Outsourcing: why it works

You don't need to outsource functions to get the benefit of codifying the relationship between them.

Why do companies choose to outsource? Or more importantly, when? What’s the motivation for outsourcing? The trigger?

The usual answer, it seems, is cost. Company leaders believe they can achieve the same ends for less money. In an ideal world, they test this belief before the decision is made. Then the relationship between supplier and customer is codified in a contract. ‘We will get X for Y by Z’.

Now imagine having that contractual relationship in place for every function of your business. Not as a step to outsourcing. But as a means to better understand your business. You don’t need to spend millions on lawyers and contracts. You don’t even need to spend thousands on consultants. Just spend some time understanding the inputs, outputs, and expectations for every function of your business.

In my experience, very few organisations go through this exercise with any frequency. The worst offenders are profitable companies with happy, long-serving staff. They sound like great places to work. But in these places, people rarely ask difficult questions.

This lack of clarity has three effects.

1. Poor value measurement

If you don’t know the inputs and outputs of each function, it’s hard to understand how value flows through your business. For example, properly matching sale prices to input costs. This is particularly challenging in service businesses, or businesses with a blended product/service model.

2. Misalignment of goals

I don’t believe that everyone in even a medium-sized company can be aligned with the same goals. Without the constant reinforcement of day-to-day reality, goals are just words. Each business function needs to operate to a goal that is coherent with the organisation’s goal. And each function’s goal needs relevant metrics in place against which its success can be measured.

3. Lack of agility

Changing a function you don’t understand is hard. Understand your business functions and their interactions, and you can reorganise them more quickly as your business changes. Or, if it makes sense, outsource.

Outsourcing works, even when it doesn’t ultimately deliver value, because there is clarity in the relationship. Because inputs and outputs are understood. Because metrics are defined.

There are a lot of costs involved in outsourcing. A lot of friction in the contractual relationship between supplier and customer. Before you consider outsourcing, before you even start looking at your costs and seeking savings, consider how well you understand the interfaces between the functions of your business.

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