Outsourcing became a huge business buzzword somewhere in the last 2-3 decades. It was born out of the idea of the government using private contractors to fulfill some of their objectives such as transport and energy. While the buzz around the word has certainly died down, its importance to businesses has only increased. Especially with the full recognition of startups and small businesses critical role in economies. This article we are going to delve into outsourcing particularly from the point of view of the startup.
According to Investopedia outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff. To help us understand this definition better we need to define a business first.
A business is a system of processes
I really thought there was someone I could quote on this but my research did not reveal any source. A business is best defined as a system of processes. There are many tasks performed in the pursuit of providing the customer with the end product. These include design, creation, marketing, provision, sale and after sales service. Some of these involve more than one step and can thus be defined as processes. In business process re-engineering we learn to separate these processes and analyse them separately in order to improve or eliminate to the extent that they benefit the overall system.
Porters value chain
Well know economist Michael Porter created a value chain model which further explains how businesses are a system of processes. In his value chain Porter explains how a business’ activities (processes) can be split into 9 distinct groups and the ability of the business to deliver on each of these at a lower cost than customers are willing to pay for each is where value is created in a business.
While his model was created with a view to more traditional manufacturing and goods based businesses it’s easy to see in the diagram above that it still very much applicable in any type of business no matter how new or unique.
Best performance in processes
The goal of any business should be best performance in all its processes. Best performance means assuring both effectiveness and efficiency. The two are often confused so let me state that effectiveness is getting the job done, fulfilling the need. While efficiency is doing the job in the most resource (cost) effective manner.
The startup dilemma
The startup has a particular dilemma when it comes to the issue of business processes; the lack of strategic and operational capability or the ability to pay for it full time in the business. This leads to many startups which have otherwise good products failing in their marketing, customer care, payments systems, sales or other business process.. Ultimately the result is the same, a business stalls or fails.
The most common rebuttal I get to the idea of outsourcing certain functions in a business is the lack of a personal touch from outsourcing. I suppose this is valid and in certain cases irrefutable but for a greater majority the personal touch may not be better than an impersonal one. Technology and social media present a great case for my argument here. If you’re in the business of selling clothing and accessories through social media you might want to get a social media expert to manage your social media accounts. You free up your time from ineffective social media efforts and get best in class service. Perhaps if more people had taken this approach we would not have the “DM for prices” aberration that I’m sure has angered many if not all of us at some point.
How outsourcing helps
The truth of the matter is the things I learned in school about outsourcing have become obsolete. The old thinking was that you should only outsource processes that are not central to your businesses core activities, so you could outsource sales or collections for example but not manufacturing. How the world has changed, the power of technology and the emergence of Chinese manufacturing brings us businesses which are wholly outsourced. Those who have read Timothy Ferris’ The 4 hour work week will understand. Those who haven’t, need to.
You really can outsource just about any part of your business right now but what’s important is remember your business model and what your critical key is. Ray Krock, the owner of the world famous McDonalds did not own the founding McDonalds restaurant. In fact Ray Krock was a salesman and not in the burger or food business at all. He only bought out the original restaurant brothers who he founded the business with 6 years after formation. Krock simply admired the system the brothers had working in their restaurants and believed there was an opportunity to sell the business model.
The start up similarly must think in terms of business processes and their ability to fulfill them. As I said before there’s a tendency to want to control every process. While start up margins can be thin would it not make sense to outsource sales to an organization or individuals who can boost your sales numbers while paying them a commission? Would you rather have a 100% of one dollar or 10% of one hundred dollars?
There’s a tendency to think of an entrepreneur as someone who performs all the business functions and processes, it sorely lacks a complete understanding of entrepreneurship. An entrepreneur organizes the different processes the business carries out. An entrepreneur understands each of the processes enough to know how to organize them. And the start up can learn from this, focus your resources on your expertise; bake your cakes or design your websites. If you want to go fast go alone, if you want to go far go together.