When to outsource

Michael Munger, chair of the political science department at Duke University, fantasized one day about what it might be like for a business to outsource everything.  “Why have any employees at all? Why have a building? Why (can’t the boss) just sit home, wearing his jammies and bunny slippers, sipping a nice cup of tea, and outsource everything? He can write contracts to buy parts, he can pay workers to assemble the parts, and he can use shipping companies to box and transport the product.”

This doesn’t end well. Munger’s hypothetical boss fires everyone, draws up contracts with suppliers and manufacturers, logistics companies, outside sales staff and customer service call centers. And then he discovers that it’s really hard to manage a hundred service contracts and business relationships.

 “The manager shucks the bunnies, puts on his suit, and hurries over to his primary contract supplier of inputs. ‘What are you doing? We have a contract!’ The supplier says, ‘Who are you again?’”

You might be a managerial genius. But you would have to be to even have a chance pull this off.

Look at your business and ask yourself: What does this business do that makes it special or better than the next guy’s business? Are we more efficient? Are we better marketed? Do people like our style? Do we know the customers better? Do we have a technical advantage? Are we better managed?

Whatever gives you an edge is your business. Everything else is a cost of doing business. As Munger puts it, “the answer is: profits. The company has to decide which approach, at every stage, costs less, improves quality, or in some other way increases profits.”

So if your marketing is better, you probably don’t want to fire your marketing staff and hire outsiders. If you have a technological advantage over the competition, you’re not going to want to outsource your research and development. If you know your customers better, you should keep your customer service staff close to you.

The rule of thumb is to outsource any business function that isn’t part of your core strategic advantage, if you can find a vendor who can do it less expensively than you can.

But think hard about that last clause: less expensively than you can. Because finding a service provider takes time and has a cost. Negotiating a deal takes time, and has a cost. Consulting with attorneys to make sure your contracts and service level agreements provide you enough protection has a definite cost. And policing those contracts also carries a cost to you, in time and energy.