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By | May 26, 2012

Dear Toolkit,

What's all this talk about "outsourcing" lately? I keep reading about it but I'm not really sure what it is.

Slim2None

Dear Slim,

Outsourcing is what happens when companies contract with outside businesses to furnish services they used to do themselves. This has a lot to do with the trendy philosophy of "core competencies." If an activity is not within the core competency of a firm, they farm it out. Invoking this as an ideal excuse, I used to mow my own lawn, but since it wasn't one of my core competencies, I outsourced that task off on my next door neighbor's kid.

A business (or even a lazy homeowner) will often utilize outsourcing for reasons of cost, quality and/or speed. If Buddy next door can mow the lawn better, faster and cheaper than I can, he's a bargain, right? More and more companies feel the need to concentrate on what they do best and are willing to leave the marginal chores to outsiders.

In addition, some of the activities that are being farmed out these days really require a special kind of expertise not often possessed in-house--employee benefit plan administration, for example. What company needs to struggle with ERISA and COBRA and all those other cumbersome regulations when they can just pay some outside expert to handle it for them?

Now you may think that an outside benefits administrator would probably get paid a lot more per hour than Florence down in the payroll office. And you'd be right. But that doesn't mean that outsourcing this function is not cost-effective. You'd have payroll taxes and health insurance and worker's comp and a host of other expenses in addition to the wages of an employee to do the job in-house. And you'd have that expense 12 months a year, not just when you specifically needed benefit administration tasks done. And Florence would likely not know any more about ERISA than you do. In fact, you might have to hire a lawyer to check her work.

There are many areas that lend themselves to outsourcing: accounting, training, recruiting, telemarketing, maintenance and housekeeping come to mind. The keys to successful outsourcing are:

  • selecting the appropriate provider of the service you need
  • keeping in close communication with them to assure the job is being done to your specifications and satisfaction.

On the dark side, however, there are a couple of drawbacks worth mentioning. Personally, while I may give up control of my lawn, I would never yield control of the accounting, technology or personnel functions in my business. I'm too much of a control freak. And the potential for conflicts of interest between outsourcer and the outsourcing company are limitless. Just use your imagination on that one.

Oursourcing has been a trend lately but there are some indication that it may be losing steam.  For example, Jamie Dimon, the new CEO of J.P.Morgan/Chase abruptly insourced every function that had been farmed out all across that huge, multinational financial powerhouse. And, the Obama administration has announced it is committed to bringing jobs back to the United States. Is the trend starting to swing the other way? Stay tuned.

Now that you've reminded me what a good strategy it is, I think I'll outsource dinner tonight to Fabio's, my friendly local pizza delivery resource.

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