It’s the same story year after year for each and every customer. They want more for less and if you, the business owner, can’t come up with a way to deliver, then another company will. Strong relationships, brand identity, marketing appeal and superior product features are still important. But if the price isn’t competitive, you are facing an uphill battle.
One of the key advantages that small to mid-size businesses have over their larger competitors is the ability to quickly adapt to the changing requirements of their customers. In order to keep that competitive edge, a growing business has to be able to maintain its own flexibility and manage costs. One of the best ways to remain a mean, lean, profit machine is through outsourcing.
At its core, outsourcing is a simple concept, one that growing businesses have been using for years. It’s simply moving the performance of a business function from your company’s payroll to someone else’s payroll. I’ll go into more detail on what types of business functions are the top candidates for outsourcing, in a later post. For now let’s keep it brief – almost any business function can, and often should, be outsourced if it is not your core competency. The benefits are numerous:
- Cost Savings – can it be done cheaper by a company that specializes in that particular product or service?
- Quality – can you receive a better quality product or service from an outside source?
- Flexibility – does outsourcing allow your company to quickly adapt to either sudden increases in business, or just as importantly, sudden decreases in business? An important measure of this can be found in your operating leverage ratio, or the measure of fixed costs to variable costs. The more a business can shift expenses to the variable category, the better. Remember the “Great Recession?” The earlier a company is able to shed costs, the better it will be able to handle economic downturns.
- Opportunity Costs – The less time that business owners have to spend on the management of non-productive functions, the more time that is available for developing customer relationships, product innovations or the core competencies of the organization that set the business apart from its competition.
The last point deserves further discussion. In his books, “The Danger Zone” and “Avoiding the Danger Zone,” B2B CFO Founder and Chief Executive, Jerry Mills categorizes business functions into three groups – finding, minding and grinding. Business owners and entrepreneurs are the finders, engaging in the visionary activities of developing both the company’s products and services and the company’s customers. Any activity that keeps the “finders” from this role – be it managing the payroll process (a minding activity) or the manufacturing process (a grinding activity) − can set a company on a path toward “the danger zone.”
So the proper use of outsourcing can be cheaper, provide better quality, offer the flexibility to handle rapid increases (or deceases) in business and allow the company and the company’s management to focus more on adding value.
There are two issues that need to be addressed before an outsourcing decision is made. The first is to decide if the business function is one of your core competencies. Never outsource your strengths, your relationships or the things that make your company what it is. If you own an architectural firm, you can’t outsource the design of the buildings or your contacts with your customers. These are the things that set you apart. If, however, you own a construction company you may want to sub-contract the electrical and the plumbing work because what you are best at is not necessarily installing wire or pipe – it’s bringing a project in on time and under budget.
B2B CFO partners are experienced in helping business owners evaluate what functions can be effectively outsourced and in developing cost models that can quantify the dollar savings involved. In fact, as a part time CFO, we are your outsourced Chief Financial Officer – offering all of the cost savings, quality and flexibility that a business owner should expect from the nation’s largest part-time CFO firm.