The Pros And Cons Of Outsourcing
At different times in any business’ life cycle, finding the balance to support growth, diversification of skills and service capabilities is met with the age-old question: Do we hire in-house or outsource?
You’ve probably heard the saying, “stick to your core competencies and outsource everything else”, but is this always the answer?
In many cases, the answer may be easy. If you need to build a new warehouse, you’d be unlikely to hire-in your own carpenters. You may have a book-keeper for your company, but should they also perform your cash-flow analyses and determine your positioning versus strategy? And, should you find yourself with the need to advertise and market your own products, the decision to develop an in-house marketing and graphics team may not be so simple. In some cases, it may make sense to outsource until you are in a position to fill a role internally.
To understand how your company should approach such a question, it is imperative to understand your own goals, your forward strategies, your cash-flow position, timeframes for completion and whether spending resources on up-skilling current staff outweighs the advantages/disadvantages of outsourcing.
What does the Industry look like?
Outsourcing activities fall in to two categories: “Process outsourcing by businesses seeking operational efficiency” (BPO) and “business optimisation outsourcing by businesses seeking specialised, high-value services that are cheaper to procure externally”.1
The ever-growing outsourcing industry is delivering services in a range of areas such as in IT, accounting and financial services, administration, legal services, marketing and advertising to name a few. And, in a 2016 IBISWorld report, the BPO industry is estimated to exceed $31.6 billion in the coming 5 years.2 And, adding optimisation services saw the overall industry in 2014–15 being valued at an estimated $317 billion dollars’ in services.2
“This is the largest of the enabling services groups, accounting for 19.6 per cent of Australia’s GDP for 2014–15.”1
Having established that outsourcing is a key component of business and enterprise, how do you establish the pros and cons of the process for your business.
Cons of Outsourcing:
1. Data security and Intellectual property risks
Depending on which tasks and services you need to bridge, you will want to consider what information you need to divulge to a third-party in order to get the service done. If you require advertising for assistance, is there any proprietary knowledge you’d like kept confidential? Should you find on-shore or off-shore providers?
If you are bringing in outside help, you will want to consider how much access to internal operations and infrastructure you allow to mitigate any risks. You should also consider to run inductions into your company and have external providers commit to confidentiality standards.
2. Lack of control on a daily basis; Expectations versus Reality of deliverables
Outlining communication expectations is imperative to working with third-party providers. Before commencing with outsourced services, it is essential that you clearly outline the level of communication you expect, define the line of reporting and, are definitive as to what specific outcomes are deemed as satisfactory or not.
To avoid a chasm developing between expectation and reality, be specific as to how, when and why you would like to be contacted in regards to delays, project creep and issues arising.
3. Adherence to relevant industry, State and National Standards
To ensure your own compliance with and relevant industry, state, national or other relevant standards, it is vital that you have proof, prior to engaging a provider, of their capabilities in compliance. Ultimately, you are responsible that the work is performed to standard.
What are The Pros of Outsourcing:
1. Cost advantages
During times of company growth and diversification, committing to recurring salary expenditure by hiring-in may not be possible. Outsourcing can provide an immediate solution to the conundrum.
By using external providers, you pay for only what you need.
Whether it’s having Board Meeting papers compiled or annual financial statements, to administration work or ICT services; having a defined budget for outsourcing services is one way to manage company costs.
2. Expert Skills on Tap – No lead time for training
Just because you know how to create a basic website, does not mean that you should. You may even be willing to up-skill to get the job done, but does this take away time for core business? How long will the entire task take?
Whilst it may satisfy a seemingly urgent need to have a task completed, the end result may be vastly different than if you engaged a professional developer.
You may know how to use accounting software packages, but how do you know you are complying with the relevant company reporting requirements to the ATO or ASIC, for example?
By outsourcing to trained Accounting professionals with the necessary accreditations and compliance standards, you can be assured that you are fulfilling obligations you may not have even been aware.
3. Adherence to relevant industry, State and National Standards
Whilst this can be seen a con, outsourcing to professional services is also a rapid way to bring your company up to the relevant industry, state or national compliance standards.
Perhaps you are upscaling your boutique food product into a national brand. You will need to consider the relevant food standards requirements under FSANZ or your legal requirements for food labelling should you be making any health claims. In this case, you may want to consult a Food Technologist and Quality Assurance specialist to audit your systems and processes.
Are you starting a revolutionary trucking logistics and distribution business? You’ll need to understanding your OHS&W obligations under the legislation and your requirements for licencing and corresponding documentation. Outsourcing to Risk Management professionals may be your answer.
To Outsource, or Not?
Whether you are growing your business size or expanding your capabilities as a company, firstly, you need to understand your own goals, your forward strategies, your timeframe for completion and most importantly, your cash-flow position.
Discussing this with your Accountant and finance professionals, will simplify the process in deciding to spend on up-skilling current staff or outsourcing until you or may not hire-in.
What next?
Venture Private Advisory specialists can assist in understanding your financial position, and perform cash-flow analyses to ensure you make the best decision for your business. To contact us, you can call our offices on 08 7078 3505 or email us at [email protected].
Article written by Fiona Dorman in association with Venture Private Advisory.
1. “Australian Industry Report 2015”. Mark Cully, Chief Economist, Department of Industry, Innovation and Science. https://www.industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/AIR2015.pdf
2. Business Process Outsourcing in Australia: Market Research Report, December 2016. IBISWorld https://www.ibisworld.com.au/industry-trends/specialised-market-research-reports/advisory-financial-services/business-process-outsourcing.html
You might also want to read this Claiming work-related expenses.