5 Tips on Project Outsourcing

Sooner or later small business owners face a dilemma: to increase in-house staff or to outsource? “Entrepreneurs have long seen outsourcing as a strategy reserved for big business, but technology has made it a more accessible tool for small businesses,” observes Nancy Mann Jackson, a contributor to Entrepreneur. She refers to the case of Tonya Thomas, President of The Small Office Assistant, who realized that because of her workload she had no time left to grow her business. “At first I felt like I was the only person who could do the work efficiently; I wanted control over everything. […] But I wanted my business to grow and in order to do that I had to let go and start delegating,” she admits. In the first year of using outsourcing services, she managed to double her company’s revenue. Here are some tips on project outsourcing which might help you repeat Thomas’ success:

1.Don’t outsource something just because you don’t want to do it,” recommends Jim Lanzalotto, Founder and CEO of Scanlon.Louis, a boutique strategy firm. “Sometimes there are things you don’t want to do but they are important to your core business,” he explains. Marc Resnick, a small business consultant, proposes a 2-step approach: First, you should identify the core competencies and strengths of your business. Then you need to direct your R&D activities, talent management and resources at developing your full potential and establishing your market position. In his opinion, outsourcing any task in these areas would compromise your company’s capabilities to provide a unique service. In other words, your service would not differ much from your competitors’. Instead, you should consider outsourcing activities which are not at the core of your business. For example, if you work on product design, you can outsource some administrative or IT tasks but none of the tasks directly related to the product design process.  

2. Find the right outsourcer for each project. “When we first started outsourcing, we thought we’d have one partner for everything we outsourced, but we learned that wasn’t a recipe for success,” reveals Kim Kehling, Director of Global Business Services at Procter & Gamble (P&G), a consumer goods firm. Having realized the drawbacks of over-reliance on one vendor, the firm has decided to diversify its vendor portfolio: “Now we find a best-in-class provider for a particular project […] and hire our outsourcer accordingly,” adds Kehling.

The outsourcer selection process will be much smoother if you rightsize your outsourcing needs. You need to adjust your resources according to the growth of your business. “Outsourcing a custom application development project, for example, can be challenging. You need clear instructions throughout, and you must have developers with more than just the ability to code,” explains Larry Campbell, Vice President of Information Management and Technology at Development Alternatives Inc. The success of a project depends on clearly defined roles and a high level of competence on each side. As Kenneth B. Ackerman (1996) notes in his study on the failure of logistics partnerships, unclear roles are one of the main factors why outsourcing relationships fail. Therefore, if there are no clear and timely instructions, even an outsourcer’s competence will not compensate for poor communication. Needless to say, it will compromise project results.

3. Establish good contact with your outsourcer. Effective communication between a client and a service provider is one of the success factors in an outsourcing partnership, shows a Portsmouth Business School study (2012). First, you need to communicate with “the right person at the right level”. Second, you should allow a service provider to access all the information they need to perform assigned tasks. Third, keep the information balance. According to one of the interviewed managers, “over communication is as bad as no communication”. If there is an “awful lot of data floating around the business”, as he described it, a lot of time is wasted on processing all this information rather than focusing on actual work. Over-communication can cause extra costs to a client. In the end, it can turn out that project outsourcing is no longer a cost-saving option. To sum up, a successful outsourcing partnership can be established only if communication between a client and service provider is based on quality rather than quantity.

4. Think carefully before signing a fixed-price contract. If you want to implement an innovative idea, you need to keep up with the trends in your field and quickly make necessary changes. Without a quick reaction, you will fall behind your competitors. If your contract has clearly defined scope of work, and you need to change project specifications and terms, you need to negotiate a new price. Not only can this hinder the progress of your work, but it can also harm the relationship with your vendor. A fixed-price contract is not suitable for startups because they are very sensitive to market volatility, and are constantly upgrading their business concept. They need a more flexible contract both in terms of pricing and project terms. In many cases, a fixed-price agreement also means higher rates. “Service providers account for possible risks in their fixed price quotes. They are less familiar with your space and technology, so, to not loose on a fixed price quote, they apply premiums for all knowns and unknowns,” explains Chirag Kulkarni, Co-founder and CEO of Insightfully Inc., a social media analytics firm. In his opinion, a fixed-price contract can work well for fixed-scope projects of large enterprises.

5. Review outsourcers’ portfolios. Don’t choose an outsourcer only because she / he has the lowest hourly rate. Quality comes at a price: don’t expect to get a high quality service for inadequate compensation. Take your time to examine at least several outsourcers’ portfolios to filter out those who can deliver a quality end product. The more portfolios you check, the easier you will find the best fit for your project both in terms of price and quality. If you are still unsure if some outsourcers can handle your project despite having strong portfolios and good references, ask them to do a simple mock-up or an outline of a work plan. An outsourcer who is truly interested in working for you might even give you a rough concept of his / her solution.

References:  [1] Nancy Mann Jackson, Entrepreneur.com / [2] Pete Swabey, informationage.com / [3] David Strom, Baseline / [4] Kenneth B. Ackerman, Pitfalls in Logistics Partnerships / [5] Alessio Ishizaka and Rebecca Blakiston, Portsmouth Business School, The 18 C’s model for a successful long-term outsourcing arrangement / [6] Chirag Kulkarni, The Huffington Post / [7] Keith R. Crosley, The Balance