The Wise Approach to Outsourcing

For many years a certain dogma about when and where to use outsourcing has persisted. It goes something like this: CEOs should outsource those processes that are not core, i.e., not critical to an organization’s operations and keep in-house those processes that are in fact core.

Though there have been some variations to this notion of outsourcing only non-core processes, I believe the thinking in this area is somewhat flawed. This is due in large part because its supporters don’t realize certain real-world competitive imperatives that every CEO faces.  Bear with me while we look at this very important question in a bit different way.

Outsourcing – Looking Back

Let’s look at the thinking over the past decade. One very popular study and some great insights are found in the findings of the CAPS Research and A.T. Kearney Inc. study, “Outsourcing Strategically for Sustainable Competitive Advantage.” The study covered 14 functional areas that have been outsourced, and the findings show that outsourcing is here to stay, of course. But is it being used as the competitive weapon that some, including this writer, believe it can be? Sadly, this is typically not the case.

The research indicates that Outsourcing is generally used broadly across many activities but not very deeply. For example, in the most heavily outsourced function, IT, only 36 percent of all companies outsource over 25 percent of the function. Only eight percent of companies outsourcing sales actually outsource more than 25 percent of the function.

The study is silent on exactly where the spend is being made and what “deeply” signifies.  What we know from our own surveys at Sales OverDrive and  experience with roughly 750 companies is that it’s usually the less strategic sales activities that are most often outsourced. These functions typically include customer support, administrative support for sales, appointment setting, and B2C and B2B sales typified by door-to-door and call center sales.  We’ve found that the same holds true in another one of our divisions, Advanced Harmonics Recruiting,  which is focused primarily on accounting, technology and recruiting.

Outsourcing Non-Core Competencies

In their book, Rebuilding the Corporate Genome, A.T. Kearney authors Aucik, Jonk and Willen put forth the notion that for “capability driven” organizations, especially  in hyper-competitive markets (and times like these), success will come from focusing “only on those capabilities crucial to their strategy and mission as an enterprise, and outsourcing or spinning off other capabilities.”

Outsourcing Sales for a Competitive Advantage

Here again, there is something missing. It seems to me that that success will come from outsourcing or co-sourcing anything in which the organization doesn’t have exceptional competency – regardless of how critical it may be. For example, a manufacturer might outsource manufacturing, warehousing and freight forwarding and a sales company might outsource field sales if a competitive advantage can be gained by doing so.
Yet, most organizations are reluctant to outsource a function that may in fact represent a competitive disadvantage or even a threat to the survivability of the organization. The reasons not to outsource are similar in every category and have largely to do with control and a sense of invincibility that I write about in another piece.

We see companies fail every day because they see sales as core or “crucial.” But because they perform so poorly as a sales organization, they grow slowly or not at all, often failing altogether. In fact, the more poorly a sales team performs, the more control is exerted, often to the detriment of the enterprise. “Oh we would never outsource sales” either means the enterprise has indeed turned sales into a competitive advantage, or sales is in trouble and blood is in the water.

With larger organizations, CEOs don’t see sourcing at its root as a strategic play, but rather a cost-savings opportunity. Yes, it is often a very effective in reducing costs. These companies generally are not looking at outsourcing to gain a competitive advantage.

Outsourcing Non-Proprietary Functions

In the February 2005 issue of Harvard Business Review, Bain partner Mark Gottfredson and two other partners authored an interesting study , “Strategic Sourcing: From Periphery to the Core.” This breakthrough study asserts that non-core doesn’t equate with a function’s likelihood for outsourcing.

Mark contends that it’s best to think about outsourcing based on whether the function is proprietary and unique in nature to the company.  If it is, the function is not a good candidate for outsourcing.  If, on the other hand, the function it is not proprietary and is common across many industries, it may be a good candidate for outsourcing.

Sales, for example, does not tend to be proprietary and sales processes tend to be similar across numerous industries. Thus, superior skills exist in other organizations that could present a viable alternative – and even a strategic advantage to a company lacking in this area. Even for those organizations whose subject matter might be confidential, that shouldn’t preclude outsourcing in order to tap into world class capabilities.

In conclusion, I encourage CEOs to look hard at the areas in which both competitive advantages, as well as cost savings, may be found. If you don’t execute in sales and marketing well, seriously consider outsourcing sales or hire a sales consulting company like Sales OverDrive. If sales and marketing is does not present you with a measurable competitive advantage, get rid of it and let another firm deliver that strategic advantage to you.