Essential Principles and Guidelines for Strategic Outsourcing

by | July 29, 2020


Businesses today face many challenges in the form of competition and unpredictable social and economic conditions. Outsourcing is a practice that can save time, help you focus on your core activities, and provide you with a competitive advantage. At the same time, it’s important to have an effective strategy. There are certain potential pitfalls associated with outsourcing that you must learn to avoid. In this report, we will share some essential aspects of strategic outsourcing.

The Dangers of Non-Strategic Outsourcing

Outsourcing can be a boon or a drain on your business. The difference comes down to how you approach it. Outsourcing without a clearly defined strategy in place is a recipe for disaster. Hacker Noon provides some cautionary tales of outsourcing failures. Here are some problems likely to occur if you don’t have a strategy in place for outsourcing.

Lack of Clear Goals

Businesses usually start outsourcing to save time and lighten their workload. At the same time, the outsourcing process itself requires a certain amount of preparation. You need to define exactly what you want to accomplish so that your outsourcing partners know what you expect from them. You may start off with a general idea of what you want to achieve with outsourcing. Before you get started, however, you need to get more specific.

Some businesses expect too much from outsourcing and neglect to make some crucial decisions. Outsourcers can do a great deal for you but it’s still up to you to decide what you need. For example, suppose you are outsourcing the creation of a new website. You need to create a list of specifications such as design style, navigation, pages, graphics, and calls-to-action, to name a few. If you’re not clear about what you want your website to accomplish, it will be difficult to get satisfactory results from an outsourcing partner.

Poor Communication

Lack of clear communication is often related to the above issue of not defining your goals. It’s actually a distinct issue as well, for you can have a clear vision of what you want and still fail to communicate effectively with your outsourcing partner. An important component of your strategy is having a dedicated team member (who could be yourself) who connects with the outsourcer on a regular schedule.

Although outsourcing saves you from having to perform certain tasks, it doesn’t absolve you of all responsibility regarding the project. It’s essential to maintain close contact with the outsourcing partner. Ideally, they should check in with you at regular intervals. Make sure when they do so that someone on your end is available to receive the message and, when necessary, to respond. If they don’t connect as they should, someone should contact them promptly.

Costs are Unpredictable

One of the worst outcomes of not having a clear outsourcing strategy is that it ends up costing significantly more than you planned. Issues can arise with any project that may cause the price to go up. You may, for example, decide you need additional services. However, it’s something else when you don’t have a clearly defined budget or you fail to understand the terms of your agreement with the outsourcer. It’s fairly straightforward that you need to find someone who fits that budget. Beginners to outsourcing often find, though, that there are unanticipated costs, even when they are working with trustworthy and competent partners. Let’s look at some possible costs of which you need to be aware.

  • Training. If you or someone on your team needs to train workers on your software or process, this takes time and money.
  • Meetings and check-ins. These can take up time as well as money. When people in your organization are interacting with outsourcers, they aren’t doing tasks they’d otherwise be doing.
  • The project takes longer than you planned. It’s always safe to assume it will take at least 20% longer than you initially calculated.
  • Changes. You may decide, mid-project, that you want or need to change directions. There could be a problem with your software, a new piece of information, or simply a change of heart when you see how things are proceeding.

This is not by any means an exhaustive list and the particulars depend on what type of jobs you are outsourcing. Life being what it is, even when you do plan a strategy, you may end up with unanticipated costs. You can, however, keep them to a minimum. Without a strategy, you are almost certainly going to have this problem and it’s likely to be more extreme.

Important Distinctions to Understand When Outsourcing

Outsourcing takes many forms. It’s helpful to identify certain distinctions so you know the best way to proceed according to your needs and circumstances.

Tactical or Strategic Outsourcing?

Optimus Information explains an important distinction between tactical and strategic outsourcing. Either can be beneficial but you should be aware of the difference. Tactical outsourcing is when you maintain control of the overall process but outsource a specific function. Optimus is discussing IT outsourcing in particular but the concept is applicable to many industries. Tactical outsourcing is done to solve a specific problem or get help with a particular project. Strategic outsourcing is for when you want more comprehensive help and turn an entire project or process over to the outsourcers. Our main focus here is on strategic outsourcing as it has a greater potential to transform and grow your business. However, tactical outsourcing is a good way to start and get familiar with the outsourcing process.

