Friday, October 11, 2013

Exporting Your Problems: Outsourcing

Last week I met with a friend I used to work with for coffee.  We got into a discussion of a very expensive loss my ex-employer suffered.  It seems some pricing data was incorrectly computed and entered into the company's booking system leading to badly under priced products being advertised.  Customers purchased the trips and the company had to honor the prices.  It cost the company well into five digits in cash to cover the error.

I know the manager who made this error.  She was and is a top-flight professional, one of the best in the industry at coming up with innovative travel options that generally sell quite well being required to perform basic data entry tasks in addition to her core job.  She made a mistake in accuracy in data entry and basic arithmetic in her rush to complete the task on a short deadline.

The end result was that the employee resigned, so not only did the business owner lose thousands of dollars, the business lost an employee nearly impossible to replace.  The new product manager, no matter how capable, will need years of experience to get where her predecessor was.  Any competitor looking for this skill set will undoubtedly hire her.  This whole situation is a true loss for the employer.  Cash out of pocket, loss of his investment in a valuable employee who now could end up working for a competitor. 

If you own or are starting a business, you need to be aware of this type of situation.  Not only could you suffer this sort of setback, your employee could suffer the negative health affects of prolonged, un-relieved stress that is shown to cause everything from heart disease to Alzheimer's.  (see The Stress Blog for more information.)

If the owner didn't want to hire additional employees, he could have outsourced it to another business, hired free-lancers, or assigned other employees who were not particularly busy because it was their slow season.  The idea according to an ex-employer, Bob Hacker, a Harvard MBA mentioned in prior posts, is to, in Bob's words, "export your problems."

Export Your Problems:  Outsourcing
During the past two decades, businesses have received a tremendous amount of bad press for outsourcing jobs to other countries where wages are lower.

Outsourcing, however, is much more than this.  It's also a process for "exporting your problems".  In Bob Hacker's case, his company was in the direct mail business where, at the time, it was typical for a firm to have two full-time employees for every $1,000,000 in billings.  His business billed about $34 million annually, but rather than having 64 employees, he did this with 17, one quarter the industry average.

How did he do this?  By overloading and overworking employees?  No, I can tell you we all worked hard, but we all worked a standard 40 hour week.  Rather than hiring employees to handle the many functions of data-base marketing, he hired outside vendors and free-lancers on an as-needed basis, and trained and empowered his employees to manage them. 
A Guardian newspaper Small Business Network poll of British business owners revealed that 79% of respondents state they "use freelancers as a big part of our business strategy."
The result was a core group of well-paid, competent managers who supervised the work of vendors and free-lancing non-employees.  As long as the suppliers performed, they had work.  If  they didn't perform , or if there was a lack of work, they didn't. The suppliers were for the most part local, so personal communication and supervision was easy.  And it worked.

Outsourcing as business building
It's not just the cost savings that you should consider ~ outsourcing
various functions gives you the time you need to concentrate on building
and growing your business.  Ask yourself, how much money do you make doing your own books?  Processing employee payroll?  Cleaning the bathroom?  Doing basic data entry?  Maintaining warehouse records?
When you outsource functions, you avoid the need to employ people or buy or rent office space, reducing your overhead and cutting your business
costs.
". . .balanced outsourcing may raise costs slightly, but also may create more 'bang for the buck', making outsourcing a relatively wise allocation of resources."
~ Wall Street Journal 

Even if you are a control freak and feel that you have to personally manage everything, not completing key functions of your business routinely costs you money in lost income and lost opportunity.  Just so you can keep an eye on someone doing data entry or running errands?  Or requiring highly skilled professionals to do work quite frankly beneath their level of professionalism?  Wouldn't you rather you and your best people are out growing your business?

There's only so much time, and how you choose to invest your time and your staff's predicts whether or not whether your business will even survive. Could your business endure the loss of a key employee plus this much cash?

It is your job to grow your business, and you and your employees must stay focused on this rather than data entry or programming or cleaning the commode.

If you and members of your staff are feeling overwhelmed and stressed, it is time you look into outsourcing basic tasks and functions before you have your business grind to a halt in a traffic-jam of poorly or partially completed but necessary tasks.  You have to let go of your self-limiting control issues.

What Tasks to Outsource?
The first thing is to identify are the core areas of your business. Any tasks
directly associated with these areas shouldn't be outsourced.  However, the business can outsource tasks such as payroll management or inventory management to contractors.

Common problems to consider exporting ~
Repetitive tasks:  Data entry is a good example of a highly repetitive  task. While you may use your in-house staff for this, it may be a better idea to outsource this and employ the in-house staff for more useful work.
Specialized tasks: IT support can be the right example of this type of
task. While you may need IT support for your network, you may not need to
appoint a full-time employee for this purpose. In such a situation, a
contractor may be ideal for this specialized work.
Expert tasks: Financial analysis is one task to consider exporting, just as most companies, even the smallest, export tax preparation.  (An ex-IRS employee once advised me, "Want to be audited?  Do your own taxes.")

