What does outsourcing really mean for your business?
Outsourcing is a relatively simple idea, but one that can often seem divisive. This is frequently due to confusion and disagreement surrounding the very definition of outsourcing. Entrepreneur defines outsourcing simply as, “The practice of having certain job functions done outside a company instead of having an in-house department or employee handle them; functions can be outsourced to either a company or an individual.”
Outsourcing does not automatically mean offshoring
We see many articles and even outsourcing companies themselves which claim to be talking about outsourcing, but are actually talking about offshoring. The reality is that outsourcing simply refers to allowing a third party to take on a function in your organization. It is a very common business practice in the United States, and it usually doesn’t involve working with vendors in another country.
There are three primary reasons that companies outsource: to allow them to focus on core business strengths, to gain access to experts and technology, and to minimize costs of performing functions in house. Most companies are looking for a balance between these three factors. Offshoring explicitly refers to getting work done in a different country. It is nearly always a financial decision, taking advantage of wage differences in less developed parts of the world.
Hudson Software, for example, is a company that provides Technical Support and Customer Service functions for other companies. We are located in the United States. When a company hires us to do their tech support, they are outsourcing. While cost is a concern, most of our tech support customers are also motivated by a desire to focus on core business strengths, and outsource other functions.
Let’s make that idea more concrete with some examples.
Many companies provide coffee for their employees. Providing caffeine to employees is critical, but has nothing to do with your core business. If you buy a coffee machine, shop for coffee, and clean the machine when needed, the time you spend takes you away from other functions in your business. Hiring a coffee service gets you that time back. For one monthly fee, the coffee gets delivered, you don’t worry about running out of coffee, and the machine gets cleaned or replaced as needed. Conveniently, there are lots of companies who want to bring coffee to your office. So not only will you get your time back to focus on your business, but outsourcing may cost less than doing it yourself, if you consider the cost of labor (your time or your office manager’s time).
Next, something even more critical than caffeine: paying your employees! Why not do payroll yourself? The usual two reasons: cost and focus.
Payroll is not as simple as coffee. You need to buy and learn payroll software, learn the labor laws, input the hours, print the checks, arrange the direct deposits and keep the records. The payroll department deals with the 401K contributions and other payroll deductions, benefit contributions for things like health insurance, and federal, state and local tax withholding. You will want to hire someone with experience doing payroll, preferably on the payroll software you own. Expertise is critical since payroll must go smoothly and there will be fines and fees if you don’t get the government the tax withholding and the accompanying paperwork on time. So if your payroll person quits and gives you two weeks’ notice, you need to put your HR hat on and hire someone else in a hurry, because employees must be paid. Focusing on payroll will take your focus away from the critical parts of your business.
Hudson Software believes in outsourcing, so, like many businesses we outsource our payroll function as well as our coffee service.
Outsourcing isn’t only for small businesses.
Large companies sometimes outsource functions that are closer to the heart of their business. Consider the publishing industry, and the printing of books. Even in the age of e-books and Kindles, large publishers sell and print many millions of books a year. In the United States alone, over 300,000 new titles and re-editions are issued each year. If the average print run is 5,000 copies, that means that there may be as many as 1.5 billion books printed each year.
Large publishers could afford to own printing presses, or buy printing companies, but they don’t. They outsource this function. By outsourcing printing, they get printers to bid against each other and keep costs down. And they don’t need to own the specialized printing presses for different types of job, or hire the various kinds of printing workers with press experience. By outsourcing, they get both better control of their costs, and a better outcome. Selling books is their focus, not printing them.
Outsourcing technical support is very similar. To do it right, you need specialized hardware and software. You need software to do record keeping and reporting, and you may need to pay someone to customize it to get back the kind of reports you need. You need a phone system with many specialized features, such as queuing, so callers can wait for the next available agent, instead of going right to voice mail. Then you need to hire and train the people: good communicators who also have decent technical skills. Remember, those agents will be talking to your customers. Don’t forget the HR resources to replace the call center agents if they don’t work out, or they move on to other jobs.
Getting all of these things right is a distraction from focusing on your core business. It makes business sense to focus on your products and your core strengths, and to outsource the rest.