Assessing outsourcing

Other than the balance sheet, what should CEOs consider when deciding whether or not to send jobs overseas?

by Geoff Griffin

The decision to outsource is often based on numbers, but a closer look at all of the issues surrounding sending work outside the company — including both the potential pitfalls (which are already well known) as well as benefits beyond saving money (which are becoming better known) — reveals that there is plenty to look at beyond the balance sheet.

“For accountants, it’s more important to be correct than comprehensive,” says David Tufte, professor at the Southern Utah University School of Business, in explaining how numbers don’t always tell the whole story. “It’s easy to focus on the obvious.”

Rohit Verma, a business professor at Cornell who worked at the University of Utah until 2006 and did a study on eBay’s outsourcing of customer service jobs internationally, notes that, “Lots of times, businesses are looking at costs only, but it turns out that’s probably not the best approach. Cost is not a sustained advantage. There are too many fluctuations” in a constantly changing global economy.

When looking at whether outsourcing is justified by the savings, outweighed by the costs or even aided by the benefits, consider the following points that may not be readily apparent in the initial numbers.

Knowledge gets transferred
“If a certain job gets outsourced, after a certain time, knowledge about the process is gradually shifted to that outsourced location,” Verma says. “Consider both sides — someone is gaining expertise while someone is losing expertise.”

That loss of expertise can of course be detrimental to the company doing the outsourcing, but another way to look at it is that the vendor being hired can use its increased knowledge “to take a greater leadership role.” Verma even uses the term “transformational outsourcing” to describe a situation where “a vendor becomes so good at what they do, they can be an agent for change.” After all, when you outsource to a vendor, “You are hiring an expert like a consultant or a lawyer.”

Jobs are more than statistics
“I think people confuse the hidden costs and hidden benefits of employees,” Tufte says. “Employees might look more expensive than they are. There may be benefits of having employees that aren’t obvious.”

Tufte believes that when deciding whether to keep jobs in-house or whether to outsource, “people often focus too much on hard data and miss the soft stuff.” Those intangibles may be difficult to quantify, but “if you focus on explicit costs, you miss hidden costs later on.” Companies need to ascertain not only the cost of employees, but also what they bring to the table and what might happen to the corporate culture without them.

More than one way to outsource
Verma notes that outsourcing doesn’t always have to mean hiring an outside vendor who takes control of the operation. Companies also have the option of building and controlling their own outside operations that they then outsource to. Another path is called “build, operate, transfer,” in which a company hires someone else to create the outsourcing service and get it up and running before giving it back to the original company after a couple of years.

Don’t forget safety
Developments in recent years have produced a high-tech, interconnected, international business world where large amounts of data are passed from corporations to vendors. That creates potential for problems. “There hasn’t been any big case yet,” Verma says, “but there has been a big change. It has become a much bigger issue now. People are paying more attention.”

When considering a vendor, he advises interviewing them thoroughly on issues such as what kind of employee turnover they have and how many of your competitors the vendor is serving. “If I’m one outsourcing vendor serving many clients in the same industry, I have access to data that would be valuable,” Verma points out.

The decision to outsource is often driven by numbers, but it’s important to look beyond them when deciding whether outsourcing is worth it.

Relinquishing control

How to cope with the hands-off aspect of outsourcing

While outsourcing can bring many benefits, sending work outside the company also means being prepared to give up some control. While that can be difficult — and even uncomfortable — there are ways to be at ease with the work being done beyond the borders of the company, even if the usual sense of control isn’t there.

Value results over involvement: “Follow-up by someone at the company is expected,” says Bryan Phelps, search engine optimization (SEO) manager for Orange Soda (orangesoda.com), which handles outsourced online marketing services. “You don’t need to be involved in the day-to-day operations, but you should expect reporting” on what you’re getting for your outsourcing buck.

Remember that time is your money: “You should be involved, but micromanaging can be counter-productive,” Phelps points out. “Remember, when we’re on the phone with you, we’re not doing work.”

Do your research: It’ll be easier to let go if you have a good sense of who you’ve outsourced to. This is particularly true in many emerging high-tech areas, such as SEO, where regulations have not been set up, knowledge of how the service works may not be well known and industry leaders may not yet be clearly established or have a set track record. “In a newer industry, you’re going to have greater variance in skills and services,” Phelps says. “Do some research on the Internet and learn the terms.”

Outsourcing can lead to a loss of control, but taking a hands-off approach while also demanding performance from a vendor that has been thoroughly researched will let you sleep better at night.