Outsourcing: when outsourcing is more profitable than doing it ourselves

by Jones David

It is very typical for many small business managers and freelancers to think that they can, and must, execute all the processes of their value chain. In some cases it is possible that we are perfectly capable of doing everything, and well, but… Is it worth doing it to us or do we resort to an outsourcing approach? For example, in the business world, services such as those provided by Triton Technologies have become a trend. They are proven to be able to simplify the work process while improving the customer experience in a more positive direction.

An outsourcing policy, also known as outsourcing or vertical disintegration, must allow the company to achieve at least one of these objectives:

– A cost-saving.
– Greater flexibility in your production process
– An improvement in the level of customer service.

Deciding whether to subcontract a part of our processes or not is an exercise in delimiting borders and relationships with other agents in our environment (suppliers, distributors). In the turbulent environment in which small businesses and freelancers have to move today, a high degree of flexibility is necessary, to adapt to the market at all times, care for the cost that allows us to reach a margin that we allow us to stabilize our effort and offer customers, who are increasingly demanding, an adequate level of service.

What key aspects must be taken into account when deciding whether or not to outsource a process of our business? Then, in the following paragraphs of the entry, we will see the two key aspects to consider in order to compare both situations, own production or resort to outsourcing, and make an informed decision.

Outsourcing and supplier relationships

The suppliers to whom we are going to subcontract a process, have to obtain their share of the benefit. With vertical disintegration, what we are doing is introducing one more agent in the value chain, a decision that will be justified if it is capable of providing the product or service with a competitive cost in the medium and long term, even at the cost of a higher short cost. The best way to achieve this profitability is through the economies of scale obtained in the process over time, through continuous improvement policies and the elimination of waste, that is, everything does not add value to the client.

If the supplier’s bargaining position is stronger than ours, we can get stuck at some point or be forced to accept unwanted conditions. If we choose to outsource a process, it is highly recommended to assess the possibility of alternatives, avoiding being left in a weak position that could affect our business at any time.

Outsourcing can be profitable, but not all providers are capable of delivering on a financial level. Examining the good health of the financial statements of the suppliers to whom we intend to subcontract something is very important in order to guarantee the future stability of the relationship that will be established between both parties, better avoiding those that do not offer a solid guarantee of stability over time.

Outsourcing and product strategy

The outsourcing of a process must be compatible with our production chain. There is no use having a fantastic supplier who is in Australia only serving road orders or from a great lawyer if he only works night hours via fax. In the same way, we are not served by a supplier that is not reliable in the indicated delivery times. Any failure that he has, we will end up paying in our production process (delays in delivery to customers, the extra cost of stopped activities, …).

Quality is also an important factor since the responsibility for a product or service to meet customer expectations is not outsourced. A recent example is in the automotive sector and the failures that have come to light in the brakes of the cars of a well-known Japanese brand, which subcontracts the manufacturing activity of the same. Distribution of the workload to be subcontracted between several suppliers encourages competition between them and allows us to have alternatives in case of supply or quality problems.

Regarding the minimum production volume to contract, the ideal is that it adapts to our real demand, but each supplier is different and in each case, the possible alternatives will have to be studied. Be careful with what is agreed in the contract, since there can be very unpleasant surprises if our demand for a product is cut radically and we have committed to buying a volume of production that we cannot place on the market.

There are still other factors but the above two factors are the key to starting a profitable outsourcing process.

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