Core vs. Non-Core Functions

In a thorough study, MIT Sloan Management recommends that businesses begin the outsourcing process by identifying their core competencies. These are the areas that really define your business and the unique value it offers. According to traditional wisdom, including the aforementioned study, you should not outsource core competencies but other aspects of your business. In other words, focus on what you do best and strategically outsource everything else.

The Balance Careers offers some useful insights into differentiating between core and non-core functions. For example, it’s common for legal practices to outsource non-legal aspects of their business such as handling emails, answering phones, and administrative tasks. It’s similar in the medical field where billing is commonly outsourced. As outsourcing gets more popular, mainstream, and comprehensive (i.e. companies are now outsourcing most if not all of their jobs), some traditional wisdom is being overturned.

In fields such as law and medicine, it would be impossible and even illegal to outsource many core functions. However, this isn’t the case for other industries such as tech. The aforementioned MIT study, though pivotal, was created in the pre-internet era. Today, we can find examples of cutting edge companies that were practically built from the ground up using outsourcing. Entrepreneur lists a few high-profile companies, including Slack, Skype, and AppSumo, that outsourced development. It’s worthwhile to distinguish your core competencies and carefully consider whether you want to outsource these. As a general rule, it’s best to start off by outsourcing non-core aspects of your business. However, it isn’t necessarily a hard and fast rule at this stage.

What Strategic Outsourcing Really Looks Like

When done right, strategic outsourcing allows a business to get more accomplished while saving money and time. Raconteur shares some examples of agile outsourcing in areas such as customer service support, HR, and lead generation. Here are some essential characteristics of strategic outsourcing.

Clearly Defined Goals

You need to map out exactly what you want to accomplish, whether it’s a limited project (e.g. building a website or creating an app) or an ongoing process (e.g. maintaining a website, social media management, customers service). Your goals are likely to change over time as you measure your progress and re-evaluate your needs. However, at every stage, it’s necessary to know what you want to achieve.

Strategic Choice of a Partner

Choosing the right outsourcing partner is one of the most critical factors for success. You need to consider several factors.

  • Experience and track record. The ideal partner has experience in your industry and can provide references.
  • Their portfolio matches your goals, branding, and style. The work they produce needs to be a good match for your business.
  • You have a good rapport with them. You want to work with someone with whom you can communicate. That’s why the vetting process should include a serious conversation by phone or video conference. In some cases, language differences, a conflict in working or personality styles can disqualify someone even if they possess solid technical skills.
  • They fit your budget. It goes without saying that you need to find an outsourcing firm that can work within your budget. At the same time, the price shouldn’t be your only consideration. Choosing someone because they are the cheapest option is not the best strategy and often leads to disappointing results.
  • Test the waters. If you’re looking to outsource significant aspects of your business, it’s best to start with a more limited project to make sure you’ve found the right fit.

Strategic Negotiating of a Contract

One of the most important aspects of outsourcing is knowing how much it’s going to cost. While costs can be unpredictable (and often end up higher than you planned), you want to do everything possible to maintain control over your budget.

Start with a clearly defined budget.

Identify as many costs as possible (see above section on dangers of non-strategic outsourcing and hidden costs).
Determine the best arrangement for paying. It’s often more straightforward to negotiate a flat rate than a per-hour rate.
Keep costs down but make sure you don’t sacrifice quality (e.g. inferior products used to make physical products).
How to Determine What to Outsource First or Next

So far, we’ve explored some outsourcing principles. Now let’s get into some practical guidelines on how to get started, upscale, or take a more strategic approach to outsourcing. Where do you start? Or, if you’ve already done some outsourcing, how do you decide what the next step is? Deciding what and when to outsource requires you to take inventory of your business, how you spend your time, and which areas could be more efficient. Here are some criteria to use.

Areas Where You Lack Expertise

One reason to outsource is that you can find specialists who can do something better than you or anyone in your organization. You may not have skills in fields such as IT, web design, graphics, content creation, or app creation. You may be able to do certain tasks but not as well as a specialist. In some cases, an essential project is completely beyond your capabilities. These are cases where outsourcing is fairly straightforward as you are often compelled to take this route.

Helps You Save Time

Outsourcing isn’t only for activities that you can’t do yourself or that someone else can do better. It’s also great for time-consuming, repetitive, and mundane tasks that take up valuable time. When you outsource such tasks, you have more time to focus on more creative and fundamental activities that help your business grow. This category may include social media management, data entry, and other administrative tasks, processing orders, customer service, and many other jobs that take up lots of time.

