In part one of our series, we shared the four key questions that business executives need to ask themselves when considering outsourcing some of their business operations.
In part two, we are going to answer the first key question:
“Is Outsourcing Right For My Business?”
To answer this question, you must first answer another question:
“Do I really want to outsource?” It’s a simple question to ask, but not that simple to answer.
Labor cost savings clearly is the leading benefit derived from outsourcing, with offshoring locations providing a broad range of potential cost savings, ranging from 30-75% according to a study published by the Everest Research Institute.
But other factors play a significant role in the decision to outsource, including the ability to improve overall business operations and performance through the reengineering of business technologies to increase automation, visibility and control.
And in some cases, other growth-related benefits are available, such as more cost-effective access to specialized skills and capabilities, which can facilitate new production innovation, and open up new markets to the company.
Greater access…emerging markets
Consider, for example, the explosive growth of the Hispanic consumer market in the United States. Having greater access to Spanish-speaking personnel can help companies reach out to previously untapped domestic markets, while establishing operations in these regions provides a gateway to an emerging consumer market.
Clearly, there are many potential benefits available from outsourcing, but there are also many factors that inhibit businesses from jumping into it. In the end, as a business executive, you need to make the decision of whether outsourcing is right for you. There are many factors that support the decision, and some that may give you pause.
For a business that needs to reduce its costs, the outsourcing decision becomes easier. The labor cost savings that are available through offshoring simply cannot be achieved in the U.S., and at some point, reducing staff becomes detrimental to business operations. Utilizing offshore resources is a way to reduce costs without increasing the burden on already overtaxed personnel. Layoffs do not exactly buy you any more “political capital” than outsourcing does.
For companies facing tighter margins and increased competitive pressure, outsourcing can be a quick way to significantly reduce bottom-line costs. And for those companies whose competitors are already utilizing offshore back office services, it will be difficult to keep up with the lower costs and competitive advantage that your rivals are achieving.
In most cases, however, businesses that elect to move functions offshore do not do it because of labor savings alone. It may not be the "politically correct" thing to say, but outsourcing is often more about performance than cost savings.
Companies usually want to outsource some of their transactional activities because of the improvements they can gain from often-inefficient operations. Poor back office operations, due to weak or non-existent automation, inefficient processes and (cue the “political correctness police”) poor workforce quality are the other primary drivers for outsourcing. The reality is, if the process is performing effectively, the company is not going to be inclined to outsource it unless the cost savings are dramatic and cannot be overlooked. The maturity and documented outcomes of businesses that have utilized offshore services should give a business executive some degree of comfort in making the decision to consider outsourcing. But the concerns are legitimate, and need to be managed effectively.
If the answer is “Yes” to the outsourcing question, you need to ask and answer some additional questions before you take the next step:
What am I looking to gain? Is this about cost savings, efficiency, performance improvement?
If it’s cost savings, am I confident that I will achieve the savings?
If it’s efficiency or performance improvement, how will I measure the benefits?
Have I assessed the impact to the business, operationally and culturally?
What are the risks and how do I mitigate them?
Having well defined expectations and outcomes is critical to the success of an outsourcing function.
Please “tune in” to part three of this five-part series to learn more about the “Game Plan for First-Time Outsourcers.”