Cost - Take Out Insurance: Check Your Cost-Reducing Solutions With Outsourcing

What can't be cured must be insured. --Oliver Herford

When a vehicle strikes another vehicle, an object, or a person, the consequences can be grave. Part of the price paid for mobility is the cost of such accidents.

The human toll is often much greater than the economic one. Although one can never hope to compensate for the human costs, insurance can certainly help soften the economic blows.

In most places, laws require you to purchase insurance for operating your vehicle. That's a prudent way to ensure that individuals and families have some buffer against the harm from vehicle accidents.

Otherwise, people would be at greater risk of suffering personal or property damage with no compensation to cushion the blow. But you may still be hit by an uninsured driver. To help alleviate that problem, many vehicle owners purchase insurance against that uninsured-driver risk.

Receive benefits from your insurance policy after you've had a serious collision with an uninsured driver, and your economic health has a chance to recover. The funds you receive can be a vast multiple of all the vehicle insurance payments you'll make in a lifetime. Now, that's a big cost saving!

What are the low-risk alternatives to purchasing insurance? Well, you can walk. You can also ride with others. In some areas buses and subways are helpful choices.

Companies often have another opportunity. They can self-insure by keeping a pot of funds available to pay for accidents. If a company is large enough, self-insurance may be a good choice.

If the company's drivers are cautious and the vehicles well maintained, it may be that safer driving will add up to fewer accident expenses than the average experience. Employ a simple way to administer the accident payments to those who are harmed, and you've saved some administrative overhead that insurance companies add to their rates. If there's a profit on such insurance, you keep that profit for the company as well.

Obviously this option has some drawbacks for those who operate small companies. One accident costing millions can wipe out the company. The small company may also find it more costly to administer its own insurance than what a well-run insurer would charge.

A small company also may not know how its driving compares to others; there simply isn't enough information. Even the worst drivers don't get into accidents every day. Or a good driver may suddenly take to drinking and become a hazard to everyone.

But most importantly, people in small companies are usually doing many different jobs. Burden them with one more time-consuming activity, and something important that has to be done goes undone.

This analysis of how insurance works also applies to when an organization should outsource an internal activity. It's good to start thinking about what could go wrong.

If you haven't done much designing of new offerings, hiring another organization to help you test out the safety of your design may eliminate many potential accidents. Isn't that a form of insurance?

It's also helpful to think about how large the cost of something going wrong could be. Then consider how much it would cost to outsource and how often such expensive accidents could occur.

Insurance companies also use this thought process to consider if they have too much exposure to potentially expensive risks. If insurers sell too many home owners' policies in areas subject to hurricanes, they will resell some of that risk to another kind of insurance company called a reinsurer. Even reinsurers sometimes find that they need to buy policies from other reinsurers to keep their balance of risk at an affordable level should claims soar due to a natural catastrophe.

Notice that this is a kind of contingent thinking based on "what-if?" examinations. A normal business analysis tends to focus on what is likely to go right and then optimizes the various choices for pursuing the opportunity to create the largest result.

Many people draw these conclusions from spreadsheet analyses derived from simple financial models. In this article, I'm suggesting that the opposite kind of thinking also be pursued.

I'm recommending that you also look at what could go wrong that would take away most of the benefit from pursuing a given opportunity. Then explore ways that outsourcing could increase your chances of success and reduce the risk of large negative events.