Outsourcing: The not-so-dirty word

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My monthly thanks to yet another TEC associate, Monte Campbell of Santa Clara, Calif., for the views reported in this article. Outsourcing is apparently here to stay; and, in fact, if I look back in the TEC archives, it has actually been with us for some time.
The problem is that while outsourcing can improve organizational performance, it will only do so with careful planning and execution.
When should you outsource? Here are eight traditional reasons:

1. You need more expertise than currently exists in your company, and you can’t afford the luxury of waiting to get it.

2. Your business-operating environment is rapidly changing and you are too small to effectively manage the change.

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3. Some key performance functions are not up to the standards established by other key functions in the business — suggesting, possibly, that these sub-standard functions are outside your core competence.

4. Cost or other efficiency parameters become more favorable when the activity is performed at higher volumes.

5. High-level skills are needed on a periodic basis. Examples would include customer special packaging requirements on a seasonal basis, audits, unique technology training, or other short-term knowledge transfer needs.

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6. Customers demand "best practice" performance, but organizational size, or even lack of image makes it all but impossible to develop internally.

7. Any area where you find yourself saying, "I wish that problem would go away," and you have an opportunity with someone who has what it takes to fix it now.

8. You are at overcapacity but don’t want to disappoint your key accounts. So you farm out some replaceable business so you won’t have to break delivery promises.

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These are traditional reasons for outsourcing. Unfortunately, today’s environment is anything but traditional. Chaotic global economic conditions and cheap labor coupled with the use of high technology in places once unimagined such as China and India, have led to new playing fields with new rules for playing on them.
As one Milwaukee TEC member said, "I have made more trips to China over the past 12 months than trips out of the country over the last 10 years." Parenthetically, I see that Gov. Doyle is leading a trade mission there from Wisconsin in March.

Characteristics of outsourcing
What are some of the characteristics of this new breed of outsourcing?

1. Manufacturing, marketing and distribution partnerships – previously out-of-reach for small businesses, are being forged. One arrangement is to partner with one entity that buys or builds the factory, another which controls distribution in the region, and someone else who provides the production equipment with the Chinese government, for example, holding the lease on the land. Another increasingly common arrangement is to offload IT customer service 24/7 to low labor, English-speaking countries, most notably India.

2. If it’s not clear from the first characteristic, the new breed of outsourcing does not honor geographical boundaries. The supply chain itself is integrated with outsourcing partners. The chain can stretch from Europe to Asia.

3. The arrangements tend to be strategic and in line with being able to respond to long-term customer need. Gone are the days when the outsource relationship was seen as a temporary solution. In many cases, substantial at-risk investment is required with only "good faith" bargaining at the root of contracts which could be revoked at any time (in the case of Chinese outsourcing in particular) because of unanticipated political instability in the region or strained trade conditions between governments.

There is also the larger issue of how outsourcing at the global level usually cannot guarantee the protection of intellectual property in general and patents in particular. Under historical practice, it was a part, an activity, a process, a restricted portion of the customer list that was commonly outsourced. Hence, the ability of the outsource contractor to replicate the entire product or service was limited.
Today, because outsourcing has truly and rightfully taken its place in the supply-side resource chain, the availability of information upstream and downstream of the outsourced event is more widely shared among a greater number of participants in the chain.

So, going forward, if you do intend to outsource on this new playing field, what precautions can you take?

1. Make sure your outsource provider has a core business that matches up with the service you need. It’s not a good idea to link up with some one who will be doing "add ons" to meet your requirements.

2. Before you make commitments, set up a series of mutual on-site meetings at your place and theirs to insure that there will not be any surprises.

3. Even though it might be difficult to protect or enforce, non-disclosure and non-compete agreements should be drafted and signed. Don’t forget, if you’re dealing in countries where English is not the first or second language, hire very competent translators.

4. Do everything you can to structure partnerships so that at the end of the day, at least on paper, you have control based solidly on performance-based criteria.

5. Remember, if your outsourced partner is not at risk (up-front investment, quality, delivery, warranty fulfillment, etc.), you are walking on thin ice.

6. If your outsourcing partner is not easily accessible by email or fax, beware! As the relationship develops, the need to deal with ECO’s or other unexpected twists will surely unfold. Clear and timely communication is
a must.

7. One final admonition to the small business that uses outsourcing for any of the reasons mentioned above. The IRS is suspicious of business relationships where it appears that the service recipient may be disguising a true "employer-employee" relationship. Don’t fall into the old "Independent-Contractor-reclassified-employee trap." It can be expensive and totally defeat the advantages of outsourcing.

Until next month, when we’ll be right around the corner from "spring," here’s to good outsourcing relationships for you and your business.

Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-821-3340.

Feb. 20, 2004 Small Business Times, Milwaukee

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