Experts estimate outsourcing to be a $400 billion market in the United States and a $500 billion market in North America. Sadly, not all services called third-party sourcing or “outsourcing” are adding value. Some outsourced service-providers take on more than they can handle. Others exceed their capabilities or they do it to generate business for their core business. The end result is that the concept of outsourcing loses and so do the users of the services. So, does outsourcing really make sense?
Yes! Outsourcing makes sense. Outsourcing with quality third-party providers gives new and growing enterprises access to horsepower otherwise not available to them. Independent, third-party providers of services continue to gain increasing attention-and service contracts-for a variety of reasons.
It should come as no surprise that the important foundational elements of new and growing businesses are the principal areas for outsourcing. Typically, an enterprise skimps on crucial business elements in the early years, planning on a change as the company becomes better situated to afford or justify the focus. Ironically, the absence of foundational elements, whose importance in the success formula is typically underestimated or not known, becomes a chief contributor to the failure of most businesses.
Thus, the principal areas for outsourcing are usually foundational in nature. Though business is not an exact science, all successful businesses are built upon fundamental principles, practices, and processes that have withstood the tests of time. Effective outsourcing gives budding enterprises access to big business talent and systems, usually at a fraction of the cost.
In addition to MLM and Party Plan legal services and MLM software, examples of areas to consider outsourcing appear below:
- Fulfillment, Shipping and Distribution
- Back Office
- Accounting and Tax Services
- Human Resources
- Sales Order Processing
- MIS / IT
- Inventory Management
- Printing and Publications
- Report Processing
- Commission Processing
- Travel & Event Services
- International Expansion
- Front Office
- Order Entry
- Customer Service/Help Desk / Technical Support
- Enrollment Processing
- E-commerce Services
The most obvious benefit of outsourcing is likely to be access to more “horsepower” in a critical competency. By outsourcing various administrative functions, the client becomes free to focus on sustaining and growing their core business. Resources are better spent serving the field and expanding the business, adding confidence both internally (executives and staff can be mentored through growth cycles) and externally (the field becomes more confident in the infrastructure and the company’s ability to keep up with growth).
Benefits of outsourcing include the following:
- Access to more “horsepower” (relevant, timely information and seasoned specialists) that is either limited or doesn’t exist internally
- Allow company to focus on its core competencies and strengths
- Develop value-added capabilities to better serve customers and distributors
- Improve operations and customer service
- Flexibility to handle extreme changes in business sales/fulfillment cycles either monthly, quarterly or yearly.
- Improve processes
- Lay foundation for long-term growth
- Build long-term partnerships that spread the burden over multiple resources
- Increase momentum, growth and retention
- Other reasons might include the following:
- Cut costs
- Avoid capital expenditures (Postpone costly commitments, i.e. lease agreements, phone systems, etc., until sales history is established)
- Avoid labor problems
- Avoid additional employee costs such as insurance and benefits
- Avoid costs of regulations
Some third-party service providers will tout cost savings as the number one reason in support of outsourcing. We prefer to view the potential for cost savings as the result of a successful outsourcing decision; however, cost savings will only occur in a functional area of the business if (1) the costs are known, measured, reported, and studied; and (2) through planning and management, the costs are managed. This is true whether or not a service is outsourced.
That said, charges for outsourcing various services can represent as little as 50 percent of the cost of equivalent in-house functions. Consider 25 different companies; there will be 25 different enterprise and accounting systems, 25 separate computer systems, 25 sets of processes and procedures operated by hosts of individuals at 25 various office locations , 25 separate telephone systems, scores of PCs, and a considerable investment in management. By passing many of these functions to third-party providers, the client can focus its precious resources on its core business.
Ultimately, as the base of sales and enrollments grows, so does the company’s ability to keep pace. This, of course, assumes that competent third-party suppliers and service providers have been carefully selected.
How Does Outsourcing Work?
To make outsourcing work, remember that outsourcing is an option for designing and managing an important function within your enterprise. The focus should always be on functions, processes, and systems.
We recommend a three-stage approach to making outsourcing work. That approach is outlined below:
Understand, stabilize, and control
Design and implement the processes and systems
Outsource the management and maintenance of the processes and systems
It is often wise to invest in understanding, stabilizing, designing, and implementing processes and systems. The best business consultants are skilled in guiding a client through the initial phases. Ideally, the best time to decide whether a function should be outsourced is once a process or system has been designed. Typically, a cost / benefit analysis will be the most meaningful after the processes which support a function have been designed and the implementation and maintenance / management of the function can be quantified.
As in all effective management strategies, outsourcing should be justified on the basis of business factors, which are presented in the next section.
Given the vast differences in service providers and the differences in why companies outsource, the decision-maker must look closely at the alternatives, both with regard to providers as well as to reasons for outsourcing. The following self-assessment outlines the tough questions, which will help in the decision process:
- What am I looking to outsource?
- Am I considering outsourcing an entire function or a portion of it?
- Why am I considering outsourcing as an alternative?
- How do I describe the function or operation I am considering for outsourcing?
- What are the costs of the operation to be outsourced? Fixed costs? Variable costs?
- What are its capabilities? What are its current strengths? Limitations?
- How well do I service my existing customers and distributors?
- If there are service problems, what are they and what causes them?
- Are there proven outsourcing solutions available for this purpose?
- What do I expect from the third party? How will we know if it is meeting my expectations?
- What about the management responsibility of the third party? How will it be done and by whom?
- How do I effectively transition from my own operation to an outsourced provider? How long will it take to transition? Are there problems during transition? If so, what are they and how do we avoid them?
- What if outsourcing doesn’t work for me? What are the downsides? How serious are the potential downsides to the business?
- If/when will it make sense to bring the operation in-house?
- When you begin the selection process, these questions will help to evaluate candidates:
- What does the candidate bring to the table? What is its experience with the industry, with other clients, with my customers?
- What problems have they encountered in setting up third-party operations? How did they navigate the challenges?
- What are all the costs?
- How will the system operate?
- How long will it take to set up and to stabilize operations of the function?
- How will we interface? What reports will I receive?
- What is required of my company? Is this requirement for start-up or is it also ongoing?
- Why does the third-party want your business?
- Why should you select the third-party over another candidate?
If you consider outsourcing, and we recommend that you give careful and serious consideration to the benefits as well as risks, you must thoroughly understand what you are doing and what you want to do. We know of no shortcuts, but there are real problems in doing it wrong.
The future of outsourcing is significant. We are in the early stages of the new outsourcing paradigm. How it all comes together is still formative, and there will no doubt appear segmentation in the market as providers continue to discover needs and to define roles.
It’s an exciting time to be in business. And when you find yourself in moments of decision, we wholeheartedly embrace the wisdom of Theodore Roosevelt, 26th president of the United States, who said, “The best executive is the one who has sense enough to pick good men [and women] to do what he wants done, and self-restraint enough to keep from meddling with them while they do it.” To this we add, the good picks cannot only be found internally, but also externally. Outsourcing makes sense.