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What is Outsourcing and Why Should I Consider It for My Company?

A Better Way to Do Business

Outsourcing occurs when a company uses an outside firm to provide a necessary business function that might otherwise be done in-house. It is different than subcontracting because the function is provided on an ongoing basis, rather than for a specific project. The outside firm is generally better, faster or cheaper than an in-house department. Outsourcing relieves a company of routine tasks, enabling it to focus on the core strengths that make it competitive and contribute the most to its success. Most outsourcing firms also have a consulting component to help clients plan the long-term relationship.

Outsourcing has been around a long time in various forms. Some traditional examples include: law firms, public accountants, realtors, benefits managers, consulting engineers, advertising agencies, security firms, custodial services, equipment maintenance contracts, payroll and employee leasing companies, manufacturers' sales representatives, collection agencies and machine shops. Thirty-six years ago, H. Ross Perot started Electronic Data Systems (EDS). In 1998, EDS provided $16.9 billion worth of Information Services to clients worldwide. Outsourcing is now available to the smallest business here in Maine.

In the last ten years, outsourcing has extended to more functions than ever before. Outsourcing has become a viable technique for companies of all sizes; not just those that can afford a giant like EDS. These functions include internal finance & accounting, information systems, human relations, customer service, purchasing, materials management/ fulfillment, technical support and manufacturing. Outsourcing makes it possible for a single entrepreneur to develop, manufacture and distribute a product or service to a worldwide market without any employees!

Why outsource? To reach company goals faster in a world economy where the market can change faster than you can build a company. To get access to people and facilities you could not otherwise afford. To react quickly and profitably to issues and opportunities.

Reasons to Outsource

Today's businesses, regardless of size, need to "mind the store". They must focus on those one or two core strengths that give them an "unfair advantage" over competition and permit them to move faster, grab a greater market share or earn more money. If they don't, no matter how successful the company is today, someone will eventually take their business away with a more innovative approach just ask people who used to work for IBM or Digital Equipment during the 1980s.

Three critical success factors are needed for any company to survive, grow and thrive. They are the ability to sell a product or service, the ability to produce and it and the ability to find and manage money to fund sales and production. Every company, particularly a small one, has boss or a corporate culture that is weak in one of these critical areas. In nine years of consulting, I have never met an entrepreneur, however successful, who embodied all three critical success factors. Outsourcing helps fill the natural gaps in the management team.

Outsourcing adds flexibility in several dimensions. It enables a company to vary the amount of resources applied to a function by season, project or other market variable. Since outsourcing firms employ highly trained specialists and tend to invest heavily in ongoing professional development, clients gain access to experts they could neither afford nor properly supervise. It brings access to state-of-the-art technologies and expensive capital equipment the company could not afford or would not utilize effectively. In an era of shorter company life cycles, outsourcing helps build a company fast, run it profitably and, if appropriate, disband it quickly without loss. Outsourcing enables companies to address more business opportunities by focusing on their core strengths. All this makes it possible to deliver goods and services better, faster and cheaper than ever before.

Who Should Outsource

  • Rapidly growing organizations with important nonrecurring project needs, the requirements of which are greater than the availability of internal resources
  • Businesses poised for growth, but lacking sufficient in-house expertise to "get to the next level"
  • Business leaders needing advice
  • Entrepreneurial organizations which may be growing slowly, not making much money, utilizing outdated information systems technology, and/or experiencing ongoing challenges from operational issues
  • Managers who are unsure what product lines make or lose money
  • Firms experiencing material shortages, excess material or difficulty meeting customer deliveries
  • Companies emerging from bankruptcy or other financial distress
  • Owners who want to know why they aren't making enough money or don't have enough cash
  • Firms that want to stay small, but have a big market presence

Planning an Outsource Relationship

As with any business activity, outsourcing should be planned and executed carefully. A company should examine its operations carefully to know what to outsource and what to keep. Generally it makes sense to outsource functions that are complex (require specialists) but are distant from the core competency. Ideally, outsourced functions require a high degree of expertise, constant training and upgrading, but are similar across a large number of businesses. Outsourced functions do not require the full-time attention of upper management. Demand for these functions may be sporadic or seasonal, but other firms may demand them on a different schedule. For example, a high technology firm might outsource finance, and manufacturing, but chose to retain product development and marketing.

Some functions should never be outsourced. Top management should not be outsourced because every firm needs the full time attention of a manager or entrepreneur who has something at stake, whether he or she has signed on the debt or holds a fistful of stock options. Never outsource the functions that define the company's strength, its core competencies. Without core competence, a company loses definition, purpose and the ability to compete. Never outsource a function unless there is a backup plan to "re-source" or "in-source" it if the initial relationship fails. You cannot control an outsource firm or its destiny, so you need to be prepared should it fail to perform to your expectations.

Outsourcing has risks. Outsourcing vendors usually have more expertise in their field, so an unscrupulous one could negotiate an unfair contract. Be sure you thoroughly understand what you are getting into. If the contract does not thoroughly spell out responsibilities in detail, some functions could slip through the cracks. Outsourcing often means opening your company's most sensitive information and its premises to an outsider. Be sure you trust the vendor to maintain confidentiality and security. In some cases it may be prudent to require proof of errors and omissions (professional liability) insurance. Some customers and vendors may have legal problems working with an outsource vendor who works on your behalf. Be sure major relationships understand and accept that the vendor speaks for your company.

Outsourcing is like a marriage, a long-term contract in which both parties agree to provide help and support to each other. Unlike marriage, eventually all outsourcing relationships end. Outsourcing arrangements should include a written agreement that specifies, in detail, the duties, rights and responsibilities of both parties. The agreement should specify reasons for termination and a procedure to terminate the relationship with minimum damage to ongoing operations. Never enter a major outsourcing arrangement without having your lawyer review the contract.

Conclusion

Outsourcing gives a company access to resources it could not otherwise afford or obtain on short notice. It gives a company the ability to "right size" corporate functions quickly without investing in infrastructure. It makes it possible to build a virtual company competing on an international playing field with only a single employee, the entrepreneur. Outsourcing is a tool toward becoming more competitive by staying focused on your company's core competencies. Outsourcing is a tool that, when used effectively, helps companies earn more money faster than they would doing the outsourced function in-house.

As an offshore IT services provider, Miracle-design provides all benefits of a full cycle IT outsourcing company.

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