Making Choices | Article

outsourcing supplier's giftsLast Christmas I went shopping for gifts for my family. I made a beeline for a large nationally known retailer here in Dallas.

I always try to do business with companies that do business with me. This chain, an anchor in most of America’s major malls, has been an IT consulting client of Outsourcing Center. The first time I visited the retailer’s pastoral campus I was struck by the natural beauty of its gurgling streams and soaring trees. The headquarters building has an elegant architectural design with airy and comfortable work spaces. The floor plan encourages quiet contemplation and creativity.

So I expected the retailer to recreate an environment that nurtured sales in its stores. Imagine my shock when I tried to make my way through narrow, crowded aisles. When I could get near a counter, all I found was a poor selection of merchandise. The sales staff was short handed. There was nothing to recommend this shopping experience. I fled to another retailer in the mall who knew how to treat customers well even during the Christmas crush.

Deciding How to Allocate Scarce Resources

Every company makes choices. With a finite amount of capital, executives have to decide where to allot their scarce resources. This retailer elected to provide its headquarters staff with a superlative place to work instead of creating a superlative shopping experience for its customers. This business chose to focus on the wrong things. I’m sure that mistake was reflected in its anemic Christmas revenues.

In today’s increasingly competitive marketplace, companies can’t afford these expensive errors. The negative results come home to roost much more quickly in a world that moves at Web speed.

Every company has core functions which create value. These are the things that make a difference to its customers, the services or products that distinguish it from its competitors in the noisy marketplace. Every other function, no matter how important, is relegated to a support position.

A wise company invests – and over invests – in its core functions. Its executives must resist the siren call of the context or support functions that compete for capital, time and attention with the core functions. Feeding them starves the functions that are the breadwinners.

However, it’s all too easy to succumb to their pleas for resources, like the unfortunate retailer did. Support functions are important. They need to be done well. But they don’t need to done well by you.

Outsourcing provides the only answer to this dilemma. Outsourcing solves two problems. It allows companies to divest themselves of their support functions while ensuring they receive these services better, faster and cheaper than when their own employees were closing the books or managing the 401 (k). Outsourcing does not diminish their importance to the organization. Instead, it upgrades their offerings. That is the premise of my book, Turning Lead Into Gold: The Demystification of Outsourcing (2000). Companies can actually untap value in their context processes through outsourcing.

A good example of outsourcing non-core functions is in the mobile telephone industry. Both Ericsson and Motorola, two of the big three handset manufacturers, have divested their handset manufacturing operations. They discovered that they do not compete on their manufacturing prowess. Instead, they make their mark in the marketplace by their ability to devise and market new products. Outsourcing the manufacturing process to a vendor allowed them to reap cost savings and released capital and management time so their employees could concentrate on their core competencies.

Gaining Access to Elite Talent

Outsourcing allows companies to use the vendor’s capital, time and management attention to get the job done without tying up a penny of their own money or a second of their own time. Outsourcing vendors also have access to talent pools that are denied to the buying companies.

One of our consulting clients wanted to build an elite team of finance and accounting specialists who could concentrate on acquisitions. These employees also would be involved in the day-to-day operations of the department, which included handling routine transactions like accounts payable and receivable. The chief financial officer told me his recruiting efforts were fruitless because the kind of talent he needed for scouting acquisitions was not interested in the “drudgery” of routine transactions.

Outsourced solved many problems for him. He outsourced his finance and accounting function to a leading vendor. This freed the manager from the distractions of managing 600 people. He now had time to work on corporate strategy, a much better use of corporate assets. And he had no trouble recruiting his acquisition super stars when that was their sole assignment.

Outsourcing vendors concentrate on their core competencies, which means they make the needed investment in talent and technology. Vendors like Exult in the human resources space and Spherion in the recruiting arena have tunnel vision and are experts in their specialty. They compete in the unforgiving marketplace by providing better services at a better price.

Let Them Make the Capital Investment

Outsourcing vendors also invest in costly things like buildings and server farms. Our consulting firm is working with one hospital who had budgeted $100 million for new data processing infrastructure. This is a staggering amount for a hospital. There was another problem in addition to the cost. Hospitals who build new data centers receive no direct return on investment.

After studying our recommendations, the hospital has decided to outsource. The vendor already has a cutting-edge data center, so the hospital does not have to build a new one. Its supplier is able to achieve the hospital’s goals at a reduced cost per transaction while upgrading the process itself. The transition to the vendor will cost the hospital $15 million, freeing $85 million for core investments that could yield increased revenue for the hospital.

Outsourcing Is Easy for Startups

Deciding to outsource a crucial process like finance and accounting or logistics can be a painful process. Already in place, these departments have a momentum of their own. The IT department, for example, may try to demonstrate that it is a core function and fight the move to outsource. Often, it takes economic hard times for senior management to make painful structural changes. Outsourcing always picks up during economic recessions.

In many ways, small companies and startups have it much easier. Many of these younger firms chose to outsource their human resources management, manufacturing, finance and accounting, and Web infrastructure to outsourcing vendors because they have neither the time nor the capital to build those departments in-house.

Some large companies — Shell, Tenneco and Aetna, to name three — have tried to benefit from the economies of scale and process efficiencies inherent in outsourcing by creating shared services companies internally. A shared services company, however, does not solve the corporation’s fundamental challenge: How do you achieve better services at a lower cost without funneling scarce capital away from core processes and draining management attention from revenue producing efforts? As a shared services company becomes more successful, it sucks even more resources out of the corporate coffer.

The choice to outsource is the only way to turn lead into gold.

Lessons from the Outsourcing Primer:

  • Only core functions generate revenue. Support functions, no matter how important, do not. That makes them a prime candidate for outsourcing.
  • Outsourcing context functions allows companies to untap value and turn lead into gold.
  • Outsourcing frees management time to focus on strategic issues instead of day-to-day operations.
  • Choosing to spend scarce capital and time on context functions can yield costly mistakes in lost revenue and market share.
  • Large companies have more difficulty outsourcing than small companies or startups who outsource context processes from the outset.

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