly labeled offshore outsourcing.

A more accurate definition of outsourcing is the process whereby a business seeks to manage its resources efficiently by concentrating on what it is good at while letting other businesses perform functions at which they are good. We would submit that it is nearly impossible to run a business in the twenty-first century without engaging in some form of outsourcing. Anytime you use another entity to perform a business function you are engaged in outsourcing. If you use XYZ Computer Store for your computer needs, use an outside bookkeeping or payroll service or buy a service contract on your copier, you are outsourcing and, surprise; all of these functions would provide jobs to United States citizens.

Assuming that we agree outsourcing can in some cases be good, how do you go about it? Can you just call up a vendor and get what you need on the first call? You might find what you need on your first try, but that’s not likely. Like any other major business decision, the decision to outsource a business function takes study, planning, execution and oversight. Let’s explore these issues.

Evaluation and Study

Every business decision begins with the recognition of a problem. The problem could be as simple as an entrepreneur needing a way to support his or her family or it could be as complicated as squeezing an extra cent in profit out of an already highly efficient production process. Whatever the problem is, a need exists and the businessperson’s job is to fill that need, but how to fill that need is quite another story. Let’s take a look at a hypothetical example.

Company A is a multinational computer hardware vendor. U.S. sales account for 75% of revenue and a similar percentage of support calls, but most of the buyers worldwide speak English fluently. At present, support staff is based in Anywhere, USA at an average hourly cost of $65.00 per hour after accounting for all employment related costs. Management wants to streamline operations and support staff is a significant cost center. Can you reduce the hourly cost and maintain the same customer satisfaction?

If you believe all the rhetoric, your company is probably the last one to take call center operations offshore, but rhetoric is often deceiving. The real answer to your streamlining question begins with an analysis of where you are now, what alternatives you have, and how well those alternatives meet your needs. You should ask yourself such things as:
  • How does my current operation compare to the industry norm from a cost standpoint and a quality standpoint?

  • What will my department look like if I outsource?

  • What vendors are available and how will my customers respond to them?

  • How much technical competence will you need with your product?

  • Will my remaining staff work well with vendor personnel? (This is particularly important if you are looking at an offshore model. Differences in cultures can create enormous problems.)

  • Any number of other variables that will affect your needs analysis, which, in turn, effects where you turn to meet the needs.
Planning

Assuming you have thoroughly analyzed your situation and have decided outsourcing is the answer, now you have to take the next step - planning. This is where you ask yourself things like:
  • How much do I tell my employees, particularly those who will soon be out of a job?

  • How do I get proposals? Do I give detailed specifications or generalities and let each vendor provide a solution?

  • Do I want to go offshore, or just find a local or U.S. vendor?

  • What kind of trade-off am I willing to take in customer satisfaction?

  • Do I want a proactive or reactive vendor?

  • If I chose a foreign vendor, what are the privacy laws governing the vendor? Will they conform to U.S. law?
These are only a few questions. You will probably find that there are a million more. The planning phase, from selection of a vendor, to negotiating a contract and managing your boss’ and employees’ expectations are critical in creating an environment for success. Don’t rush headlong into an outsourcing project just because you think everyone else is doing it; take the time to do things right.

Implementation

This may seem to be an intuitive step. After all, once you have things planned out, all you have to do is put the plan into action, right? Anyone who has ever tried to implement the "perfect" plan knows that perfect and plan are two words that should never be put together - ever.

While it is true some implementations are smoother than others, something will invariably go wrong. That’s why a good planner knows that any plan must be laid out on a step-by-step basis with frequent checkpoints and communication of status between all parties. Frequent communication ensures problems are caught when quick reaction will have the greatest impact on keeping your project on course.

Another thing good planners know is there must be one person ultimately responsible for proper implementation of a project. Don’t allow room for the project to be derailed by the players blaming one another for substandard performance.

Follow Up

Let’s see. You implemented the perfect plan to reduce information technology costs by $500,000. You did the homework, got the best vendor in the world and the vendor even hired most of the people you were laying off.

Things couldn’t be better...or could they?

Did you save the $500,000 you projected? How are the results of the customer service surveys coming back? Any of your calls to the vendor going unanswered?

Just because you have a perfect solution on paper doesn’t mean the solution is perfect. You will need someone to make sure the vendor keeps to the contract terms. You will need to design the proper controls to be certain your customers are happy, your bosses are happy and, if applicable, the stockholders or owners are happy. How will you measure if you have achieved the savings you expected? Maybe it isn’t about cost savings, but simply about positioning your company to grow with minimal additional costs. Whatever your goals in going into an outsourcing agreement, make sure you follow up to be certain the project is a success. Only proper monitoring will ensure a good plan stays good and a bad plan gets scuttled before it scuttles the company.

Conclusion

There is no doubt that sometimes an outside vendor can help you save money by allowing you to do what you do best and leaving the rest to the vendor. It can be as simple as finding a good bookkeeping service or as complicated as taking your manufacturing operations offshore. And, depending on your needs, you don’t necessarily have to go offshore to find the right vendor. In fact, while you may find a dollar savings in going offshore, you may upset your customer base and the resulting loss in revenue could eat up your savings.

Different companies have different needs and only a properly thought out, implemented and monitored plan will allow you to maximize the benefits of outsourcing. Is something not quite right in your business? Do you have a suspicion that you could save money outsourcing some of your daily business functions? Give us a call and let’s talk. We’ve had a lot of experience with businesses over the years and we know what works. Let us help you determine what the risks and rewards of outsourcing might be and whether the rewards are worth the cost.

Have a wonderful September.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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