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Does Outsourcing Hold Advantages for Your Small Business?

Published on 26 May in SAP

The Challenge: “We’re spending way too much time on administrative tasks when we really should be talking with customers and developing our product portfolio. I say it’s time to look at outsourcing some of these business activities, but my partner disagrees, saying it’s too expensive and we risk losing control.”

The Advice

Rest assured, this same conversation is playing out in many other small businesses. Our customers often ask for our advice on how to make the decision on which business activities are safest or best to outsource vs. what they should keep in house. As with so many other questions in business the answer is, “It depends.”

However there are a few questions that might lead a company to lean one way or the other when making the outsourcing decision for a particular process.

  1. Is the function a core strategic component or differentiator to your business?
  2. Do you need complete control of this function to deliver your value add?
  3. Do you perform this function better or at a lower cost than anyone else?

When in-house makes good business sense

If the answer to these questions is a resounding YES, then outsourcing probably isn’t the best option for this activity. Keeping core functionality in house in this case offers you a competitive advantage, and provides the most control over the quality of goods or services you deliver. You can find many sample questions to help answer the build or buy decision; here is one example from Inc.

The case for outsourcing business activities

On the other hand, if the specific element in question is not a core competency or competitive differentiator, if the delivery is not a critical path item, and if there is another source that delivers the function better and at a more competitive cost – then outsourcing might be the best option.

A few examples include a medical office that outsources billing, a legal firm that outsources document storage, or a not-for-profit company that outsources payroll.  A recent Paychex small business trends report identified a few benefits of outsourcing payroll to a firm whose expertise is to stay on top of rules and regulations in their Small Business Payroll Trends for 2015. They mention that outsourcing can actually give small business owners, “far more flexibility and control over how they manage and pay their workforce.”

Expertise with flexibility to suit your business

We are also seeing an increase in IT outsourcing, when IT is not the core mission of the company but rather the means to running the business at its optimum. Outsourcing IT can also change the financial treatment of an IT investment from an up front capital expense to a quarterly operational expense. The company can experience all of the benefits from a state-of–the-art solution without having to manage the system themselves – such as, customer insight (which promotions are effective), supply chain insight (when will my goods ship), or customer sentiment (what are customers saying about my company).

Today the vast majority of research is being done online before making a purchasing decision, so small businesses are also considering outsourcing marketing services and expertise especially around social and digital marketing. While the percentage of research varies depending on the source, Acquity Group states, “… 94 percent of B2B buyers report that they conduct some form of online research before purchasing a business product. Fifty-five percent of B2B buyers conduct online research for at least half of their corporate purchases.”

Another consideration is seasonality. Outsourcing can be an attractive alternative for a company that experiences a variable workload. Whether a holiday spike, or another reason for an uptick in business, it might make sense to outsource employees on a temporary basis.

How to manage your contractors and employees

In these cases, as well as in all other outsourcing situations, selecting the right organization to perform the work is critical. You will want to research references and make sure you have a Services Level Agreement (SLA) that meets your needs. This Forbes article recommends that you “clearly establish goals and a timeline with your contractors.”

One other aspect of this discussion is your own company’s philosophy and expectations around contracting. I remember back to one of my previous jobs where it was crystal clear that the philosophy was to outsource all processes that were not core to the company. Clearly communicating the management commitment to and position on outsourcing is critical.

There are many articles and resources that your small business can reference to help make its outsource decision, like this Outsourcing Decision Matrix. By working together, you and your partner will be able to create a cost-effective strategy that you can both be comfortable with – allowing you to refocus on your customers.

The Small Business Coach

This week’s Small Business Coach is Carrie Maslen, Vice President of Small and Medium Enterprises (SME), SAP. Twitter: @carriemaslen

Today’s question on The Small Business Coach is based on a hypothetical business situation. If you have a real question about how to run your small business better, smarter, and faster – send it in to The Small Business Coach using the form below or email it to newsroom@sap.com. Be sure to follow SAP’s latest news and events for small business on Facebook and Twitter @SAP4SmallBiz.

Read more from The Small Business Coach series.

Top image: Shutterstock

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