Outsourcing dilemma Featured

7:41am EDT April 2, 2003

Just about every business magazine and industry consultant has mentioned the benefits of outsourcing. On the surface, it makes a lot of sense: your expertise is in making widgets, not administering benefits or fixing computer networks. The people that do those things cost a lot of money, you’re a small company, and it’s important to keep the payroll as lean as possible.

Like most areas in business, there is efficiency in numbers. Outsourcing companies combine many jobs from businesses and handle them in bulk, doing it cheaper and more efficiently than you could do it yourself—or at least that’s the way it’s supposed to work.

“Outsourcing can be a valuable tool if it is done properly,” says Greg Hackett, president of The Hackett Group, a benchmarking and research firm based in Hudson, Ohio. “Companies oftentimes want to focus on other things, so they take some transaction and throw it to an outside agency. You have to keep in mind that those people are in business to make lots of money, and some of them have figured out ways to take you to the cleaners.”

The biggest motivator in sending work out is usually the lure of cost savings. Why pay a human resources person $40,000 a year in salary and benefits when you can let a third-party administrator do the same work for only part of that cost? But many companies have found that outsourcing actually costs them more.

Studies by The Hackett Group show that it is not uncommon for costs to rise 7 percent through outsourcing.

“Before you give a task to a third-party administrator, be in a position where all interfaces with them are simple,” notes Hackett.

Companies can be lured in with a transaction cost of $1 or less, but then nickel and dime themselves to death with additional demands and by generating additional work for the administrator. A few additional calls requesting additional information might turn that $1 transaction into a $10 transaction. The savings you obtained through outsourcing have just vanished.

“To make it work, make sure your practices and policies are very simple, and you have to make sure—and we see this all the time—that you are not a pain in the ass,” says Hackett.

The more hoops you make them jump through, the higher your fees will be. Many of their efficiencies are achieved with a one-size-fits-all philosophy, not tailoring each program to each business, so they have to charge for the extra work. Hackett saw one larger employer that had $37 million in “penalties” for basically being a pain in the rear end.

If you are not willing to abide by their policies, you are probably better off keeping the functions in house, saving you both time and money in the long term. For some smaller companies, outsourcing can really be a catalyst to growth. Outsourced functions such as payroll, accounts receivable, benefits administration and other complicated tasks can free up time and money to invest in other areas more critical to the success of the business.

“Just think before you jump in,” says Hackett. “Don’t think, ‘Let’s just dump this so we can concentrate on something else,’ because it’s much more complicated than that. You can really cause yourself a lot of problems. Don’t do it unless you have to.”

For more information, go towww.thgi.com.

In or out?

Business leaders outsource tasks such as human resources or information systems for a variety of reasons, including:

  • Lowering operating costs

  • Increasing service quality

  • Reducing business risk

  • Finding a source of scarce skills

  • Refocusing management

But many have discovered that:

  • Most world-class companies outperform outsourcers in costs and productivity.

  • Early projected savings vaporize as exceptions, special requests and increased volumes arise.

  • Much of the front-end and back-end work remains with the company—not the outsourcer.

  • Service levels are highly variable.

Source: The Hackett Group