Outsourcing for a Small Business
September 02, 2015
Cost and benefit calculation is a key component in understanding the advantages of outsourcing and whether this strategy makes sense for a particular business. Some businesses regardless of size outsource as many functions as possible while others never use outsourcing as an alternative means to accomplish certain tasks and projects.
Operational cost savings and optimizing efficiency are two key considerations for a small business to consider when deciding whether to outsource a particular process. In today’s competitive marketplace, businesses must concentrate on both of these aspects to maximize profit. It is important, however, for a business to understand both costs and benefits before deciding on this strategic approach for certain business functions. By leveraging the benefits with costs, small businesses can use outsourcing as a major contributor in achieving strategic goals both in terms of profit and market superiority.
Outsourcing cost and benefit analysis must take into consideration financial and non-financial factors:
Cost Savings - In economic terms, outsourcing must add to the bottom line by reducing operational expenses. This analysis can be quite simple in determining the dollar cost reduction. Does outsourcing eliminate or reduce a significant capital investment for equipment and employee costs? Along with cost reductions for outsourcing, consideration must be given to the quality of services received. Significantly lowering costs should not come with a reduction of quality.
Technology and Human Resources of Vendor – The decision to outsource must include an analysis of the vendor’s technology and human resources. Is the vendor capable of handling all of the business' outsourced needs in a particular area? Is equipment and software needed to process the job up to date? Are employees well trained and able to execute the outsourced tasks successfully?
Quality and Timeliness - Quality and timeliness are as important as cost savings. If an outsourcing partner fails to deliver on time even with high standards of quality, any cost reduction may be offset. Inquires should be made regarding an outsourcing vendor’s disaster recovery plan. What will the effect be on the business if the outsourcing vendor has a disaster? A small business cannot afford to have its operations interrupted due to a vendor’s problem.
The Competitive Advantage Factor – Can the outsourced vendor be a “partner” to the small business? Will the vendor be reliable and communicate with the owner or manager as if the business is a priority client? Will the vendor share the business philosophy in helping the company gain a competitive advantage in the marketplace? Is the vendor ready and capable of “going the extra mile" for the business, and in the case of increased business or an emergency, will the outsourcing vendor have the capabilities to handle all the business needs?
Time To Focus on Core Business – One major advantage of outsourcing is allowing owners and manager to focus on the core aspects of the business. Outsourcing decreases time spent on non-core areas giving owners more time to devote to core functions. If too much time has to be spent monitoring an outsourcing vendor, then it can defeat the non-economical objective of outsourcing.
Reduced Liability – Many functional areas in a business carry with it a certain amount of liability such as the proper filing of various state and federal tax returns and reports. Other functional areas depending on the business might have liability exposure depending on the risk of the activity. Outsourcing these functions can reduce both liability exposure and possible insurance costs. Liability details need to be discussed with the vendor in advance of any agreement.
A real advantage of outsourcing in addition to the economic benefits is empowerment of a business in areas such as increased knowledge, technical superiority, quality compliance, timeliness, market advantage, and limitations of liability.
Posted by Richard Weinberger, PhD, CPA
Chief Executive Officer
Association of Accredited Small Business Consultants