How to know if its time to Outsource
Is it time to Outsource or not? It’s a key recursive question on any Business.
Have you asked yourself that question yet?
Every company should have a Business Plan. And I don’t mean the kind that you create when starting up or trying to gather additional investment, but the “working tool” kind.
A Business Plan should:
- be performed towards a time horizon that matches your Core Business Vertical Sector dynamics
It is pointless both to establish a Business Plan for 5 years with regards to an AI company as it is towards a Tree Planting Exploration one, yet by distinct orders of reason; while in the first case it is impossible to forecast what will happen with AI within half a decade, due to the colossal momentum that this technology is experiencing, in the second case everyone knows that a proper financial forecast towards a Tree Planting Exploration requires at least a 10-year horizon.
- comprehend a proper Market Analysis
You must know your potential prospects, where they are and live, age, gender, social condition, etc… as well as your competitor’s portfolio, clients, the Benchmark and so on …
- establish a logical roadmap through its Strategic Plan
Based on your capacity and portfolio + costs + Market Analysis define WHAT is your target market and HOW will you address it.
- define the approach to the marketplace via both a Marketing and Sales Plan
Define WHICH will be the actions and sequence towards reaching out to your target Market in a manner that fits your capacity and bear the most potential of producing fast results.
- show a Financial Forecast
Clearly lay out a Profit and Loss (P&L) Forecast + plus a Revenue Flow Plan and a CashFlow map, so you may understand how it is foreseeable that your capital will “behave”
- layout an Outsourcing Plan
Define what makes sense to MAKE and what makes sense to BUY.
Now all of the above-mentioned steps are mutually retro feeding, meaning your start developing one but then you need to go back and updated it based on the findings reached while preparing the following. And that is the first advantage of developing a proper Business Plan, meaning you get to have a clear picture of how the entire endeavor may evolve and why.
Then, it gives you an absolute edge to revisit the Business Plan once each quarter and check the impact of the effective market evolution on the previous quarter forecast, then deciding what you need to do to improve your Business based on it. This is where the MAKE or BUY question needs to be assertively assessed.
You Outsource what you are not capable of doing in a cost-effective or efficient manner right?
So, isn’t your personal doctor a freelancer to whom you Outsource your healthcare?
Make or Buy
To give an easy example, let’s say you manage a bicycles brand that aims at a specific niche market and currently your Gross Profit is 40%, meaning in each $1,000 bicycle you sell $400 is profit and $600 what it cost you to produce the products you have sold.
Now, this company was founded by you grandfather and it produces every single part that constitutes the bicycle, from the metal frame to the leader seats.
You have developed a Business Plan and within the Market Analysis, you have got to know of a specific company that produces high-quality Leader Seats according to client specifications and the price sounds really competitive.
Now, they do not produce bicycles, therefore they are not really a competitor of yours, so could they become partners, as in suppliers to whom you outsource the seats?
You start by asking them for a quote regarding 10,000 seats and after getting it you pick up your Financial Forecast, look at the P&L worksheet and access that:
- Step 1 - each seat now costs you some $120 to produce (and you end up selling it for $200 within the bicycle $1,000 price tag)
- Step 2 – the cost derives from:
- the raw material, meaning leader, and stitching rope
- the salary and social benefits regarding two FTEs (Full Time Employees) who perform the work over two shifts each day
- the energy consumed by the leader seats press machine
- the maintenance cost towards such leader seats’ press machines, which although having its acquisition cost fully depreciated for quite a while, it presents growing maintenance costs because it is an old equipment.
- Step 3 – You got back the quote from the seats producing company and it reads $950,000, so $95 a piece plus $140 for each 1,000 parts shipments, so each seat will cost you $95,14, delivered ready to install at your “door step”.
That represents a potential saving of almost $25 per seat which will impact an additional profit of almost $249,000 on each 10,000 units sold.
Since each unit currently produces $400 profit (40%) your profit will rise to 42,5% if you Outsource your bicycle seats instead of producing them.
- Step 4 - Now, that is the immediate gain, yet there are other things that you can mirror against what your Business Plan review tells you, like:
- you have identified that your seats’ press machine is old and representing growing maintenance costs each year, so not only the cost per in-house produced seat is expected to raise but also it is likely that you will need to perform a serious investment to buy a new machine soon.
- Outsourcing poses you a chance of applying a one-off sale tactic to improve your cash flow within the year which may give you the flexibility to either maintain the seat outsourcing or collect enough liquidity to buy the new press.
If you leverage the additional profit by, let’s say not raising the price at year’s end due to inflation adjustment, because your new lower cost allows it; you may do a sale in March when your competition has ware out previous year stock and the only way to match your price would be to reduce their profit margin.
- Step 5 - If you do it right, maybe by also Outsourcing the transmission chain and pedals, you may gain a price driven competitive edge over your competition. It will be a one-off competitive edge (meaning it will happen once and not systematically), yet it gives you the chance of both producing a “perception impact” towards your target market by lowering the benchmark without losing profits while generating more revenue and cash flow within the following year’s Q1 (first quarter) which will capitalize your company and allow you other strategic options that you now do not have.
Make or Buy decisions, meaning to constantly consider Outsourcing gives you a wide range of strategic and tactical options to both move your business forward and grow/ expand while giving you the needed flexibility to tackle unforeseen events.
That is why the large manufacturing corporations largely outsource while constantly promoting rounds of Market Consultation to lower the cost of goods and services they buy.
When you Outsource and constantly resort to cost efficiencies through procurement initiatives, you not only merely create competitiveness spirit within your potential supplier’s community, but also challenge them to find new and more efficient ways to produce their products or deliver their services.
We are witnessing one clear example of such dynamic with regards to the IT Services Outsourcing Industry. Services like Service Desk or Application 1st Level Support are being automated by the Service Providers through automation and even AI, because the benchmark is getting to levels where bears such low prices that do not sustain humans performing the tasks.
But that is a good thing because it now means that “less qualified” tasks are being automated and the result is a significant cost reduction without compromising the quality of service.
Outsourcing, everyone gains from it!