The opposite of outsourcing: how a Minneapolis-based association used an in-sourcing strategy to reduce costs and improve its net.

WHEN AN ASSOCIATION CEO RECENTLY STATED that she had outsourced enough work to drop her staff from 14 to 6, I couldn't help but wonder whether she'd soon have nothing to be CEO of. In my view, while having fewer staff reduces the management headache, the decreased skill set of a staff that's half the size it was previously would almost certainly reduce the association's ability to respond to unique tasks and handle spikes in workload. My perspective is the result of my experience. At the Health Care Compliance Association (HCCA), Minneapolis, we have taken the opposite tack by dramatically reducing our dependence on outside assistance. Along the way, we've turned in a positive net, too.

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In this article, I will share several examples of cost-saving measures that we have implemented at HCCA. If some of these ideas work for you, as they have for us, you will reduce your costs significantly. In addition to the positive financial impact, we have realized a positive impact on operations, and member services have improved dramatically as well.

The big numbers

HCCA is a $3 million association with 3,000 members and 13 staff. Our association outsourced almost everything until October 2002, at which time staff numbered two. By 2003, we'd brought nearly everything in-house. Our net profit for 2003 was $430,000--twice the total profit of the previous six years combined ($193,000). But it's about more than the money.

* We have better customer service, increased board support, and a vastly improved Web site.

* We have more staff to handle the spikes in our workload.

* Our staff has a broader skill set.

* And we now better control our quality and customer service.

Yes, it is more difficult to manage more people and do the work in-house, but the savings and efficiencies have more than offset the increased workload.

Minimal outsourcing 

Reading this article might lead one to believe that we advocate doing everything in-house. We do not; but we do try to minimize outsourcing. Outsourcing was helpful in the first few years of our existence; it helped us grow. In limited applications we still support it, but as we matured, outsourcing was not as cost-effective or as beneficial. Here's what we currently outsource:

* complex graphic design services (not basic layout);

* facilitation of strategic planning;

* annual financial audit;

* color printing jobs of more than 250 imprints;

* copying jobs of more than 250,000 imprints;

* limited legal analysis; and

* esoteric network support.

The outsourcing trend

You'll get no argument from me that outsourcing has increased in recent years. (See "Outsourcing as Strategy" article on page 36 for more on this.) But at HCCA, we've questioned the conventional wisdom.

The core competency argument. Most of what I've read and heard about outsourcing is described in rather unspecific terms. Experts say, "Stick to your core competency." It sounds good; however, is it really an advantage and at what cost? Who decided that meetings management, Web management, and graphic design were not core competencies? The implication is that if you don't outsource, you will impede your ability to fulfill your core competencies. My "non-core competence staff" does not impede my core competence staff. In fact, they often help.

For example: Our annual meeting grew 35 percent to 1,400 attendees for 2004. Several knowledgeable "non-core competency" staff members will attend to help manage the meeting. We would have had to use more temps if we outsourced more of our "non-core competencies." Our staff can answer participants' questions about our organization in great detail. They can also cross-sell our other products and services. Temps or a meetings management company would struggle on both counts.

Promises of savings. Another contention of some outsourcing proponents is that if you outsource, you will save money. But rarely are specific dollar figures included in the outsourcing discussion. And the few numbers that I have seen were incomplete and vague.

Several examples from our experience show that outsourcing was more expensive for us. And the higher cost of outsourcing reduced the financial resources that we had available for our core competencies. For example, because of our in-sourcing focus, we have saved $42,000 on audiovisual equipment rental. We have used this money to add online meeting registration, product purchasing, membership registration, and several other important improvements to our Web site, which in turn support our core competencies.

I recently asked a noted author, lecturer, and consultant in the field of association management about outsourcing. He said it's a good idea. He said that a CEO he respects is doing it, and it's working very well for him. When I asked about the financial impact of outsourcing, he shook his head and said, "I don't have any of these details." How can you advocate outsourcing if you have no idea what the specific financial impact is?

The devil is definitely in these details. If our outsourcing companies had shown us the exact financial impact of outsourcing, it would have demonstrated how much money they were making. It would have also shown us what we could have saved by bringing the work in-house. On occasion, our outsourcing companies would put some rough numbers together with assumptions that suggested we were saving money. After we did our own analysis and brought the work in-house, it was clear that the assumptions about savings were exaggerated.

Efficiency myths. Outsourcing companies tend to claim greater efficiency because they spread the workload and costs across several organizations. However, our data and experience did not corroborate this theory. Many discussions comparing outsourcing with in-sourcing falsely assume that you will not be innovative or efficient. For example, if you replace the 20-hour-per-week outsourced graphic designer with a 40-hour-per-week in-house designer, of course you will become inefficient. However, if you opt to combine the graphic design with network and Web support, as we did, you can be as efficient as an outsourcing company and keep their profits for your members.

Instead of paying $60 per hour for graphic design, I pay less than half of that. In essence, we have staff perform multiple functions to save money rather than work for multiple organizations to save money. As a bonus, we have more staff to help out during busy times. And we have a staff that is more satisfied, challenged, and likely to stay put.

