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When Should I Consider Outsourcing?

Posted by Mark Fallon on Mar 18, 2015 5:30:00 AM

When evaluating a function as a candidate for outsourcing, the three most important factors to consider are:

  • OutsourcingIs it a core competency directly related to the business?
  • Is the internal operation cost efficient?
  • Is there internal subject matter expertise that brings added value?
The core competency issue is often a topic of fierce debate. One could argue that an insurance company should outsource the mail operation because it's not directly related to insurance. On the other hand, mail is probably the most common form of communication between an insurance company and its customers. A function is a core competency if it's a service your customers expect, it has a direct impact on your customers' perceptions of the company, or it has a significant impact on the bottom line.

The main business driver that leads most companies to outsource is financial. An external vendor may be able to provide the service at a lower cost than the internal operation. To make this determination, managers must be able to quantify the real costs of a specific process or product. This begins with keeping accurate measurements of volumes, labor and materials. Then apply all charges, including indirect and overhead costs, to develop an accurate cost per piece. This is the baseline when comparing an internal cost against bids from vendors.

Subject matter expertise may be the most important factor to consider. The management and staff must consistently display technical proficiency and industry knowledge. Further, the manager should be a proactive internal consultant who develops solutions for the business units. The internal operations leadership should be active participants in industry trade associations and attained professional certification.

If a process is critical to the customer relationship, and the in-house operation performs that function at a reasonable cost while adding value to the company, then that activity should be kept in-house. But if the process has no strategic value, is costly to produce, or the internal organization has no special capabilities, then consider outsourcing.

Whether or not a company decides to outsource a certain function, that decision should be reviewed on a regular basis. The organization should continually examine its processes and reevaluate how to improve their impact on customer relationships. Also, shifts in technology, production costs and corporate organizational structure can impact the decision whether or not to outsource or bring a function back in-house.

Operations Management

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