What should you outsource?

I've been consulting with a number of different firms over the years, and have come to the conclusion that outsourcing is right for all the wrong reasons.  Many firms focus on outsourcing to reduce or more effectively manage costs.  I'd suggest that they should outsource the functions they do poorly, to allow them to focus on the functions they do well.

Recently I was with a firm that has excellent operations.  They are tops in their industry in terms of cost per process, variations, error rates and so forth.  The challenge they have is that they are so lean, and so operationally focused, that they don't have the bandwidth or the mentality to think innovatively or create new products and services.  On the other hand, you have very creative firms - marketing agencies, PR firms, Apple, etc, which are very innovative but perhaps not as great at managing the operational stuff.

It would seem to make tremendous sense for the creative firms to outsource the mundane, so these really creative firms are freed up to do even more innovative and creative work, and are not forced to hire people to manage the transactional issues.  Of course there is some creative tension when these factors interact, but transactional and operational people never feel appreciated or valued in a creative firm - just ask any of the operational people in a marketing agency if anyone even follows their processes.  I think we'd all agree that a firm that wasn't the best at information technology might want to outsource to an Accenture or EDS.  Should a creative firm outsource the mundate to a business process outsourcer?  Probably.

What about the reverse, however?  Should a firm that is excellent at creating and managing to specific processes and is very lean decide that it should "own" the maintenance side of the business and outsource creativity and innovation to third parties?  To a great extent, this is already happening.  Many larger firms already rely (too heavily in my opinion) on strategic consulting firms to generate ideas about new products and services.  They abdicate the investigation of new customer needs and market opportunities to third party consultants, eager only to implement the ideas.  However, if we can argue that firms should outsource what they do poorly and focus on what they do well, then why can't we make the reverse argument - firms that are operationally excellent and very lean struggle to innovate.  So, why not create outsourcing capabilities to help create ideas, identify opportunities and offer new products and services to what is an operationally excellent firm?

Whether they are doing it intentionally or not, many large firms are already heading down this path.  The question will become whether or not these innovative skills are valuable inside the firm, or make more sense in the hands of a trusted third party.

Comments

[Martin Proulx]

Unfortunately, companies typically outsource to cut costs with little considerations to the criticality of the business process impacted. Outsourcing is not a bad thing as you mention when the business process outsourced is not mission critical. When organizations make decisions strictly based on the cost side of the equation, they will have the feeling they made the right decision in the short term but will quickly realize the long term impact of the decision but it might be too late.

[Business Process Outsourcing]

Outsourcing is subcontracting a process, like product design or developing to a third-party company.The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, technology and resources.