For people not immersed in the business world, the term outsourcing often conjures images of domestic workers losing out to labor on foreign shores.
While that certainly qualifies, the reality is that outsourcing simply means focusing on your own core competencies and contracting out the stuff that doesn’t fit under that umbrella.
What are Core Competencies When it Comes to Outsourcing?
Core competencies are the aspects of your business that set you apart from your competition.
They are the areas where you excel and are at the core of competitive edge.
Core competencies start with an organization’s USP. From there, core competencies are the areas where an organization can deliver faster, better, or more often than the competition.
Let’s say that I am a farmer who produces farm fresh produce for local restaurants and a network of farm stands. My core competency, what sets me apart from the produce that is sold in grocery stores, is that my produce comes straight from the farm and goes straight to tables providing an unmatched level of freshness.
But when it comes to transporting my produce to my customers and points of sale, I don’t know where to begin. How should I pack the trucks to avoid damage and spoilage? Should I use one truck and build a route, or should I use multiple trucks with less destinations per truck?
My core competency is growing great produce, not trucking. Therefore, it may make more sense to outsource the shipping and delivery of my produce to a third party whose core competency is knowing the answers to my questions and delivering produce in farm-fresh condition.
It is common for organizations to outsource activities of all types, and as technology makes partnering and integrating easier, we are seeing a growing trend of emerging outsourcing industries.
These industries are seen in all shapes and sizes from enterprise (think 4PL logistics providers) to startup (digital marketing agencies).
Marketing, IT, billing, shipping and receiving, warehousing: these are all prime candidates for outsourcing to more specialized vendors, but the process should be weighed carefully.
The Decision to Outsource Matrix
The decision to outsource matrix is the first step in determining whether to take the outsourcing plunge, or whether the activity in question should be carried out in house.
Entrusting an outside company with a piece of your business is a scary prospect. Consuming resources on noncompetitive activities is also scary.
When the question “Should we outsource?” comes up, the decision to outsource matrix can determine the next steps.
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The decision to outsource matrix compares criticality on one axis and impact on the other. This divides the matrix space into quadrants.
Criticality is how important an activity is to operations. Impact is best described as what would happen to operations if the activity in question were removed. If day-to-day business would grind to a halt, then an activity has a high impact.
If an activity falls into the top right quadrant (high criticality, high impact) then it is an area where your organization excels.
These activities are generally core competencies or core components of your business. Would you trust the core of your business to another organization? Retaining high criticality, high impact activities is the best course of action.
They should be kept in-house because they are the money makers. If your organization doesn’t excel at the activities that make it money, perhaps it’s time to find a new line of work.
These activities should never be outsourced.
Continue around the matrix clockwise, to the bottom right quadrant. Activities that are low criticality, high impact are prime candidates for outsourcing. These are activities and processes like IT, warehousing, and shipping.
Manufacturers who excel at producing computing components, for example, may have insight on how they should be packaged, but a logistics specialist who knows how to make a microprocessor?
That would be quite the diverse résumé.
Of course, the components must be shipped to retailers or other customers, so if the shipping activity was removed from the equation, the business would be heavily impacted. This makes shipping high impact.
Shipping components has very little to do with their production, however, so it has low criticality when it comes to getting the important stuff done. This places shipping squarely in the “outsource” quadrant on our matrix.
Our example components manufacturer might waste effort and money building an efficient supply chain (then again, they may not).
The point is, that activity might be better left to professionals.
These professionals are organizations who specialize in logistics—this would be their core competency. Specialists can do it cheaper, faster, and better than nonspecialists, and that’s when a components manufacturer would approach a 3PL or other logistics company with the first steps in the outsourcing process.
Moving to the bottom left of the matrix, these activities are categorized as “eliminate.”
Despite the name, activities that are low criticality, low impact are not necessarily candidates to be sent out the door (to specialists).
Instead, decision makers should analyze these activities with a critical eye.
If an activity is not critical to creating competitive edge and its removal would have little to no impact on business, then should it even consume resources?
“Eliminate” activities come up more often than one might expect. Discovering them (and following through with elimination) is a healthy and normal part of being in business.
Don’t be afraid to prune the dead wood.
Form a Strategic Alliance
It is easy to spot activities that should be retained or eliminated. “Alliance” activities can be tougher to spot.
The top left quadrant is home to activities that have a low impact on operations but a high criticality to competitive edge. These activities blur the line between candidates to be outsourced and those that should be retained.
Consider the following example.
Our fictional computing components manufacturer uses a variety of raw materials and finished parts to produce their bestselling microprocessor.
In the early days, this company made its own finished parts.
These parts require their own logistics chain of materials, labor, and processing. Finished parts are critical to the construction of a microprocessor. What if we make them, as opposed to buying them?
Make or buy; this has a low impact on operations.
In this instance, finding a dedicated supplier and forming a strategic alliance may make the most sense. Specialist manufacturers can deliver quality results cheaper, better, and faster than nonspecialists.
On the other hand, if a reputable manufacturer can’t be found, or quality control issues crop up, our company may need to continue making the parts, because the criticality of the activity means that it can’t be eliminated.
The Bottom Line
The bottom line is that a decision to outsource matrix should never be far out of reach.
It is a helpful tool in the search for the answer to the question “Should it be outsourced?” It can also uncover instances of waste or redundancy by bringing “eliminate” activities to the forefront.
Decision makers should never be afraid to ask the question, and they should agree to be bound by the (informed) answer that is produced through tools such as the decision to outsource matrix.