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AllBusiness.com
Wednesday, December 26, 2007

Outsourcing - the practice of using outside firms to handle work normally performed within a company - is a familiar concept to many entrepreneurs. Small companies routinely outsource their payroll processing, accounting, distribution and many other important functions, often because they have no other choice. Many large companies turn to outsourcing to cut costs. In response, entire industries have evolved to serve companies' outsourcing needs.

But not many businesses thoroughly understand the benefits of outsourcing. It's true that outsourcing can save money, but that's not the only (or even the most important) reason to do it. Wise outsourcing can provide a number of long-term benefits:

-- Control capital costs: Cost cutting may not be the only reason to outsource, but it's certainly a major factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business and allows you to avoid large expenditures in the early stages of your business. Outsourcing can also make your company more attractive to investors, since you're able to pump more capital directly into revenue-producing activities.

-- Increase efficiency: Companies that do everything themselves have much higher research, development, marketing and distribution expenses, all of which must be passed on to customers.
-- Reduce labor costs: Hiring and training staff for short-term or peripheral projects can be expensive, and temporary employees don't always live up to your expectations.

-- Start new projects quickly: A good outsourcing company has the resources to start a project right away. Handling the same project in-house might involve taking weeks or months to hire the right people, train them and provide the support they need.

-- Focus on your core business: Every business has limited resources, and every manager has limited time and attention. Outsourcing can help your business to shift its focus from peripheral activities toward work that serves the customer, and it can help managers set their priorities more clearly.

-- Level the playing field: Outsourcing can help small companies act "big" by giving them access to the same economies of scale, efficiency and expertise that large companies enjoy.

-- Reduce risk: Markets, competition, government regulations, financial conditions and technologies all change quickly. Outsourcing providers assume and manage this risk for you, and they generally are much better at deciding how to avoid risk in their areas of expertise.


Pitfalls of outsourcing

Management: The outsourcing company must be prepared to manage projects across time differences and cultural barriers.

Quality control: The outsourcing company needs a clear set of guidelines, expectations and processes to manage the quality of products or services.

Taxes: Employing several outsourced for-profit enterprises can impact the taxes assessed on the outsourcing company.

Liability: It can be difficult to determine the liability of different parties involved.

Tip: Examine processes

To make an outsourcing relationship work, you may have to rework some of the internal processes that will remain in-house. Consider what strategies you'll need to hand off segments of your business, and make sure you manage the areas around outsourced functions. Are systems designed to receive what your outsourced vendor delivers?

AllBusiness.com provides information about products and services for entrepreneurs, small businesses and professionals to start, manage, finance and build a business. Visit www.allbusiness.com. 

This article appeared on page D - 3 of the San Francisco Chronicle

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