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Outsourcing: How and Why
Note: This article was published in the June, 2015 issue of the Small Business Journal. Click here to view the published version.
Outsourcing: How and Why
Today’s business markets are faster moving and becoming more competitive than ever. Businesses are under relentless pressure to improve their offerings and keep costs low. For most businesses, labor costs and the supporting overhead constitute the largest portion of business expenses.
Many companies are using process outsourcing to cut costs and improve the quality of their outputs. Functions that require processing of data, but not physical handling of goods, are largely location‑independent and can be moved, albeit with some challenges, to lower-cost locations to realize substantial savings.
What underlies those challenges? Businesses usually need to change mindsets and structure to enable an optimal outsourcing program. The biggest problem, as with any major undertaking, is getting from Point A to Point B.
Why Outsource?
Substantial Cost Savings
A competent clerical worker in New York City earns between $14.00 and $20.00 per hour. Payroll taxes and benefits increase this cost 10 to-30% or more. After factoring in paid vacations, holidays, and sick time, a typical clerical worker will cost most businesses well in excess of $20 per hour. Moving New York‑ area work offshore will save most businesses at least 60%, often substantially more, on fully‑absorbed labor costs.
Scalability
For growing companies, constantly adding employees frequently requires changing locations, upgrading computer networks, and adding supporting overhead that slows down growth and increases unit costs. Scaling up outsourced processes moves this burden to the outsourcing service provider, enabling companies to grow faster and more economically.
Standardized Processes
Outsourcing usually forces businesses to adopt standardized processes for all transactions, with documentation of procedures. In the long run, this transition usually makes businesses more efficient.
Skillset Acquisition
Companies will often find that an outsourcing company has more in-depth capabilities in certain non‑core functions. Working with an outsourcing company enables businesses to learn through watching the processes being performed on their behalf.
The competition is already doing it
Most companies, at almost any size, are either outsourcing some process or giving the idea serious consideration. Keeping up with the competition requires looking at all the possibilities.
The Challenges
Location-based Thinking
Many managers feel the need to walk over and talk face-to-face with employees to obtain the feedback and interaction necessary to “manage”. Managing employees in a distant location requires analytical substitutes to the face-to-face encounters. Managers control outsourced processes through measurements and controls, such as error rates, throughput rates, balancing totals, and other metrics that substitute for the constant hands-on interactions. Outsourced processes are more likely to be managed by the numbers.
Training Lag
It does takes a little longer to train an employee at a distance, than it does face-to-face. Most standard processes, even if easily documented, have many exceptions to the rules. In a face-to-face environment, it is easier to teach processes that are heavy with exceptions.
Culture Gaps
People from different cultures and countries think and respond differently to communications. Because of this, there are often misunderstandings about expectations and deadlines for completions of work. Thinks do get lost in translation if preventative measures are not taken in the early stages.
Time Differences
When handled properly, time differences can help keep businesses operating around the clock on time‑sensitive jobs. However, some companies experience difficulty maintaining communications among employees with different work-days.
Resentment of existing employees
Using offshore workers can be seen as a threat to job security. There can be a certain disdain among US employees for work done by foreigners, even when competence is demonstrated.
Implementing an outsourcing program
Because of the compelling economics, outsourcing can be a game-changing strategy for many companies. However, it must be done carefully to mitigate many of the challenges we have described. Here are some things to think about.
Figure out what work is truly location based
The cashiers in retail stores are tied to its location, as they deal face-to-face with customers. Order processors in a web-based business are not. Every business function should be analyzed as to where it really needs to be performed. Many companies redesign job duties and responsibilities to enable more functions to be moved.
Pick a simple process as a test
If possible, look for something that requires relatively little training. Watch the process carefully with the goal of improving implementation procedures with each process that is moved.
Go paperless
Besides enabling outsourcing, paperless processing improves efficiency and cuts cost in many ways, from storage to slowdowns due to missing papers, to copying costs, etc. Any professional outsourcing company will help you go paperless. However, even if you decide not to outsource, you will eventually need to go paperless to maintain profitability.
Pick a company that speaks your language and understands your processes
Your client manager should be experienced, US-based, and available to you. Arrange site visits prior to selecting a vendor. Ask specific questions about methodology and timing. Discuss the challenges described above with the vendor. Get comfortable.
Outsourcing works best when there is no dire need for it
When times are good and people feel secure, there is little resistance to outsourcing processes. When times are tough, employees will resist anything that looks like a threat to their jobs. Outsourcing works best when companies leverage the capabilities of their existing employee base through the addition of low cost new hires. Growing companies are ideal candidates for outsourcing.
In Summary
In the current business environment, the use of outsourcing can strengthen your company’s bottom line and competitive position. While there are challenges, you can succeed if you are careful and do it right.
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