At its core, outsourcing is an act of contracting jobs and services typically performed by organizations’ employees to third parties. While the benefits behind outsourcing seem quite compelling, not all outsourcing efforts are always successful. This is not unlike the use of internal resources. Not all internal company projects are always successful. Thus, when outsourcing, companies need to understand several key criteria. Specifically, before outsourcing a particular job, role, process, or department, companies need to:
- Understand their overall company objectives and goals. For example, if the company desires to be a market leader in making widgets, it may not want to outsource the widget design process unless it believes that by doing so it can increase its leadership position.
- Have a strategic vision and plan. Without the understanding of the overall company mission, incorrect process can be outsourced.
- Select the right vendor. Naturally, this is because the success of outsourcing hinges directly on capabilities of vendors. This point is crucial because by outsourcing, companies naturally relinquish some control to a vendor. For example, if an internal employee does not perform his/her duties to satisfaction, the company has several tools at its disposal such use of better motivation, disciplinary action or termination. This is much more difficult with vendors, because performance of individual employees as well as their motivational factors are often abstracted and hidden.
- Ongoing management of relationships is also very important. While the subcontractor itself is an entity, work is ultimately performed by people. These people may or may not know the specific goals set by their customer. They may not understand what is important, and want is not as critical. They may not be motivated by the same factors as their customer. However, if the company can manage to create a close relationship with the subcontractor’s employees, they may create an environment where these employees are their natural extension rather than some abstracted resource.
- Further, a properly structured contract is very important. As an example, a software development project with a fixed bid where the customer can change both the timeline and features is an incorrectly structured contract. This is because while the price to the company is fixed, if features are added, the subcontractor’s cost will increase without it being appropriately compensated for such increase. This will inevitably lead to poor quality and deterioration of the relationship.
- Open communication is always critical whether this is internal communication or communication between the customer and the subcontractor. Without open communication, both the company employees and the subcontractor’s employees are left to their assumptions relative to best way to perform the job. With any luck, such environment leads to productive work; however, companies should not rely on luck. Having open communication will thus insure that all parties are on the same page.
- Not unlike internal resource allocation outsourcing must have support from senior management.
- Lastly, companies should financially justify outsourcing. This does not mean that outsourcing must always cost less compared to using an internal resource, but given the company objectives, outsourcing must positively contribute to net profits, the return on investment and cash flow.