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More on combined functions. Combining functions in-house to achieve efficiencies rather than sharing an employee with several other organizations has additional advantages. The following four benefits are among them:

* Our staff is more efficient because they focus all of their attention on one association--ours. Our staff does not have to understand the intricacies of multiple associations.

* Our staff knows what is going on in our other departments, which creates efficiencies and generates innovative ideas through daily interaction among functions. These innovative ideas result in better member services and cost-saving ideas.

* If we need something done today, we do it. In an outsourcing model, if we needed something today, we would take a number and hope our outsourcing company didn't have a larger client making the same urgent demand.

* Innovative changes are easier to implement because all of the involved parties are working inhouse on the same team. Some of the cost-saving examples cited in this article were attempted in the past but failed because they required multiple companies to be motivated and agree to change.

One might question how much of our recent success was associated with the quality or costs of our past partners. But as I mentioned previously, our outsourcing partners were key to our growth. In our association's first six years, our outsourcing companies took us from 0 to 3,000 members. They took us from $0 to $3 million in annual revenue. They were very helpful individuals and companies. They charged us market rates or even charged us a bit less. However, their assistance came at the cost of the profit they needed to make. So for the long term, we opted for the benefits and efficiencies I've described.

Our analysis

It would take another article of this size to describe the complete analysis that we performed to decide that moving away from outsourcing would be financially successful. Our entire in-sourcing process, from first look to implementation, took a full year. Although it took a while to gather and analyze the data, it was a simple process. In a nutshell, here's what we did:

* We broke down the costs of individual functions, using conservative estimates.

* We compared the number of staff and costs associated with an outsourced task to the staff and costs of completing the task in-house.

* We used an outside audit firm to help verify some of the analysis.

In almost all cases, the actual savings were higher than our estimates, which is validated by our 14 percent 2003 net, up from -3 percent in 2001 and 4 percent in 2002. We made the switch in the third quarter of 2002.

Where we saved

Meetings management. We average 20 conferences with a total of 3,000 participants per year. Our largest meeting has about 1,000 participants. Most of our other meetings have about 75-200 attendees. We paid our meetings management company 22 percent of our meeting revenue. In fall 2002, we hired Tracy, Beckie, Darin, and Erin and brought meetings management in-house. Customer service has improved for our planning committee, speakers, and attendees. We have seen a significant increase in conference revenue and a reduction in conference costs.

Had we not brought meeting management in-house, we would have paid our meetings management firm $393,914 in 2003. Our conference management staff's salaries, benefits, and overhead costs were $244,306 in 2003. Approximately three quarters of their time is spent on meetings management, leaving time for other responsibilities. The equivalent of another 40 hours per week is dedicated to meeting registration, finances, and communication related to our conferences. The total savings was $149,608.

In addition to the savings, we've seen an increase in revenue associated with our annual meeting. Conference sponsorship dollars went from $25,500 in 2002 to $70,000 in 2003 and $115,000 in 2004. Paid attendance went from 702 in 2002 to 748 in 2003 and to 1,100 in 2004.

Audiovisual equipment. You obviously can't handle all of your AV needs internally; however, significant cost-saving opportunities do exist. Our meetings management company rented all of our AV equipment. We asked the company to purchase two LCD projectors to reduce costs. They said, "The bulbs will burn out or break in transit, and they're expensive." They said, "The LCD projector will fail, and the hotel will not help because you did not use its AV services." We even offered to pay for the LCD projectors, but they thought it was a mistake.

After we took over the management of our meetings, we bought the two projectors. A year later we have yet to replace a bulb, for any reason. Neither of our LCDs has failed. The hotels have not been unhelpful, and on occasion, they even volunteer to set up the projectors and test the remaining life of our bulbs.

Yes, it is a hassle to ship and haul the LCDs, but my staff beams when they tell our board members how much they are saving our association. By buying two LCDs, we eliminated 96 one-day rentals, averaging $500 per day, saving $48,000 per year. To put it in perspective, assume it takes us an additional 48 hours a year (I believe it's actually closer to zero) to haul the LCDs with us and set them up. That means our "small AV department" is actually making $1,000 an hour. The fact that AV is not our core competence is irrelevant.

Photocopies. Our meetings management company also outsourced almost all of our copying and passed the charges through to us. We bought a copier and cut copying costs by $50,584 in 18 months (1,129,285 copies at 4.5 cents per page). After supplies and maintenance of $15,584 and a copier cost of $16,590, we saved $15,410. We spend less than one quarter of a staff member's time on copying, and now that the copier is paid for, we save $21,300 a year. We consider $21,300 for a one-quarter staff member to be a good trade-off.

In addition to the savings, lastminute jobs do not require access to a copier located miles away from our office. We do not get stuck behind other jobs. Our staff has immediate access to a 45-page-per-minute photocopier, which saves them time even on small jobs.

