Ask Christa! Business Basics Series (5/6) - What is Outsourcing and Should All Businesses Do It? (S3E30)

Introduction and Listener Question

Hi everyone and welcome to Ask Christa! the place where you can ask questions about how to work through business challenges and workplace issues. I'm Christa Dhimo and today’s listener question is about an essential way that all businesses work, and yet it's a question I'm not sure I've ever been asked before. Here it is: “What is outsourcing and should all businesses do it?”

As always, I’m going to point out that this is what we call a double-barrel question, which means there are two separate questions put together in one—and that’s OK! I’m going to answer them both.

Every Business Outsources

Here’s the truth, and this might seem odd considering what most think of when they hear the word “outsourcing,”: ALL businesses outsource, and all businesses SHOULD outsource.

Now hear me out-- because the practice of outsourcing has gotten a bad rap in the last 40 years. I’m not here to judge one way or another why those decisions were made, or how they were made, or whether they were the right decisions or not… but… I included this question as episode 5 of 6 in the Business Basics Series, because no matter what kind of business you have, you WILL outsource different parts of your business processes at some point, and for good reason.

What Is Outsourcing?

But before we get into that, which is the second part of the listener’s question, let’s start with what outsourcing is because the word “outsourcing” has a different meaning for different people. But you’ll see that as I talk about what outsourcing is, you’ll begin to see whether all businesses should do it.

Now, for those who started working or were perhaps in mid-career in the 90s, you may hear the word “outsourcing” or “outsourced” and think about millions of jobs that were “sent overseas” where similar or same jobs were done at a much lower cost, especially with the globalization of business coinciding with the acceleration of technology—specifically, more sophisticated telecommunication infrastructure that supported global call centers, and of course, the rise of the Internet, which… not only enabled broader connectivity, but also enabled a closer connection directly with customers.

For others, the term “outsourcing” is an everyday word that simply means a company has given a certain amount of and type of work to outside resources so the company can focus on their core operations—their core competencies, or what they do best.

Two Common Outsourcing Examples

For example, if you have a niche consumer goods product, say, biologically-based cosmetics… YOUR core competency is the development, formulation, and production of your product in a compliant way so it meets or exceeds quality standards.

And remember, you’re a niche product, so while you’re not mainstream per se, you have enough customers to have a steady stream of income, and you manage your business in a smart way so it remains profitable with steady growth. Maybe you’re selling 35,000 units each month.

Here’s the question: do you want to build a warehouse for your inventory, buy the software to manage customer orders or store orders, manage your inventory ongoing, fulfill all the orders, ship to your customers and to the businesses that sell to THEIR customers, AND manage all the returns, too? That’s a BIG expense for a company that might bring in 10 million dollars a year.

Well, the alternative is using a third-party logistics company that will do all of that for you, able to increase or decrease the managements of your units within a range of increase or decrease as per the scope of your service agreement.

You stick to YOUR core competencies—your core operations, and you pay someone else, an OUTSIDE RESOURCE, to manage your inventory, shipping, and returns. You are… outsourcing that part of supply chain and logistics to another company that provides that as THEIR core competency SO THAT you can focus on what you do best. So there’s the what of outsourcing and the why.

But here’s another what and why: there are times when there’s a very important function in your business, but you don’t need it full time. You need a depth and skills at very specific times throughout the year—it’s a situational need.

Public Relations, or PR firms, is a great example of outsourcing a critical function that simply isn’t needed all the time. Companies will have Corporate Communications, and for publicly traded companies, they will also have Investor Relations—or they SHOULD—and these functions are full time, in-house, critical, and important. They manage company branding (but note: marketing typically manages PRODUCT branding). Corporate communications also manages key messaging. They work with various functions like HR and Legal for general internal and external communications, too.

But when you’re gearing up for a BIG rebrand like when Arthur Anderson shifted to become Accenture, or when there’s a crisis situation… like when Arthur Anderson HAD to shift to become Accenture… (look that one up…)—these are times when you need a different level of depth and media connections that your in-house Corporate Communications team won’t and shouldn’t have. You will outsource crisis management, rebranding, media relations, and host of other PR-specific functions to a PR Firm where this is the air they breathe, the connections they cultivate and maintain 24 hours a day 7 days a week, with very specific depth will support a specific objective for your organization.

In that way, you are still outsourcing to receive core competencies your organization doesn’t have, but you’re doing so based on a specific need because of a specific point in time. A situation.

Those two examples are why I say EVERY business outsources and SHOULD outsource.

How Do You Make Outsourcing Decisions?

So, how do you make outsourcing decisions. You can find a lot of information out there on this topic, so I’m going to be brief.

First, it’s what I always say: focus on your objectives: your business objectives, your operational objectives, and your commercial objectives.

Then gain clarity and conviction about your core competencies: what do you do best and what do you want to continue doing best. These days, thriving businesses often get into a thriving position BECAUSE they focus on what they do best and hire other companies (or OUTSOURCE) to do what THEY do best. And it’s not just about what will reduce costs for general needs. Outsourcing decisions should look at short term and long term, like every other strategic decision.

Then of course there’s the usual: look at the benefit of outsourcing vs the risk (for example, if someone else manufactures your product and their operations are shut down by a federal or international agency, what happens to your supply?) as well as the benefit of outsourcing vs the cost. Of course, it’s a numbers game when it comes to cost of manufacturing and general processes like call centers, but depending on your service agreement and the volume, or even the evolution of technology, it might make more sense to bring those operations back in-house.

Additional Resources

For your resources, I’ve included Buia [forgive any mispronunciation] et. al.’s 2018 white paper from McKinsey called “The risks and rewards of outsourcing,” so you can gain a fairly broad understanding of outsourcing overall.

But I also included Fulfillrite’s “What is a 3PL? Third Party Logistics Explained Simply & Clearly” video. It’s from June 2024, and what I like about it is how focused it is as well as how it demonstrates how 3PL has become a primary way for various businesses to outsource their e-commerce inventory management and distribution. It is perhaps the best example of outsourcing that I think many can relate to, particularly if you’re wondering if every business should do it… which of course is the second part of the listener question for this episode.

But it is ALSO a fantastic way to understand a key foundation to any business selling a physical product—AND, this is one of the aspects of a product-based business that typically deters people from starting up product-based business: where will I store the product, how will I manage inventory, how will I ship out the orders, how will I manage returns.

These days… that can all be… outsourced.

To round out the examples, I also included an article from Entrepreneur called “What You Need to Know About Doing Your Own PR vs. Handing Over the Reins.” It’s written by Kristen Shea, edited by Kara McIntyre, and was published in April 2023. It’s a thorough article that not only offers perspective about the PR function in general, but also talks more about some of what I mentioned in this episode while differing in a few areas that I mention. Remember—I care about offering resources that help you learn more, not necessarily the ones that are fully aligned to my own training and experience.

Wrap Up & Submitting Your Questions

OK, THIRTY EPISODES!!! THIRTY!!!! Amazing… thank you for your support.

Keep the questions coming! Just go to my show’s website, AskChrista.com, that’s Christa with a C-H, where you’ll see my latest episode on the front page in both video AND audio—and I record the audio version separately and specifically for those who prefer the audio production style. You’ll see the “Submit a Question” tab where you can submit YOUR question, and while you’re there, sign up for my weekly Sunday Night newsletter called “More Answers,” where I send out a booster for our community to set you up for the workweek

Once again, thank you. And remember, if you have a business challenge or a workplace issue—Ask Christa!