Do you need to make a decision about outsourcing?
It is probably one of the most common decisions a CIO or CTO makes on a regular basis and one that I am asked frequently. The big arguments thrown around are often about how much cheaper it will be and how much money you will save by outsourcing.
BUT is that really true? Even if you do save money, will you impact your product/service quality?
I could list a bunch of pros and cons regarding outsourcing in general, but the fact is that every company is different, their products and services are different and their financial situation is different. To make the decision well you need to think beyond the cash headline and focus on what’s really important and right for your business.
To help with the thought process these are often the top considerations listed in order of importance.
Core to the business
First work out what your business actually is. If something is key to differentiating your business or if it is absolutely vital in the delivery of your services, then don’t outsource it.
Examples:
Your company makes shoes. Should you consider outsourcing IT? Yes. You win by designing and making better shoes.
You are running a hospital. Should you outsource cleaning? No. Cleaning is the bedrock of running a good hospital.
Control
How important is it to have control over the supply of the product or services in question? If they are vital to the business success, then don’t outsource.
Examples:
You run a chain of hotels. Should you outsource laundry services? Yes. Although clean bed linen is vital to your service, it is easily checked by your staff as it is used.
You company sells hosting services. Should you outsource the running of the network inside the data centre? No. The data centre network is tightly integrated with the design and build of the services.
Commodity product or service
If the product or service is a commodity, then it’s normally worth outsourcing. In this context you can judge if something is sufficiently commoditised by answering yes to the following questions:
- Can I substitute one supplier for another with zero impact?
- Are there several possible suppliers?
- Can I switch suppliers quickly?
- Are the margins for the supplier low?
- Is it easy to measure quality or service level?
Examples:
Network connectivity between sites in any metropolitan area and standard office software applications.
Expertise
If the skill set to provide a service is not readily available, then outsourcing is a great option.
Examples are:
You run a national chain of gyms. Should you outsource your IT support? Yes. It’s easier for a specialist provider to provide the right level of support at all your remote locations.
You run a web design firm in Central London. Should you outsource your software development? No. Developers are readily available and skill sets often overlap with web developers.
Scale
When working at large scale, a company might find that a simple way to get additional return on investment without having to take risks on new product launches is to vertically integrate and own the supply chain or the delivery side of the business.
Examples:
You run a large chain of coffee shops. Should you outsource your coffee bean roasting? No. As you grow, it’s time to bring it in-house.
You own a small retail business with fewer than 20 employees. Should you outsource your accounting system? Yes. There’s no advantage to running it yourself at that scale
Money
The two main factors that would encourage a decision to outsource would be.
- Your business lacks capital for investment.
- There is significant profit margin to be made on the product or service concerned.
Examples:
Your business is an equipment hire business. Should you outsource your IT infrastructure? Yes. Owning your own infrastructure would only add to your capital expenditure without providing direct returns.
You offer shared hosting and email services to your customers. Should you outsource your infrastructure? No. Why not make an extra 20% margin by running it in house?
Yes but… No but…
Of course the devil is in the detail, so even with the examples I’ve given, there are times where the decision would be reversed. Above all, start by understanding what’s important to your own business success and never outsource your crown jewels.
If in doubt, drop Techsensei a line. We would be happy to help with your outsourcing strategy.