Graphic design, Web support, and network support. We spent $29,000 in 2002 outsourcing graphic design at $60 per hour. Granted, some of it was artistic work that required a highly skilled designer. Most of the work, however, involved simple editing of text in existing templates. We now subcontract out about $2,000 worth of "art" design each year and do the rest in-house. We hired Gary, who does all of our graphic design, Web support, and most network maintenance. In addition to saving $27,000 in the graphic design area, we save $24,000 in Web site management and $5,000 in network support per year.

One of the biggest benefits of bringing technical support in-house is that we can adjust our priorities on a moment's notice. Our previous webmaster required us to hold our changes until Thursdays. Important Web updates can now be done in 15 minutes. Even those panic design jobs requiring unrealistic turnaround times are now more manageable. With in-house expertise, we update our printed materials more frequently. Gary also produces, for our electronic magazine, HTML e-mails and marketing that would have been too cumbersome and costly to outsource.

Surveys. We previously outsourced our annual survey to a company that charged us $16,000 for a 25-question survey tool. We brought it in-house, put it online, and doubled the number of questions. It takes us about two weeks to summarize the data and lay out the report. We also saved another $17,000 on our member satisfaction survey. We now understand the results of the survey more clearly because we summarize and graph them. This has triggered ideas for restating and adding questions, resulting in a more effective survey. None of these ideas occurred to us in the five years we outsourced these $33,000 projects.

All about staffing

You may be wondering how tough it was to fill some of these positions. Our graphic design position is the most interesting example. We posted the job on Monster.com on a Monday and by Friday had more than 200 resumes. As it turns out, our schools have been cranking out thousands of graphic and Web designers during the past few years, but the job market has not kept up. For us, the dearth of positions equaled tons of talented applicants. This has been the case for almost all of the positions that we have posted recently.

Combined positions. A common problem for some associations is that they don't have enough work in a particular area to keep one person busy full time. This was the case for us. The solution: combined positions, an approach that also makes the job more interesting and rewarding for the employee.

Our experience has been that many job seekers have two to three skill sets adequate for our needs. In fact, some of our employees were unchallenged in previous positions because they only took advantage of one skill set. Having employees with more than one skill set is particularly important in small-staff associations.

Waste management. Overall, our staff has embraced the cost-saving philosophy. The grumbling while loading the copier is drowned out by the atmosphere of being responsible stewards of the members' money. In fact, posted above the copier is a memo stating how much money they have saved the association. Leadership's commitment to saving money helps the staff view it as important as well. It is difficult to get the staff to cut costs if we outsource things because they are inconvenient. Staff seems to know intuitively when outsourcing is not a good cost-management decision.

Our staff knows the financial impact of their actions, and they are proud. Our success has bred a cost-containment mind-set. My staff often comes in to tell me about another couple thousand dollars that they shaved off some project. They find savings that I would not have spotted. I don't have to micromanage or yell or rant and rave. Waste management has become a part of our culture.

Satisfied staff, positive results

We have hired people with multiple skill sets. They have more variety in their work. They get to use many of the skills that they have learned. They get to work on things that they have not worked on before, thereby expanding their skill sets. They are challenged in their jobs, which will keep them around longer and reduce our turnover. Synergies and efficiencies occur when the membership director, graphic designer, and meetings manager sit within feet rather than miles of each other. Our staff takes more pride and interest in managing the entire project rather than pieces of it. We have fewer occasions of finger-pointing because fewer people (and companies) are involved.

Does in-sourcing work? Our profit margin in 2003 was 14 percent, well above the national median reflected in the ASAE Operating Ratio Report, 12th Edition. Contrasted with vague assertions that outsourcing saves money and increases efficiency, our concrete results dramatically show otherwise. My board constantly comments on the improved customer service and reduction in complaints--that may be the best result of all.

RELATED ARTICLE: [THE BENEFITS]

Our Experience With In-Sourcing

* Our staff is more effective at cutting unnecessary project costs.

* In most cases, outsourcing was more expensive.

* Customer service has improved for our conference planning committee, speakers, and attendees.

* Our staff is more successful at obtaining conference sponsorship money.

* Our turnaround for marketing materials dropped significantly.

* We have greater synergies for problem solving and new ideas.

* We spend less time orienting outsourcing companies to our volunteers, staff, mission, and vision.

* We've experienced less finger-pointing among companies.

* Fewer things fall through the cracks.

* As a result of summarizing and laying out our own survey data, we generated more ideas for improving survey questions.

* In-house tech support allows for almost instant Web updates.

* Marketing is more effective because the staff have a better feel for who to market to and what the hook is.

* We are no longer stuck behind projects of larger clients.

* We don't see a drop-off on our support when the outsourcers' work peaks.

* Our graphic material is more frequently updated.

* Projects that would have been done in plain text are now graphically enhanced.

* As a result of decreased graphic design costs, more of our e-mails are delivered in HTML rather than plain text.

* Employee satisfaction is greater due to increased variety of work and greater control of all components of a project.

* We control who is working on which projects.

Roy Snell is the CEO of the Health Care Compliance Association, Minneapolis. E-mail: [e-mail].