Benefits of Outsourcing Business Activities
A business doesn’t have to do all the activities that it wants to carry out, from creative design, through manufacture, to selling, out of its own retail outlets. Other businesses are almost certainly better at elements of the process. For example, most businesses don’t sell the products they manufacture, and even within the same industry companies take different approaches.
Outsourcing some of your business activities can help your business to:
Focus on your core competences. Small businesses typically run their own computer and IT systems, for example, and call for help only when things go wrong. Big businesses, who you might think would be better able to run these and other support activities in-house, mostly don’t do so. Some 65 per cent of UK retailers, for example, outsource their IT activities, warehousing or another part of their distribution network, while 55 per cent outsource payroll and 45 per cent outsource store security. That leaves retailers to focus on store location, merchandise and layout, all central to their distinctive offerings.
Reduce your capital expenditure. Raising money to get started or to grow is hard enough without tying it up in assets you don’t have to own in order to use. For example, Ingredient Solutions, a small company who supply cheese to fast-food sandwich outlets such as EAT, initially contracted out slicing to allow them to concentrate on higher value-added functions such as dicing and shredding for pizza toppings. You don’t have to buy and own an asset to benefit from its output.
Make use of worldwide best practices. While your company may be best, or at least strive to be best, in its core area of business, others will be better at what is central to their proposition.
Start new projects quickly. An outsourcing firm can have as a selection criterion the resources to start a project right away, giving you a head start. The same project run in-house may take months or years to research, evaluate options, purchase and install equipment, hire and train the right staff.
Level the playing field. Few small businesses can equal the in-house support or specialist services their larger competitors offer. Outsourcing can help small businesses act ‘big’ by giving them expertise that only large companies usually enjoy.
Customer Relationship Management (CRM), for example, is one area where outsourcing can create a level playing field for small firms and bigger firms with in-house systems. CRM helps businesses focus on learning more about their customers and developing stronger relationships with them while providing the resources required to leverage these relationships for future business and referrals.
Salesforce, Pipeline, HubSpot, SugarCRM, Zoho CRM and Spark all have affordable CRM systems that mirror the best on the market, working well with businesses with just a handful of sales staff.
Reduce risk. All businesses are risky; that’s the nature of the beast. Markets, competition, government regulations, the financial environment and technologies all change very quickly. Outsourcing providers take on and manage much of this risk for you, and as experts in their own field they generally are much better at identifying and minimising those risks.
Lower costs. Any organisation that produces more of a product or carries out more of a particular process than you almost certainly has a lower unit cost. Boston Consulting Group (BCG) explained that this in a process known as the ‘experience curve’ showing that each time the cumulative volume of doing something – either making a product or delivering a service – doubled, the unit cost dropped by a constant and predictable amount. The reasons for the cost drop include:
Repetition makes people more familiar with tasks and consequently faster.
More efficient materials and equipment become available from suppliers themselves as their costs go down through the experience curve effect.
Organisation, management and control procedures improve.
Engineering and production problems are solved.
Outsourcing is not without risks, though. In some countries, the culture can be to cut corners and bend the specification in ways that the supplier may not fully appreciate the significance of. Patrona, a small travel accessories company, is a case in point. Their problems in this area were so severe that they had to seek money on crowdfunding website Kickstarter to help pay for UK tooling for a production facility when their Chinese outsourcing partner let them down.
Andrew Brundan, the businesses’ founder, faced a production mishap in September 2012 when he was waiting on £250,000 worth of stock from China. When he opened up the shipment, he discovered to his horror that the stock, in its entirety, was faulty: a catastrophe for Patrona as the stock had been pre-sold to a number of large UK retailers. The outsourcing partner had used the wrong plastic and adhesive for the Patrona tablet cases it had produced, rendering most of them unsellable. Brundan had provided a detailed specification, which would be binding under the business culture that prevails in the UK and elsewhere in Europe. In China, however, they see it as just a recommendation of how to make the product and use their own judgement on how to actually proceed.
When outsourcing, you must make sure that your outsource supplier understands exactly what you require, and you will need to invest time and effort in managing the relationship.