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One of the realities of the COVID-19 crisis is that many organizations have “circled the wagons” and have stopped purchasing services from vendors. Part of this is simply to preserve cash, but unfortunately these decisions rarely include an ROI analysis of a given expense. When times are flush, companies and other organizations tend to apply much less scrutiny to procurement, whether that is for products or services. When times are hard, they often create byzantine approval processes for even the most basic purchases, which, while achieving the purpose of spending less, also compromises agility and customer outcomes, and requires that senior people spend precious time on low level, low impact decisions. This dynamic also has a serious impact on decisions to outsource certain tasks, projects or functions, such as research, legal services, marketing, recruiting, etc. Unfortunately, whether in good times or hard times, these decisions are rarely based on a solid rationale or set of principles and more often end up being based on rote requirements, previously allocated funds or financial thresholds such as how much a given manager position can spend without subsequent approval from someone “higher up.”
It would make much more sense if the decision to outsource a given task or project were based on a set of principles that assess benefit to the organization (and its end users) rather than on cost alone, which in isolation, can lead to really poor decisions. Some examples include:
- Would outsourcing a task or project allow the organization to deploy internal resources and people to things that can create more value by being done internally?
- Would outsourcing solve a problem or support a capability more quickly than doing it internally, particularly if the outcome can be monetized or affects customers directly?
- Would outsourcing a task, project, or function increase existing revenue or create access to a new revenue stream?
- Would outsourcing materially decrease cost without compromising quality or the end user experience?
- Would outsourcing allow the organization to complete tasks or projects in parallel rather than serially, thus shortening timelines?
- Would outsourcing a task or project effectively meet a customer need, either more quickly, more efficiently, or with higher quality than doing it internally?
The core principle for making outsourcing decisions, which I learned from a very successful entrepreneur and CEO with whom I used to work is as follows. If the stakes of a given task or project are high, but the requirements of completing the the task or project are not a core competency of the organization, then it’s time to rely on outside experts for whom it is a core competency. He added that this often happens with things that are really important, but also episodic. An example he used is executive recruiting. The organization cannot afford to get it wrong, but it also cannot afford to build and maintain an internal core competency for an activity that only happens every few years, which is the case for C-Suite hires. In such a case, retaining the right executive search firm is a way to benefit from expertise and core competency, while only paying for it when you need it. Note that as with any outsourcing decision, I purposely said the “right” executive search firm. Many of the large, traditional firms are very well resourced, but they are often structured in ways that make it very difficult for them to deliver the game changing leaders that all organizations need today.
The reality is that, within reason, cost should rarely be the driving force in a decision to outsource a task, project, or function, partly due to outcomes, but probably more importantly, because the expense of outsourcing tends to be variable rather than fixed, which, in the end, provides greater budget flexibility even if cost is temporarily incremental. Cost should almost always be subordinate to issues such as time/speed, low stakes-high stakes, competency, agility, efficiency, disruption/distraction, quality, etc. In fact, the proper use of outsourcing can be a critical competitive advantage, particularly in a high-change, turbulent operating environment, because it allows for the quick acquisition of core competencies, but without a long-term obligation to fixed cost.
While some organizations worry about how customers will react to outsourcing, in the end, a firm’s clients tend to be agnostic about how a company or organization meets their needs and expectations relative to the role of outsourcing as long as the outcome is good and the company maintains full accountability, even for third party work. You can outsource work, but you can’t outsource responsibility!
In short, it is a mistake for organizations to think so conservatively that they sacrifice long-term revenue dollars for short-term expense nickels. Particularly in a time of crisis, access to highly specific, even esoteric competencies can not only support operations during crisis, but it can support a successful transition to a sustainable post-COVID new normal by maintaining customer confidence now while providing band width for innovation in the future.