Cost - Avoid Incorrect Methods Of Identifying Outsourcing Choices

Most people pursue outsourcing choices in an incorrect way. When you spend time on alternatives that don't make sense for your organization, you've missed an opportunity to outsource something that will put you ahead of competitors.

Here are the typical approaches that can draw your attention away from your best outsourcing opportunities:

-Examining only choices that potential outsourcing vendors propose.

-Looking at outsourcing methods that competitors use.

-Pursuing opportunities that journalists have favorably described.

-Considering only choices that may offer large cost savings.

-Trying to clean up poorly run operations by putting a new person in charge.

Relying on vendors to determine your outsourcing agenda means that you'll spend most of your time looking at large outsourcing alternatives such as those for contract manufacturing. You will be seeing these choices because the vendors can make so much money from a sale that they can afford to continually engage your attention.

Such a decision may or may not be in your best interest. Your agenda is probably being controlled more by the self-interest of vendors rather than your own self-interest.

Competitors may have made bad choices in outsourcing that they have taken pains to hide. If so, you're wasting your time looking at their outsourcing methods.

Competitors' circumstances may also be substantially different from your own. For example, a smaller competitor may not be able to efficiently engage in a level of value added activity that makes your organization much more profitable.

In the early days of 5 1/4-inch floppy disks, only a few vendors could afford to coat their own magnetic media. Everyone else had to buy such media from 3M or another supplier. Despite being a small company, market leader Verbatim was large enough to run a coating line and enjoyed much higher profit margins than those who purchased coated media.

Much as most people like to extol a free press, you'd be surprised to learn how many articles in leading publications closely follow vendors' press releases. These reported ideas are more likely to describe the marketing pitches of those who make the most money from a new customer.

As a result, it's rare that such stories capture important information that anyone should apply. Much like focusing on outsourcing options brought to you by salespeople, these reports are likely to be a poor indicator of whether or not you need the help.

Even if the media report is correct in its facts, such a report may still be a misleading indicator of whether you should outsource. Outsourcing often isn't a better choice.

A common problem is that many organizations lack the skills to consider and make outsourcing choices for difficult tasks. Here's an example: When a wine company looked at industry economics, the owners correctly understood that more profit was earned in low-priced wines by making bottles than from making wine. The owners read lots of accurate horror stories about how hard it was to learn to make glass bottles.

As a result, the task was outsourced to a joint venture with a proven bottle maker. Unfortunately, the wine company didn't know how to negotiate such a contract.

The wine company thought that by limiting the partner's compensation to a fixed percentage of costs, the wine company was protected. Instead, the wine company had unintentionally granted a license to print money for its partner who could find never-ending reasons to escalate costs -- hardly what the wine company had in mind.

It seems like a no-brainer to be focusing on choices that provide huge savings. How can you go lose?

Well, often you won't, but sometimes you will miss better savings opportunities by being on the wrong track. For instance, if you are in an area where costs will rapidly decline anyway, your potential outsourcing supplier may simply be quoting you low current prices that are high when compared to the average cost over the duration of the contract.

The outsourcing company's plan is to lose some money now and make a killing later at your expense. Or you may simply be the world's biggest incompetent at whatever you are doing.

Put both circumstances in place, and today's lowest cost outsourcing choice may not be in your organization's best interest. Here's an example: When Electronic Data Systems (EDS) was led by Ross Perot, the company displayed a genius for finding very incompetent data processing organizations and quoting long-term prices based on a small percentage saving over the current mess.

Between EDS's ability to improve data processing operations and the rapid declines in computer equipment costs, these contracts often created enormous profits for EDS. Within 2 or 3 years, such an organization could have found any number of vendors who would have completed the work at a lower price than EDS was charging at that time. But it was too late. EDS had already locked up the business with 10-year contracts so the organization doing the outsourcing had no choice.

If your own operations are poorly run, letting someone else work on the problem may be a great solution. That's true if your outsourcing resource's people are brilliant at fixing messes.

I encourage you to be a little skeptical about how helpful outsourcing will be in such a situation. In my experience most organizations are better at starting a new activity on the right foot than in cleaning up a mess.

I observed a great example of this point: Ecolab has industry-leading expertise in eliminating pests and various kinds of contamination from food preparation activities. When it contacts a potential new customer, Ecolab usually finds that the food preparer is already outsourcing most of its needs.

In doing a performance audit, Ecolab often finds that despite these outsourcers having promised to keep out the vermin and bacteria, the premises are shockingly unhealthy and the costs are no bargain. I had an opportunity to see an Ecolab outsourcing proposal for a large food handler, and the report on how well the current outsourcers had been doing was appalling.

Yet the company's management didn't even know the company had a mess. The operating managers around the country had informed senior management that past messes had been solved by the various outsourcing vendors that had been selected. Obviously, no one had been paying attention to the actual performance compared to the lip service that had been received in the outsourcing proposals.