Lets You Scale Your Business

Outsourcing is one of the best ways to scale your business. You and your current team can only do so much. Outsourcing is an alternative to the more costly option of hiring full-time employees. Any form of outsourcing has the potential to help your business grow as it frees up time. There are certain times, however, when it can directly get you more leads or customers. Consider B2B lead generation. Companies may hire someone to make cold calls, handle incoming calls, manage email campaigns, or pay-per-click advertising. These types of campaigns help you reach more potential customers. If you see good results, you might continue to scale up, connecting with even more leads.

How to Test What Works

In the example of acquiring more leads with outsourcing, many elements must be tested. In an ideal world, you come up with a high-converting offer, find the perfect outsourcing partner, and immediately start bringing in droves of leads and customers. In reality, however, you may have to tweak various factors before finding the right formula.

Tracking Results of Outsourcing

Set clear deadlines and milestones so you know what your outsourcers are accomplishing.

  • Have metrics and KPIs so you can measure your results.
  • Don’t confuse output with the outcome. In an article in Entrepreneur, Rahul Varshneya points out that when you outsource development, you have to focus on the outcome and not the output. He’s talking about app development, where quantitative output such as lines of code doesn’t necessarily translate into results. The same principle is true for other types of projects. For example, if you’re outsourcing social media posting, simply putting out thousands of posts on Facebook or Twitter doesn’t always yield desirable outcomes such as engagement, leads, and sales. Quantity does matter but it shouldn’t be confused with quality or outcome.
  • Use tracking tools. Various tools can help you track the results of outsourcing. Basecamp, Asana, and other time-tracking and collaboration software are useful for keeping outsourcers accountable. When it comes to customer service, polls and surveys let you know how customers feel.

How to Pivot and Troubleshoot When You’re Struggling With Outsourcing

At times, outsourcing doesn’t go as smoothly as you’d like. What happens when your outsourcing partners fall behind schedule, don’t perform as promised, or produce poor quality work? You can significantly reduce the chances of such issues by carefully selecting your outsourcer and creating a clear agreement. Nevertheless, there are steps you can take when problems occur despite your best efforts. Here are some possible issues and how to deal with them.

Misunderstandings With Your Contract

In some cases, language barriers can cause communication problems. Once again, it’s best to make sure you have a good rapport and mutual understanding before you sign a contract. If there is a misunderstanding, open the lines of communication. If necessary, employ a translator. If you’re working with an outsourcer with a good reputation, give them the benefit of the doubt unless they give you a good reason to distrust them.

Quality is Subpar

Sometimes, even when you vet an outsourcing partner, it turns out that they can’t complete a certain task as you hoped or as they promised. Studying their portfolio and asking for references can mitigate this risk but it may happen anyway. For example, a company’s quality may go down because of high demand for its services or other reasons. It’s important to identify such issues as quickly as possible, which is why regular communication is essential. You can hopefully convey your needs or train/retrain your outsourcer. If this proves impossible, you may have to decide to cut your losses and find someone who can meet your needs.

Costs are Higher Than You Anticipated

This is a common issue that may come about because of conditions beyond your (or even the outsourcing company’s) control. For example, an economic or natural catastrophe occurs, government regulations or tariffs are introduced. As noted, it’s best to assume that the costs will be higher than you originally planned. A Lieberman survey revealed that 62% of businesses found that outsourcing IT contracts cost more than anticipated. If you find yourself in this situation, you can make plans to renegotiate your contract, provided you’re satisfied overall with the services provided by the outsourcing company. You may also consider a different arrangement for payment such as paying a flat rate per project rather than hourly billing.

Strategic Outsourcing is a Powerful Business Strategy That Helps You Grow

According to Statista, the global outsourcing market reached 92.5 billion in 2019. There’s every reason to believe that massive growth will continue. The key to success is to practice strategic outsourcing. Here’s a summary of some essential points to keep in mind.

  • Be clear about your goals.
  • Spend as much time as necessary to identify the right outsourcing partner.
  • Negotiate your contract with care. Be sure both you and the outsourcing company are clear about what is expected at every stage.
  • Maintain regular communications with your outsourcing partner.
  • Track your results so you can see what is and isn’t working.