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To buy or to rent?

A practical guide to figuring out which services to do in-house and which to farm out.

In business, you can't be too rich but you can be too thin.

For many business owners, particularly those with small businesses, the only fat in their offices is found in the coffee creamer. Trying to keep up with yesterday's accounts receivable, today's regulations and tomorrow's technologies can be an exhausting exercise in futility.

Enter outsourcing. Done properly - a crucial caveat - outsourcing can lower overhead, improve productivity, speed services and give businesses access to outside expertise. Outsourcing business functions is entirely different than doing them in-house. While KISS (Keep It Simple, Stupid) is an excellent strategy for internal business tasks, outsourcing - with its infinitely more complicated communications and commingling - requires the KISSOFF method, an appropriate acronym for the following advice.

Know yourself

It takes two to tango, and as the outsourcer, you get to lead. To lead, you need to know where you want to go, what you want to do and what kinds of tasks you're willing to delegate.

"I didn't become a civil engineer so that I could collect bills or clean the office," says Steve Ward, president of Westech Engineering in Salem. "Outsourcing is a source of freedom. It allows us to focus on what makes us special."

Inventory the nature of your business

Analyze every facet of your firm. Identify the crucial (your core competencies - the "who you are") as well as the mere essentials (necessary support services like accounting and human resources).

Formations Inc., the internationally known designer of museum and visitor center exhibits, is known for creative outsourcing. The practice reduces costs, but it also helps the Portland firm mine for talent. "We have an inside core of creatives and an outsourcing pool of muralists, taxidermists and silkscreeners," says Sandy Vischer, a firm principal. "In other words, we have two core competencies: creativity and the ability to identify and manage creativity. To be successful as artists and business people, we need both."

Warning: Don't overlook peripheral procedures, those tasks which are so often outsourced that we forget their potential power."Outsourcing deliveries to UPS may be a necessity, but it includes risks that few people recognized prior to its recent strike," says Kerry Dugan, of Dugan Inc. Advertising and Public Relations in Portland. You can't mitigate risks without identifying them.

Select potential functions for outsourcing

Some tasks are best done in house, others are easily done "out house." Popular choices for outsourcing include accounting, tax and legal work, human resources, marketing, credit management and - the perennial survey favorite - "other."

Tom Lundberg, president of Shadetree Landscaping in Albany, has many "other" ideas. He outsources tasks that have high costs in terms of training, turnover, legal liability, OSHA compliance, workers' comp costs or safety, or any unfamiliar task.

Because an objective analysis is required, many companies turn to experienced consultants.

"Outsourcing is like brain surgery: You can describe it in 20 words or less but it takes special knowledge to do it properly," says Kit Johnson of Arthur Andersen, the international accounting and consulting firm. "Also, like brain surgery, it isn't an operation you want to conduct on yourself. An objective third party is best equipped to help a company identify its true core competencies - those tasks that give the firm its competitive advantage - from tasks that are simply essential. Consultants can also help companies leverage outsourcing as a true strategic tool."

Secure support

Don't outsource unless you can expect many happy returns on the investment. Give your customers both internal and external - reasons to buy into the outsourcing concept. What will the return be to customers? Lower costs, better service, more options? What will the return be to employees? Less overtime, fewer cyclical layoffs, less paperwork? What will the return be to managers? Improved business focus, fewer staffing problems, flexibility? What are the potential negatives? Example: For every 100 jobs you outsource you'll need five to 10 employees to monitor and manage the arrangement.

Outline what you want from others

You can't get what you want until you know what you want. Exactly what tasks do you want to outsource? What characteristics do you want in a provider (geographic proximity, comparable corporate culture)? What tradeoffs will you accept (cost vs. quality, flexibility vs. predictability)? Consultants should help with both the needs analysis and the request for proposals.

"The upside of outsourcing is that you get what you ask for," Kit Johnson says. "Of course, if you're unprepared, that's also the downside."

Find partners

Finding an outsourcing partner is like finding a spouse: You have to kiss a lot of toads before you find a toad you really like.

Legwork - and mouthwork - is important. Talk to people in your industry, people in the provider's industry and peripheral competitors. They may include people in your industry but outside your geographic market, commercial comparables such as local businesses that are in similar but noncompeting industries and trusted accountants, lawyers and other professionals. Get member lists from professional associations.

Investigate potential providers with at least as much zeal as you would investigate a potential employee. Check the provider's key employee resumes, employee turnover rates, financial condition, reference list and technical expertise. Is outsourcing a major source of the provider's business? How much of its staffing, technology and time is guaranteed? Will you have a single responsible contact and, having met said person, would you be comfortable working with him or her? How can you consistently reach your contact? If you were going to do the work in house, would you be willing to hire this person or, for that matter, any of the provider's staff?. What will the provider do to make the outsourcing work, starting, for example, with minimizing initial disruptions?

"Pay an unannounced visit to the potential provider's place of business," says Lundberg,"and insist on a thorough tour. Or better yet, surreptitiously visit their unofficial employee watering hole."

Finalize arrangements

"Finalizing arrangements is something of a misnomer," says Sandy Vischer of Formations Inc. "Outsource management is a continual process."

According to a 1997 study by Dataquest Worldwide Services, 17% of all outsourcing contracts are reviewed for renegotiation within six months of the initial signing. To circumvent potential problems, always use outside help when negotiating an agreement. An ounce of written contract is worth a pound of court documents.

Like employees, outsourcing partners will look to you for guidance, feedback, challenges and, of course, money.

"Done well, outsourcing won't be the beginning or the end of all your problems," says Westech's Steve Ward."Basically, you're just trading one set of challenges and benefits for another."

SOUL SEARCHING

Should you reengineer internally or outsource? Before reengineering, ask yourself:

* How would reengineering effect our core competencies?

* What are the opportunities and costs?

* Can we maintain the improvements; that is, commit the time, financial and physical resources needed?

* Will this reengineering require continual updating? Can we keep up with any changing technologies?

* Will we actually do the reengineering?

* Will keeping the product or process in-house help us maintain any synergies?

THE FINE PRINT

The perfect outsourcing contract should cover:

* Competitive, performance-based pricing

* Objective performance criteria

* Changing service levels

* A three- to five-year contract limit

* Provisions for continual evaluation

* Industry benchmarking

* Security arrangements

* A responsibilities matrix

* Formal management relationship structure

* Right to use third parties

* Termination conditions

* No-compliance costs and penalties
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Copyright 1998 Gale, Cengage Learning. All rights reserved.

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Title Annotation:outsourcing
Author:Tylczak, Lynn
Publication:Oregon Business
Geographic Code:1USA
Date:May 1, 1998
Words:1226
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