Month: June 2013

To outsource or not to outsource, that is the question

By Johnny Hewett, CEO Smedvig Capital, originally posted on www.growthbusiness.co.uk

In an era when you can outsource your outsourcing, working out what is really core is time well spent.

Of the many strategic conundrums managers face, one that has risen in prominence over the past two decades and particularly the second half of that period, is identifying which parts of a business to do internally and which parts to outsource.

Part of the reason for the change is the growing availability of outsource options that provide services that until recently were unavailable and/or were prohibitively expensive. Where it once started with basic back office functions, now a plethora of different functions can be outsourced including no doubt, a strategy function to decide what should be outsourced!

Quite correctly, good managers begin the thinking by identifying what is really their ‘core business’ and their key source of differentiation. Where there are areas that are clearly non-core, the decision conceptually should be relatively straightforward and appears to be as obvious as, it makes sense if there are outsource players that can perform a function better and/or cheaper than it can be done internally.

In practice, there is a sizeable check list of things to be confirmed before it is so clearly a good idea including confidence in ease of integration with the main business, commitments on service levels etc, etc. But that list is reasonably well documented.

Where the decision is perhaps more complex is in those areas that are perceived as core. The ‘easy’ decision is merely that as a core function, it has to remain in house. However, it may be that the best solution is a hybrid, where those core activities can be broken down into smaller discreet functions and some are better done or supplemented outside the organisation.

Clearly, overall strategic or operational leadership of an area is likely to be maintained in house but some of the resources required to deliver different parts of the execution can potentially be productively outsourced. This may be advantageous for many reasons such as access to particular specialist skill sets that serve to complement in house expertise or global execution/input where small scale operations would prohibit that in house and certainly it can help with rapid scaleability.

A poignant example would be the KPO or Knowledge Process Outsource firms that provide ‘high end’ analytical resource. Clearly, the product quality is varied but the best players such as The Smart Cube can deliver top-flight consulting style resource for a very substantial saving over acquiring that resource in house.

As such, it is an obvious extra arrow to the bow of investment banking teams, private equity teams and indeed strategic consultants but also to a wide variety of growing businesses where time poor managers struggle to find sufficient resources for such in depth information gathering.

The initial reaction for analysis that may drive key business decision making is that it must therefore be ‘core’. However, if senior executives in the outsourcing organisation retain the critical ‘so what’ from this detailed analysis, gathering the input data which is often a very people intensive exercise, can be done by organisations who will do it at least as well (and often better) for considerably less. Particularly in an era when cost bases are looked at with great scrutiny, thinking carefully about what is truly core when making outsourcing decisions is time well spent.