7 Secrets to Leverage Outsourcing to Scale Your Company
One of the least understood tools available for growing your business is outsourcing. It allows you to expand capacity without having to formally hire large numbers of new staff; without having to invest in new capital equipment, without leasing a larger commercial space; and without having to invest in development costs for non-core parts of your business, increasing your fixed overhead.
To be clear, outsourcing is when you take a function, activity, or need of your business and hire an outside company to do the work instead of doing it in-house. This includes: contracting with a fulfillment company to stock and ship all your customer orders; hiring an online marketing company to manage and run your pay-per-click ad campaigns for you; turning over your payroll to a professional employment agency; etc.
Here are the 7 ways you can leverage outsourcing to scale your company.
1. Gain instant scale in an area of your business that would be costly or difficult to expand quickly.
For example, that fulfillment company you hire already has the capacity to handle 100 times (or even 1,000 times) the order volume you currently have.
So ask yourself, is there some part of our business that currently holds us back because we’ve been slow to scale it internally?
Then ask, would an outsourced solution provider help dissolve that limitation in a stable, scalable, cost effective manner?
Then make sure you think if the part of your business under the microscope for potential outsourcing is core to your business (see point 7 below for more on this critical factor.)
2. Leapfrog all the development costs and trial-and-error learning that the outsourced service provider had to go through to build the solution you’re buying (or renting) from them.
In many cases, outsourcing lets you skip all developmental costs and tap directly into a proven business system and team in that specialty area.
In essence, the outsourced service provider has amortized all the significant development costs over its base of customers, of which you are one.
Quick comparison here. A decade ago, before there was an outsourced solution for an e-marketing platform, my company invested $500,000 to build one for us to use with our 100,000 person e-list. Once built we had ongoing maintenance costs in the low six-figures. Compare this to the roughly $10,000 per year we spend today on our current e-marketing platform, a solution that is literally 100 times better for pennies on the dollar of what we spent to build in-house!
That’s why 98 times out of 100 when I have a business coaching client ask me if they should develop their own software solution in-house or go with a third party solution that they can then customize, I tell them to outsource.
3. Tap into the expertise your outsourced service provider offers that your business lacks.
Many companies miss out on this opportunities because they let pride or ego get in the way.
One of our business coaching clients manufacturers top of the line metal bike parts. When they wanted to get into carbon-fiber and other composite, non-metal materials they turned the experienced team they knew in Singapore to help them. Those Singapore manufacturers and engineers had hundreds of thousands of person-hours-experience designing, engineering, and manufacturing in these materials that our client didn’t. It was the fastest way for them to gain access to expertise that would have been too costly in time and money to gain on their own.
4. Ride along with the ongoing and future investments your outsourced provider makes.
One of my favorite ways to benefit from an outsourced provider is to let them invest in the ongoing development and training costs to keep their solutions cutting edge in the market.
5. Beware the costs of choosing an “also ran” outsourced provider.
Increasingly the world is winner take all so make sure you pick an outsourced provider who will be in the top 3 so that they will be around to continue to develop and mature over time.
For example, several years back, we made the decision to go with a specific online learning platform for use with our business coaching clients, only to later watch as it was outpaced by other, better market choices. This meant we faced the dilemma of eating the sunk costs we’d invested integrating around that old solutions provider, or living with an inferior solution.
You better believe that now we factor in which solutions provider is likely to be chosen by the market as the clear winner so that we have a much greater chance of riding their ongoing development improvements up as we scale (see point 4 above.)
6. Only use outsourcing when it lowers your real cost.
Make sure you factor in the direct and indirect costs of keeping the work in-house as well as the direct and indirect costs of outsourcing the work.
Indirect costs to keeping it in-house include: loss of staff time and focus to perform the work; increased overhead to both perform and manage the work; and more complexity for your business to manage.
Indirect costs to outsourcing include: the cost to find and implement an outsourced solution; the cost to replace any failed outsourced relationship; and the costs to integrate the outsourced service with your own company systems.
7. Beware outsource an area or function that is core to your business.
If the area or function you’re outsourcing is the main way you create value in your business, then outsourcing puts you at risk.
In fact, disruption in the outsourced solution can kill your business, leaving you vulnerable. You lose the capability internally.
Look at what happened to Dell when it outsourced the manufacturing of its core computer production to Asia. It essentially paid the cost of creating its next generation of competition!
While it can be appropriate to outsource a core area or function of your business, be much more cautious about doing so. In fact, in most cases I strongly caution against doing it. Sure you give up some seductive, short term benefits, but the longer term future can often be eroded by outsourcing your core.