Outsourcing potential

The big end of town seems to wax and wane when it comes to out-sourcing. One year it is the next best thing and the following, it is off the agenda. I also recall not long ago when there were a wave of articles saying you should hold onto your core competency and only out-source those activities which weren’t critical to your business.

However, what is clear is that out-sourcing is now part of the corporate landscape and there are many companies and even countries who are the recipients of the work.

Whatever your ideological or philosophical views of exporting jobs are, whether it is to the next town or next country, the business which has high growth potential needs to seriously consider how out-sourcing can assist their growth strategy.

High growth firms are constantly hitting constraints as they grow. Most of these are internal. They simply run out of puff. High growth is very demanding on cash and resources. Many of the resources needed are only available in large lumps like factory warehouses and accommodation and must be purchased well in advance of need. People need to be recruited and trained before they are productive.

There is also a significant and growing work in progress funding which is needed. Rather than purchase resources, high growth firms need to see if they can out-sources some of the activities so that they can reserve their funding capacity for those activities which are core or cannot be out-sourced easily.

Because so much has to be funded, another reason for out-sourcing is to move costs from fixed to variable. Rather than build a warehouse, it could be rented. To take this a little further, rather than operate a warehouse and incur the costs of equipment and employees, the entire operation could be out-sourced. This approach can be taken to any activity which has a high up-front fixed cost. The high growth firm needs to conserve as much cash as possible, out-sourcing transfers the funding problem to another organisation.

We also should not forget that no firm is good at everything. There will be many activities which the firm takes on which will be sub-optimised because they are not part of their core capability. So for example, the firm might be better off having a debt collection service administer its credit rating and collection service rather than undertake the work in-house. Any specialised activity which can be done better by another firm because it is their core strength or capability may generate a better outcome for the firm.

Lastly, don’t forget that it may actually be cheaper to out-source. In any activity where economies of scale apply, those companies which undertake the higher volumes should be able to reduce their cost per transaction. If you have a number of activities where you do not have the volumes to operate efficiently, these should be considered for out-sourcing.

The justification for out-sourcing by high growth firms need not focus on reducing headcount, they need to see it as a way to cope with the growth issues they face. This is one place where employees can see that out-sourcing can really help a business grow and prosper.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.