To help you understand outsourcing, here is a partial list of typical
"problems" your business can export ~
  1. Advertising and Publicity  These functions are commonly exported to specialized providers, either businesses or free-lancers.
  2. Bookkeeping/financial report preparation Again, it's very common for businesses to contract with a free-lance bookkeeper or a Certified Public Accountant to collect the firm's financial data and to prepare regular reports.  (Note: not generating and using regular financial reports is a primary cause of small business failures.  You don't need to know how to write a profit & loss statement or balance sheet, but you must know how to read and interpret them, and must review them on a regular basis.)
  3. Human Relations  Again, these are services routinely exported by many small employers, simply because you must have a certain number of  employees to justify hiring an HR specialist.  Having access to an HR specialist when you have employees is the best way to avoid being sued for any numbers of causes from discrimination in interviewing to wrongful discharge.  A human resources vendor can recruit and screen potential employees, manage their benefits and payroll after they're hired, navigate government regulations and employment laws and even handle disciplinary actions, all at your employer's direction.
  4. Payroll and benefits There are quite a number of local, regional and national firms that will maintain and process your employee's payroll, taxes, and benefits in accordance with a jungle of laws and regulations.
  5. Janitorial While most small business owners or their employees I know are DIY janitors, taking out the trash and sweeping the floor as part of their regular job duties.  To be honest, unless there is a health inspector involved, these are some of the honestly dirty businesses I know.
  6. Transportation and delivery  From town car services to bicycle messengers.
  7. Employees  Yes, it is possible and commonly done to contract with a temporary employment agency to provide a small business with a permanent employee or even employees.  These employees work under your direction, at your place of business but are employees of the agency.  Agencies that do this offer the employees much better benefits than you could if you have just one or two employees  The agency may have hundreds of employees, and qualify for much better rates on things like health and dental insurance.  You write one check a month, the agency handles the rest, and, your employees often have much better benefits as well at a cost savings to you.
  8. Information Technology  There are advantages to outsourcing your IT services. By shopping around, you often can find a good match for the exact services you need. It's often cheaper than keeping the function in-house, both in terms of staffing, training, and lost time.
Step One:  Identify Exportable Tasks
Think through and write down a list of all the tasks it takes to run your business.  Include everything you can think of and get them on paper. Go through the list and cross out those tasks core to your business. Edit down the list to those things you can comfortably export, again, basic tasks like data entry or highly specialized tasks such as tax preparation or financial analysis.
  • Assign an employee to manage this vendor/project/process early in your outsourcing effort.

Step Two:  Establish a budget
Start with the function or task you consider to be the biggest problem or that's pays the least return, and figure out how much you're paying now to accomplish this.  This becomes a basis for budgeting.

Step Three:  Look for capable, qualified suppliers
Ask other business owners for recommendations and do an on-line search for potential vendors.  Other options are past employees, or using underutilized employees during slow periods that all industries have.

Step Four: Request bids
Write a description of the work to be done to complete this task to your standards.  (This may be the first time you've ever thought about how clean you want your employee restrooms or how often you want the trash taken out.) 
  • Specify channels of communication and assign one employee to manage this vendor/process/project.
  • Include step-by-step procedures to accomplish this task.
  • Include milestones and deadlines for completion of the tasks.  (This becomes the basis of the payment schedule once you're ready to contract for services.)
Step Five:  Review the bids, interview the most likely bidders
It is important, rather than quickly opting for the cheapest price, to
read through their reviews and look through their portfolio carefully.

Step Six: Negotiate and write a contract
Use the task description with milestones and deadlines as the basis for your negotiation. 
  • Specify the contact person from supplier and your company. 
  • Specify charges and costs, including out of pocket, and what cost the supplier can incur without your written permission and which they need your approval in writing.
  • Specify a payment schedule, and what redress each party has if work is sub-standard, payment is late, and so on.
Consult an attorney at this point.  Your vendor should do the same - just to make sure your agreement meets local legal standards, covers all the base, and doesn't obligate you to something without your knowledge.

Additional tips
  1. The best way to ensure that the partnership works out is to be clear about everything.  Put it in writing, and require that all communication is written. 
  2. Because you are the one providing instructions, you are probably to blame in case of any misunderstanding. To ensure proper communication between your business and your outsourcing partner, it is best not to leave anything to assumptions.  Again, put it in writing, and require that all communication is written. 
  3. Bear in mind that those your hire will need some time to learn your systems and adjust to your processes.
  4. Do not, under any circumstances, attempt to micromanage a vendor or free-lancer. Focus on the product they provide.  If it meets the standard you set, you're happy.  How they get there is none of your business.  Micromanaging and interference will sour your working relationship and affect the quality of the work you receive faster than anything. 
Reminder:  The idea is to save you and your core people time better spent building a successful, profitable business.


This is a very basic, bare-bones description of the outsourcing process.  I recommend reading one of the books listed below and perhaps even talking with an outsourcing specialist in your area.

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Sources:
  • Tim Crosby, How Outsourcing Works, money.howstuffworks.com/outsourcing
  • Matt Barrie, CEO, Freelancer.co.uk, The Guardian Newspaper
  • Richard White, editor at Yellow Brick Path, Why, When, What and How to Outsource Tasks, In Small Business Operations, March 22, 2013
  • Michael A. Stanko, Jonathan D. Bohlmann and Roger J. Calantone, When should companies try to come up with new ideas themselves—and when should they give the job to outside experts?, Wall Street Journal,

1 comment:

  1. IT staff outsourcing services give backup support along with other IT services at any time of company's requirement. Apart from IT services you can rely on out sourcing services for necessary software equipments also.

    ReplyDelete