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December 9th, 2011 posted by David Finkel (Taxloopholes.com Advisor)

How does your business go about using “outsourced solutions providers”?

Outsourcing is a powerful way to quickly scale or stabilize areas of your business.  It brings four powerful benefits to your business:

1.      You get instant scale in that area of your business. E.g., the fulfillment company you hire already has the capacity to handle 100 times the order volume you currently have; the payroll service you use can immediately handle any increased staff you hire, etc.

2.      You get the benefit of all the development costs and trial-and-error learning that the outsourced service provider had to go through to build that business. You skip all this and tap directly into a proven business system and team in that specialty area. In essence, the outsourced service provider has amortized all the significant development costs over its base of customers, of which you are one.

3.      Your outsourced service provider offers expertise your business lacks. E.g., the shipping and distribution company you outsource to may have decades of experience for what may be very new to you; the advertising agency has created hundreds of television ads before, whereas you may have only been involved in one or two, etc.

4.      As the outsourced provider grows and matures its business, you get immediate access to that company’s upgrades in know-how, systems, and staff.

So how do you know when to outsource, and when to hold on to the project, task, or area internally in your business?

We developed a simple 3-part criteria to make this decision inside of your business.

3 Criteria to Determine When It’s Smart to Outsource

1.      When outsourcing lowers your real cost. Make sure you factor in the direct and indirect costs of keeping the work in-house as well as the direct and indirect costs of outsourcing the work. Indirect costs to keeping it in-house include: loss of staff time and focus to perform the work; increased overhead to both perform and manage the work; and more complexity for your business to manage.

Indirect costs to outsourcing include: the cost to find and implement an outsourced solution; the cost to replace any failed outsourced relationship; and the costs to integrate the outsourced service with your own company systems.

2.      When outsourcing increases the value you provide your customers and clients. For example, will outsourcing give you faster and more reliable delivery service for the same or less money? Will outsourcing give you access to better technology in this area than you could afford to buy or lease yourself?

3.      When the outsourced area or function isn’t core to your business. If the area or function you’re outsourcing is the main way you create value in your business, then outsourcing puts you at risk. In fact, disruption in the outsourced solution can kill your business, leaving you vulnerable.

While it can be appropriate to outsource a core area or function of your business, be much more cautious about doing so. Do thorough due diligence on the service provider you hire. Make sure you have contingency plans in place to handle the worst-case scenario of the outsourced relationship failing.

Have a great close to your week!