Wednesday, April 15, 2009

Outsourcing - Good or Bad

I found this blog which goes by the title "Venture Level - Entrepreneur" created by Romil Patel. I should say that this blog is a must read for all those who are interested in starting their own firm and for all MBA students. This blog discusses anything involved with being an entrepreneur, running a business, or any personal success strategies

Romil Patel is a serial entrepreneur. Romil is currently involved with a few different online ventures as well as many ventures off the internet. He is very experienced with running businesses in retail with investments in well known franchise quick service restaurants, convenience stores & gas stations, and in the hospitality industry. Romil enjoys discussing how to better business "game" and strategies for entrepreneurial success.

There is a post on outsourcing ("Is Outsourcing Viable?") in which Romil has put out a few interesting observations. That kept me thinking over sometime and even I came out with my comments. You can find both of them below. It will be great if anyone throws some more light into the issue.
Outsourcing Good Bad


A lot of businesses do it these days and there is usually one major benefit to the company, if not more, which is cost effectiveness. Outsourcing has its ups and downs, but in my opinion, I would rarely, if ever, outsource any of my business work. Now that doesn't go to say- you shouldn't hire companies to handle "one time" work, but you should consider the following when you outsource your work.


There are too many loose ends. Any new entrepreneur that is starting out a company, probably doesn't have much start-up capital, so they look to outsource some work, instead of hiring help to work under them. This is usually okay, but sometimes when starting out a new venture, you are really worried that your project will be exposed or even worse- stolen. Yes...you can probably sue someone or a company if they steal your ideas and make them their own, but honestly- if you didn't have the capital to hire someone to work under you- what say's that you have the capital to hire a lawyer and destroy the opposing party. So the bottom line is- hiring in house, can keep loose ends limited.


Time is wasted. Just like when you purchase a custom product from a company and then you want to make changes to the order, it sometimes cannot be done or it will just take a longer time. When you outsource, every change, be it minor, will take time to implement. If you are doing something in-house, changes are followed through on much faster and easier to work with.


You don't know what's going on. What does that mean?...Exactly what it looks like. When you outsource, you rarely know who is working on your project and beyond that- you just don't have the power to know what is going on at all times. Whenever we're working on a big project at any of my businesses, I always check in on the progress and anything else that has came to be a possible road block. I'm pretty sure most successful entrepreneurs I know, always like to have that power.


Quality is unknown. Whether you are outsourcing a small project or a long term part of your business, you don't know how the daily operations are actually being handled. For example, a lot of companies outsource their customer service call in centers, outside the U.S. I'm not saying that it is a bad thing, but a lot of customers are often dissatisfied, from what I hear, by the inefficiency to communicate clearly. If you are outsourcing some of your business, how do you know that the company will uphold the quality behind your company in the same way?


Employee talents are YOUR asset. As previously stated, outsourcing can mean various people working on your project. It could be a team of all stars or a team of people who know very little about what they are doing. Whatever it is, you just have access to their talents (or lack thereof), for the time being. When an employee is working for you, in-house, you have access to their talents, until the remain your employee.

There is a lot to digest when thinking about outsourcing, in which some cases it can be a great opportunity, but sometimes turn into a disaster. Entrepreneurs who are looking to outsource should always map out two scenarios. One of the possible outcomes if they do outsource and one where they don't. After everything is mapped out, it gives a better prospective on what route should be pursued.



I am a supporter of Outsourcing and my comment to the above post goes like this.
Outsourcing is a tactic to reduce cost but that itself is not the sole intention. It is actually trying to improve efficiency by concentrating on our core area and outsourcing the not so critical activities to someone for whom that part is a core competency.

"Time is wasted". This would happen even if there is an inhouse IT team with a typical hierarchial structure. I think by having a proper service level agreement and contract specifications this could be avoided.

"You dont know what exactly is going on". I would agree to this to some extent but again a lot companies offer enough transparency on what's going on who is working and his competencies etc. A regular check on status of project and by having prototyping etc. also could do away with this. I somehow feel you posed a problem but not what the industry is doing to workaround for the same.

When you said 'quality is unknown'. It seems you are very pessimistic on the idea of outsourcing. The trust on the 3rd party should come from his testimonials and past track record. We have to select someone who is considered to be good in the industry. Every respectable company would like to deliver a quality product/service.

Outsourcing
I would like to end the comment with one very important advantage of going for outsourcing. The company to which the work is outsourced would be having multiple clients in multiple geographical locations. With this there will be an exhaustive knowledge repository being created. This knowledge which typically consists of the industry best practices can be used across it's customers. This will eventually help in improving the quality. There is enough scope for geographical level,product level and customer level spillover

12 comments:

  1. wow man...wt an analysis, i am cool with outsouricng and support it wholeheartedly.

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  2. @Waqas: Thanks buddy, glad u liked it.

    @G3 : We Indians have to..in order to live..we have no option :D.. thanks

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  3. Abhishek Nawab BhatiThu Apr 23, 10:11:00 AM 2009

    I have mixed feeling after reading this wonderful piece. The issue is not just cost but competence specially for a start-up. There are numerous firms which want to do many things but can’t afford to do or don’t have competence to do. It’s better for them to outsource there work to someone who is better off and at least results are ensured.

    This cartoon depicts the typical corporate stand on CSR. Now, this is again tricky. When you outsource CSR most of the employees wont relate to the activity since it’s the "third party job", so its show off. Optimistically, at least they are doing something which they probably would not have had.

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  4. nice comments overall. My 2 cents

    Outsourcing is not for every one. You need to evaluate your next best option that provides better returns, on the same amount of effort and time spent doing a portion of work that could be outsourced. In such a case, with a better ROI alternative, it makes complete sense to outsource.

    Alternatively, when you outsource to reduce costs, you are left with two options 1) you can pass the benifits to the customers you serve 2) you can re-invest the excess returns generated through cost savings in growing the company and creating more new and high value capturing jobs

    Outsourcing should never be done on skillsets that compromise a company's competitive advantage, but one must understand that outsourcing itself is not a competitive advantage anymore.

    Also, when outsourcing or futher offshoring, it is of great importance to evaluate to whom you outsource and what agreeable levels of service they can provide to you. I personally have had expeiance in a management decision to take in a large outsourcing parnter. It went under because we didnt want them to be totally autonomous (did we micro manage? :}).

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  5. I like the simplicity of your thoughts... always fun to hear from you.
    Best wishes for everything that you do & please always keep your blog updated, i've bookmarked it.... whenever i get bored i read your blog.

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  6. @Bhati Nawab
    Rightly said man.. outsourcing makes a lot of sense for startups cos they cannot afford to get their hands on to everything..they have to concentrate more on their competence..
    and about CSR who else can relate it to better than you :). companies outsourcing CSR should not be a problem cos.. they want their employees to focus on their work..and are letting the experts to deal with teh social work..

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  7. @Gopal.. well sir outsourcing is simple economics.. where you have to measure your opportunity cost, and decide upon to go for it or not.
    but really appreciate for enlightening us with those valuable comments.. I feel like editing my post with those comments of yours so that people know that. Thanks so much!

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  8. @Anonymous.. dear friend.. I am glad you like my posts.. am honored by those kind words.. I will try my best in keeping my blog up to date

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  9. So good topic really i like any post talking about Business Ideas and Advices but i want to say thing to u Human Relations not that only ... you can see in Business Human Relations and more , you shall search in Google and Wikipedia about that .... thanks a gain ,,,

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