Outsourcing Decision: What to Consider

　　You've become familiar with or helped to identify your organization's core competencies. Looking at your noncore functions, you think you see some potential outsourcing candidates. But before you plunge headlong into the process, what other factors should be considered in the outsourcing decision?
　　Identifying Potential Candidates
　　All functions that affect the profitability of your organization should undergo a sourcing analysis. Anything that could give your company a competitive advantage can be considered as an outsourcing candidate. Many business analysts will tell you to develop a list of your core competencies and leave them alone, with anything else being fair game for outsourcing. That approach may be too confining -- just look to the automobile industry for confirmation. Chrysler used to be one of the leading manufacturers of automobiles; now, the majority of its manufacturing is outsourced, with specifications developed jointly by Chrysler.
　　Even common outsourcing candidates such as payroll need to be looked at carefully. Although everyone else in your industry may be outsourcing payroll, what specific benefits do you obtain by going along? Will it help you gain that elusive competitive advantage?
　　There is, of course, real-world pressure from time to time to produce immediate financial results. If this can be achieved through outsourcing without any adverse effects to the strategic direction or financial health of your organization, then outsourcing noncore functions may allow you the time to focus on more important priorities.
　　What functions are current or potential outsourcing candidates for other organizations? According to a survey by The Outsourcing Institute, a New York-based professional association, the largest area for outsourcing is information technology. Within that area, the functions most commonly outsourced are maintenance/repair, training, applications development, consulting and reengineering, and mainframe data centers. The information technology functions most frequently mentioned as candidates for outsourcing are client/server, applications development and maintenance, networks, desktop systems, end-user support, and full information-technology outsourcing.
　　Looking at the Big Picture
　　While you're reviewing potential candidates for outsourcing, consider some of the improvements that outsourcing may bring. All of these are usually not achievable in an outsourcing opportunity, but represent the variety of improvements that are possible. All factors are situational and need to be analyzed in depth to determine if changes will restore or achieve your organization's competitive advantage.
　　* Risk: Some functions carry such an inordinate amount of risk -- with a large penalty -- that transferring the function to an outsource supplier may offer some mitigation of, or insulation from, this risk.
　　* Market capability: Developing expertise may be more difficult than purchasing it from a supplier. Many firms choose to source components rather than develop either the technology or the personnel necessary to compete. This type of outsourcing may allow rapid entry into new markets or large gains in existing markets. For example, you may choose to outsource technological programming for application development, rather than developing that expertise in-house.
　　* Strategic alignment: The ability to change the direction of your company may be easier if some of the functionality is purchased rather than owned. As more companies strive to be reactive to market forces, being lean may allow smoother transitions.
　　* Flexibility: Changing demand levels can be difficult to manage with in- house staff. Staffing for peak levels or close-to-peak level has sometimes been necessary to maintain service levels during high-demand periods. Keeping that same staff level productive and motivated during low-demand periods can be a challenge, and constant reductions and additions to staff are costly and inefficient. Outsource suppliers usually have several accounts and can adjust staffing between accounts, allowing added flexibility.
　　* Service: Improving the delivery or quality of the service would be a major reason for outsourcing. A supplier should have more expertise than you do. Improved service levels tend to have a ripple effect within an organization; other functions become more productive as their expectations are met by the service provider.
　　* Financial: Total cost is almost always a driving factor, and in bad decisions, it may be the only factor under consideration. Financial comparisons are the easiest to obtain, and it may be considered the only factor objective enough to matter. Financial considerations are only the make-or-break factors if they provide you with the competitive advantage you need. Intellectual property is becoming the next great legal battleground -- giving yours away to save money may be long-term competitive suicide, while keeping it exclusive may produce the same result. Balancing the financial restraints of your business with the other factors mentioned will help you best achieve your strategic goals.
　　When to Consider Outsourcing
　　The decision whether or not to outsource should only be considered after extensive analysis of your needs and of the functions under consideration has been completed. Gather all the relevant information you can regarding these functions, including costs and service levels. Then, benchmark with other companies, both those that have outsourced these functions and those that have retained these functions. Conduct a request for proposal to see how suppliers would handle your business, and compare these proposals with both your internal history and your expectations. Only then can a sourcing decision be reached. Outsourcing is not an end unto itself, but a method to help you reach an end. Consider outsourcing another weapon in your arsenal to gain a competitive advantage: Use it where and when it is appropriate and remember to consider all factors in the decision.