If you have a software development background like mine, I’m sure you often get questions about when to outsource, versus building the solution in-house. The same applies to manufacturing and almost any process these days. Outsourcing is defined as contracting the work to another company, usually located in a developing country, like India, China, or Eastern Europe.
This alternative has been around for several decades, with the generally accepted advantage of reducing costs. Recently, I’ve seen a lot of discussion about bringing the work back home, since costs have gone up in less-developed countries, there are issues with intellectual property, and time zone and language differences make management difficult.
In reality, the considerations haven’t changed all that much over the years, and are worth repeating for those of you who haven’t previously faced this decision. So before you decide to move your manufacturing, software development, or call center out of town, make sure you understand the following considerations:
Don’t give someone else control of your competitive advantage. If your software or your manufacturing process is your “secret sauce,” you need to keep the work in-house. Saving cost won’t help you if you can’t make the daily innovations required to stay competitive. Let someone else do the ancillary processes where you have no economies of scale, like accounting and support.
Keep intellectual property keys in-house. Despite some recent advances, there are still some cultures which have less regard for patents and other intellectual property. For example, it is no secret that software pirating is still very common in China, Vietnam, and other cultures. Don’t count on contracts and non-disclosure agreements to save you.
Don’t let leading edge become bleeding edge. Leading edge technology software and manufacturing require constant course corrections and iterative restarts. These can’t happen with outsourcing, without long time delays and excessive rework. Results on commodities, including mature software maintenance, adapt well to low-cost contracting.
Factor in all the cost elements. It’s easy to find companies in certain countries that will quote cost reductions up to 75 percent. Your challenge is to factor in the right additional costs for these deals including contract negotiation, increased project management, and extensive travel. Apparent cost reductions can quickly evaporate into increased costs.
Look at internal services versus external services. Customer-facing services, like call centers, should rarely be outsourced. You can’t isolate your customers from language idiosyncrasies and empowerment issues, per reduced customer satisfaction highlighted a while back by the Wall Street Journal. Internal services, like marketing and accounting, are more manageable and have less customer visibility.
Focus on operational processes, rather than innovative new ones. It’s hard to write a detailed specification on an evolving new service, process, or product that embodies your core competency. Don’t expect a contract company, either offshore, onshore, or near-shore, to implement a vision that is still in your head. You need to capture the learning in your own team from the evolution.
In any case, before you select a specific outsourcing or contract alternative, there is no substitute for doing good due diligence. Visit the contract location, investigate their skill level, training, and quality of their facilities. Spend time building relationships, ask for referrals, and follow up. Make sure the chemistry, values, and culture of the owners is compatible with yours.
After the contract is signed, make sure that both you and they have strong project management skills in place to prevent scope creep, incomplete specifications, and lack of acceptance criteria. If you are a typical startup operation, consisting of an unpaid founder and co-founder, both working part-time, outsourcing is not likely the solution to your resource constraints.
Overall, I believe the utility for outsourcing is going up, rather than going away. The world is becoming a smaller place, and more homogeneous. Startups are often distributed entities, so adding and managing freelancers, contractors, and outsourcing firms is not a big step. But customers are not looking for yet another homogeneous product or service, so be careful.