Outsourcing has seen massive growth in the past decade, driven in no small part by a new wave of forward thinking entrepreneurs and the small-team mentality that is central to so many modern startups.
Despite its prevalence, outsourcing remains a controversial topic in the business world. Some praise the many benefits of outsourcing, while others warn how costly and time-consuming it can become when mismanaged. One point upon which there is consensus, though, is that when initiated and managed properly, it is a cost-effective and flexible way to create a competitive advantage.
In this article, we’re going to discuss some of the most compelling reasons for outsourcing, then share a list of the most common mistakes that companies make when outsourcing, so you can avoid them.
Why Companies Outsource
While companies in different industries and at different levels of development may have varying motivations for considering outsourcing, there are certainly a few which are common.
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Reduction of Labour Costs
Outsourcing, as opposed to hiring additional staff, essentially converts fixed costs into variable costs. For startups still involved in their funding stages, this is a huge incentive, as capital can be directed towards revenue-generating activities, rather than towards growing costs.
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Efficiency
Economy of scale often dictates that an outside company, dedicated to a specific task, will be able to perform the same role more efficiently, and at a lower cost. And for a startup they may prove to be too much of a financial burden to take on. For small companies that require periodic research and development or marketing efforts, for example, an outsourced solution will almost invariably be the more efficient option.
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Focus on Core Business
By outsourcing peripheral activities that support or enhance a core product or service, internal resources can be dedicated to essential business activities. It’s all too easy to entrepreneurs to get caught up in managing projects or activities which do not directly generate revenue, and which can be a distraction in a startup environment.
Avoiding Common Outsourcing Mistakes
In order to reap the benefits of outsourcing, it is vital that outsourced projects and activities are managed with due attention.
When it comes to outsourcing, the “cheapest” option is rarely the best. Whether making that decision yourself, or presenting it to a board, the reasons for outsourcing to cheap labour territories seem overwhelmingly compelling. The picture changes dramatically, however, when you are realistic about the level of risk involved, particularly if you do not have existing resources available to meticulously manage the outsourced work.
The Hidden Risks
To illustrate our point, let’s use an example. We’re a new tech company in a crowded marketplace, looking for a competitive edge. We devise a new feature that would differentiate us from our competitors and help us to take the lead in our industry. We get a quote from a local software development firm who we’ve worked with in the past, but their quote turns out to be considerably higher than the project’s estimated budget. So our team investigates offshore outsourcing options, which come in at a fraction of the price of the local firm.
The cheaper option will allow us to dive straight into development, without the hassle of trying to free up more money to pay the local dev firm, and even leave us with spare budget for any issues that might arise.
In an article published in a journal called Academy of Management Executive, Jérôme Barthélemy outlined the 7 Deadly Sins of Outsourcing, based on a survey of nearly a hundred major outsourcing efforts in Europe and the United States. Let’s evaluate our company’s decision, based on these most common pitfalls of outsourcing.
1. Activities which should not be outsourced
Is the job that we want to outsource part of our businesses core activities? If so, how could handing over even partial control of its development to an untrusted partner be a good idea? In another entry entitled “Outsourcing and industrial decline“, in the same journal, it is suggested that “core activities should not be outsourced because firms risk losing competitive advantage and becoming “hollow corporations.” Whereas “outsourcing noncore activities allows firms to focus on the activities they do best and improve their overall performance”.
Are the reasons for outsourcing compelling enough to entrust a contractor who we have never worked with before, with the future of our company?
2. Selecting the wrong vendor
In the case of the development of our new feature, consider how thoroughly we would scrutinise the capabilities of a developer if we were going to hire one in-house? How does our analysis of the contractor compare? Have we asked to look at past projects, or spoken to happy clients? Have we found out what compliance and testing staff and protocols they have in place, or asked for details on the devs who will actually be working on our project?
These are critical points in which we would expect total clarity if we were developing the feature in house, so surely these points should be even more closely scrutinised when handing the work off to a third party.
3. Writing a poor contract
It is critical that dependencies, deadlines and deliverables are clearly specified in the vendor contract.
4. Overlooking personnel issues
Have we considered the impact that outsourcing such mission-critical work might have on our existing team? Barthelemy’s report found that outsourcing can impact on the morale and productivity of existing staff. Should we decide to outsource the development of our new feature, it will be important to ensure that we retain key staff members, which may require higher salaries and benefits. This must be factored into the overall evaluation of our decision to outsource.
5. Losing control over the outsourced activity
Technology is a fast moving industry and agility is absolutely critical to maintaining competitiveness. How would we respond if, just a few months down the line, we realise that our new feature needs to be realigned with market demands, or that more functionality needs to be built? Will our offshore contractor be able to revisit the terms of our contract, or even have the capability to build the new functionality? How long will it take for our team to brief in the changes and who will ensure that they are being enacted?
6. Overlooking the hidden costs of outsourcing
How much cheaper is offshore outsourcing than our trusted contractor if we honestly consider the hidden and resultant costs of managing the offshore contractor? The most prominent expenses identified in Barthelemy’s study included:
- Salaries for internal contract management staff
- Contract consultants and lawyers
- Formal and informal meetings with contractors
The study showed that “cheap” outsourcing has the potential to cost companies far more than initially projected, and importantly, far more than the contract amount. Hence, costs need to be closely assessed and managed.
7. Failing to plan an exit strategy
lead to further delays and greater costs. A contingency plan should be in place from the outset to assess the impact of ending a contract ahead of its initial end date. Can delays and costs be mitigated should early termination occur and is an alternative financing plan in place to keep the project moving? Both of these should be supported by your contract, which should define failure and specify what steps will be taken, should it occur.
The success of outsourcing depends on how it is sourced and managed. The vetting processes for new contractors should surpass those in place for full-time staff in terms of detail and a clear, detailed plan must be in place to manage the contract and guarantee quality control. When managed properly, outsourcing is a fantastic way for startups and SMEs to gain a competitive advantage through the skills and experience of their contractors. But it is a business decision that requires detailed assessment and thorough planning before taking the leap.
Thinking about taking the leap into new office space? Speak to a specialist at Instant.
