Outsourcing - Why, When and How

published in: Leadership

18 Apr

Outsourcing is subcontracting an activity to a third party.

Outsourcing - Why to use this management technique
The main advantage of outsourcing is that it allows the company to increase its productivity and efficiency by focusing on core activities.  As a rule, the less functions an employee performs, the more productive s/he is.  For instance, if s/he prepares an offer for 15 minutes, when interrupted 5 times s/he would do it for 20 minutes (+33%).  And the more functions an employee has, the more interruptions s/he will face.

Postulate 1. The manager must minimize the number of functions performed by each employee.
Postulate 1 is in constant fight with:
Postulate 2. The manager must ensure reliable and quality performance of each function on department / company level  (ie at least 2 people should be qualified to perform each function, thus in case of absence of one of them, the second to ensure proper function execution).
If your company carries out 2 mailing campaigns monthly, you could assign this activity to an advertising agency.  Thus you’re reducing the obligations of your employees and redirect their efforts to more important business activities.

How and when it is appropriate to apply outsourcing
Consider, for example, a small trading company with the following departments: management and administration, imports, sales, distribution and accounting.  The first 3 activities are essential and should not be subcontracted to external organizations. Suitable for outsourcing are distribution and accounting.  The company has 1 accountant and net salary USD 1900.00 or total salary costs for the employer about USD 2800.00.  We should also add the indirect costs (part of office rent, workplace equipment costs and maintenance, office materials, telephone, etc.)For convenience, I accept that these indirect costs are equal to 50% of total direct salary costs of the employer (you should use % that is applicable in your company).  Therefore the total costs on our outsource, managementaccountant are USD 2800+50% = USD 4700.  On the other hand I increase the offer of the accounting services provider by 15%, which represent the cost of more complicated communication with them.  From costs point of view, the company point of indifference is to be reached when the subcontractor offer is USD 4087.00 (USD 4087.00 +15% = USD 4700).                                                         Outsourcing - the outsourced elements
                                                                                    do not spoil the company essence

Postulate 3. The point of indifference is only the starting point for our decision to apply the management technique - outsourcing.
It is not enough to have a very attractive offer from the subcontractor, suppose USD 3900.00.  We need to evaluate the savings against:
  • the probability after 6-12 months our accounting to double its volume and how this will affect the point of indifference

  • the probability to implement new software that integrates supply, sales and accounting documents; without in-house accountant such integration is impossible

  • the present workload upon our in-house accountant and the other functions s/he performs

  • the significance of the accountant’s personality for the team

  • how often the company needs urgent stats from the accounting (the subcontractor will provide them with delay compared to an in-house accountant)

  • how important client our company is for the subcontractor (as a rule, choose a subcontractor for whom we are a key, or at least medium size client)
Like any other management decision, the outsourcing cannot be a result of a mathematical equation.  It depends on company business plan, the accuracy of managers’ forecasts, the dynamics in company development, its degree of innovation, staff quality...
The decision uncertainty makes managersjob more challenging and interesting and allows boundless field for management skills implementation.  The uncertainty also brings tension and insecurity, but one, who is afraid of bears - should not wander in the woods!

The willing to be managers are many times more than the ones that could be managers.  I suspect that the yearning for authority obscures the sober discretion of the unprepared for managers.  But ... let's look at ourselves!  The wind of change - department, company, society – starts from us.  A thousand miles road starts with one small step - Confucius used to say.



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