Outsourcing: Not Just for Big Business
By Paul Rich, Principal and Business Consultant
Siegel Rich Division of Rothstein Kass -Certified Public Accountants
Outsourcing has become a controversial issue and a hot topic among presidential candidates this year. But have you stopped to think how your business can benefit from the efficiency, functionality and cost savings of outsourcing? If you have, you might find that, like many others, you are already outsourcing-and enjoying its benefits.
What is Outsourcing?
Outsourcing simply means "contracting out" various functions of your business. It doesn't necessarily mean that you will be contracting out work to foreign countries because there are many American companies that provide outsourcing services i.e.. commercial printing services and cleaning services, among others.) The vendors who supply outsourced services may be self-employed contractors, consulting firms, temporary employee services or professional service firms. One common example of outsourcing is payroll processing. Other commonly outsourced functions that can be provided by professional services firms include:
Succession planning
Accounting and tax preparation
Information technology (IT)
Consulting (i.e. due diligence, business planning)
Distribution services
Pension management
Manufacturing
Assembly
Staffing
Grounds Maintenance
Estate and income tax planning
Why Outsourcing Can Work for Your Business
Fortune 500 corporations are under the microscope for outsourcing thousands of jobs overseas to low wage workers, potentially leaving American workers out of work. But according to Forrester Research Inc., of the 2.7 million jobs lost over the past three years, only 300,000 have been from outsourcing. With that in mind, outsourcing means something different for family and privately owned businesses. With fierce competition affecting the margins of many businesses, companies are finding that they cannot afford layers of administrative overhead dedicated to operating their core business. They are realizing that outsourcing provides alternatives to doing everything for themselves. For example, if your business is distribution, there may not be a need to employ a large administrative overhead dedicated to support functions like those listed above. Companies that provide outsourcing services are able to invest more time and resources into the specific functions that generate revenue. Because of this, they can operate more efficiently and economically, which can help you compete more effectively than companies that do it themselves.
Information technology is a good example of this. The cost in personnel, benefits and training to keep pace in the rapidly changing world of information technology is prohibitive for most privately owned businesses. By outsourcing this function, management is free to focus its energies on the core aspects of the business-those that provide revenue-generating products and services-and leave the other areas to vendors who specialize in performing those functions.
Benefits of Outsourcing
Proponents of outsourcing cite a variety of reasons for "letting others do it." Here are some of the most important:
Cost savings - By outsourcing functions that were previously performed in house, companies are often able to reduce their employee levels and related costs, such as recruitment, supervision, salary and benefits. By outsourcing a capital intensive function, you can also reduce the costs of equipment obsolescence and depreciation. A portion of your cost savings will go to the outsourcer, but outsourcing vendors have a tighter control of fringe benefits and run leaner overhead structures. They also know how to deal with vendors serving the function they are providing and therefore, are able to pass on to your company the benefits derived from bulk purchasing and effective leasing.
Quality of service - Because your company is the outsourcer's customer, you will likely experience a "can-do attitude," which may not always be exhibited by an in-house staff.
More capital funds - Outsourcing reduces the need to invest capital in non-core business functions, thereby freeing capital to invest in profit-making aspects of the business.
State-of-the-art technology - Outsourcers have to spend time and money on the most current equipment and on employee training to remain competitive. By outsourcing certain areas, you are assured of receiving the most efficient services and the latest technological advances within that particular function.
Price stability - By signing a contract to outsource, you will likely be able to obtain stable pricing, eliminating the future need to shop around. Stable pricing allows the company to budget operating expenses and capital purchases more accurately, while potentially preventing the likelihood of surprise expenses.
New business partners - Outsourcers clearly wish to be viewed as your business partner. And as a business partner, they share in the desire to keep your company operating at its maximum potential. Through this business partner arrangement, outsourcers are eager to introduce you to other outsourcers to assist in that goal.
More time to focus on core business activities - You cannot overlook this intangible benefit of outsourcing. If a company is to be successful and profitable, management is needed to spend time planning and directing the company's business strategies and not wasting time worrying about managing certain administrative or ancillary functions.
Potential Drawbacks
As with every new system and procedure, you have to take the good with the bad. Critics argue that outsourcing creates too much loss of control, less flexibility, questionable savings and the risk of over dependence on too few vendors. Owners of family and privately owned businesses should understand that initiating an outsourcing arrangement takes considerable management time. Finding and selecting the right outsourcing company can take many months. And outsourcing companies need to be given overall directives and guidelines for what the company wants done, and therefore, some level of supervision by management will ultimately be needed. Also, if an outsourcer is replacing a function that has been historically done within the company, layoffs could very possibly affect employee morale and may cause talented staff in other core areas to leave for fear of job security. In addition, be cautious not to completely eliminate the internal ability to provide the basic product or service you offer. For example, if you are a manufacturer and you have outsourced the assembly of your product, be sure you can still provide a sample of a specialty order in-house if asked to by a customer. A delay of a product sample could cost you the customer's business.
One of the biggest complaints by companies that have outsourced is that there has been a mismatch between expectations and reality. When an outsourcer is marketing its services there is usually much enthusiasm and talent dedicated to solving the problems that were defined at the outset. However, once the contract is signed, the outsourcer brings in its implementation team, which often lacks the same level of enthusiasm that the sales and marketing team had. Due diligence is necessary when beginning any new business relationships. It is best to get recommendations from current customers of the outsourcer or other reliable sources in your industry.
Careful Selection Is Key
By being aware of these drawbacks at the start of the outsourcing process, you can mitigate many of these and build outsourcing relationships that benefit your business. The key to successful outsourcing is careful selection of both the functions you outsource and the vendors you choose to supply them.
About the Author
About Paul Rich
Siegel Rich Division - Rothstein Kass
Paul Rich is a business consultant and specializes in assisting closely-held and family owned businesses in structuring and negotiating mergers and acquisitions, securing financing, rendering IPOs and private placement advisory services, assisting with succession planning and providing profit-enhancement business planning and executive coaching, among other hot button areas for small business owners.