Why now is an interesting time to think about outsourcing – and what you need to consider before you do
Today’s world is in flux. Employees have discovered the joys (and pains) of remote work. Location no longer matters for most professions, even retail. Freshii, a Canadian take-out, uses virtual cashiers based overseas to take orders. Virtual conferencing such as Zoom or virtual worlds such as “Decentraland”, enable face-to-face collaboration from anywhere on the planet. In addition, with inflation and supply chain challenges increasing the cost of doing business, we need to rethink our business model.
Outsourcing can be a great strategy to reduce costs, streamline your business processes, increase efficiency and bring innovation to your organization. Yet, while it can bring significant benefits, there are also notable risks and legal implications. Planning and having a clear goal of what you want to achieve through outsourcing is the key to success and mitigating disadvantages.
First, make sure you keep core activities in-house
What are your company’s strengths? Where do you have a competitive advantage? As Bill Gates once wrote, “An important re-engineering principle is that companies should focus on their core competence and outsource everything else.” So, while Freshii outsourced its customer service, they still make their smoothies and salads freshly in-house.
Non-core activities are important but typically don’t directly drive revenue – think HR, IT, Customer Service, etc. However, some non-core activities may be critical for your business as they may create risk or put you at a competitive disadvantage, such as logistics. So, you need to carefully consider any potential downsides to outsourcing those.
Second, consider the reason behind the outsourcing
Do you only need a temporary solution to cover expansion or for more staffing flexibility during the holiday season? Are you looking for ways to reduce labor costs? Or like Freshii, are you struggling to find workers? Depending on your firm’s goals, you should decide what outsourcing model is right for your needs.
If you need a shorter-term or tactical solution, an outstaffing model might be sufficient to complement your in-house team. But if you are looking for specific expertise that is not available internally, you may want to consider outsourcing activities to a dedicated team. This is particularly useful if the need is project-based. For more strategic or longer-term outsourcing, you could consider an offshore model to a lower-cost country as Freshii did. Or if your goal is to bring in innovation where you don’t have in-house expertise, a product development model may make more sense.
In short, the chosen model will depend on the level of vendor involvement needed, your staff’s availability and skills and your expectations. You will also need to have a proper outsourcing policy in place. Being aware of what you intend to outsource, as well as documenting your outsourcing processes, is key to a successful outsourcing.
Finally, keep in mind that outsourcing isn’t a golden bullet
Even if you have identified what you want to outsource and how, there are potential risks that you will need to mitigate. Examples include underperformance, infringement of intellectual property rights, data breaches or unauthorized disclosure of information to competitors, and even infrastructure breakdown or disaster that may affect outsourcers’ ability to fulfill their obligations under the outsourced agreement. These are only some of the risks and legal implications this practice might have on your business.
Businesses that don’t manage these risks effectively can face several obstacles such as increased regulatory scrutiny, service interruption, financial losses, as well as consequences from reputational damage. How you negotiate your outsourcing agreements and structure them for success at the outset can determine its success or failure, which require a number of considerations to be taken in contract negotiation, drafting and formation. You also need good due diligence to ensure all key points are covered, and that your supplier is stable and you won’t face hidden costs.
In summary, while outsourcing can be extremely beneficial for your company, you need to consider your goals to choose the best model and set your company up for outsourcing success. Likewise, only a carefully negotiated and drafted agreement can effectively account for the potential risks and protect your business interests.
How can Logan & Partners help?
Your outsourcing agreements must be appropriately negotiated, structured and customized to suit your business goals and to help you mitigate exposures as much as possible. For more information about how we can help you with your business outsourcing options, please contact Jana King Allen and schedule a 20-minute free consultation.
Jana King Allen