In-source or outsource- How does one decide?
In-source or outsource- How does one decide?
By default, every organization would want to handle every process in-house. The apparent reasons for this preference are – better control, confidentiality of data, outsourcing is costlier, discomfort about off site work as compared to on-site and so on.
There are however very valid reasons why organisations explore outsourcing as against getting the work done from internal resources. Some of these are – bringing in process efficiencies and best practices, preference for not increasing the head count, confidentiality of data, cost considerations and so on.
It is interesting that factors such as confidentiality and costs are common reasons for outsourcing as well as in-sourcing. There are many who believe that confidential data such as financials or Salaries is safer outside the organization than inside. Many are of the view (and rightly so) that cost of outsourcing is lower than in-house resources. This contradiction is discussed later in this blog.
Let us look at how organisations can decide whether to in-source or outsource.
For deciding the best way to conduct your operations, following questions need to be answered:
Is the process core to my operations?
A process is core if it is critical to the success or failure of the organisation. For instance, Sales, Quality control. Some also classify customer facing processes as core – for example after sales support.
If the core process involves use of proprietary technology or knowledge, it is handled internally. Thumb rule is that whatever is non-core is eligible to outsource. Investment in people and technology in a core process is easily justifiable vis-à-vis a non-core process. This line is however getting invisible by the day as now organisations also outsource something as core as Production, Testing, Servicing, etc.
Is the process eligible for outsourcing?
The eligibility test comprises of following questions:
- Is the process de-couplable? Can the core and non-core be segregated)?
- Is the process manual intensive? Higher the score more the eligibility.
- Does it have a direct customer connect? Usually, customer facing processes score low on eligibility.
- Has the process been standardised or are there several customizations. If there are too many deviations the eligibility score is low.
- Is there a possibility to improve the process or is it operating at highest possible efficiency levels? Generally, if there is little scope to improve performance, processes are handled internally.
- Are the tasks in the process repetitive in nature? If so, these are ideal for outsourcing. Wherever there is discretion or judgement involved, it is better to handle them in-house.
What is cost of handling the process in-house?
If the cost of handling a process is lower when outsourced, the choice is a no brainer.
Often the perception is that cost is lower in-house as the outsourced service provider will have a built-in profit in his charge. That is not necessarily true. In-house costs should, apart from direct salary of resources, include indirect people costs – staff welfare, training, gratuity and infrastructure costs such as workstation, space, office overheads. In comparison what you pay to the outsourced service partner is a blended single rate which covers all the direct and indirect costs. A very important commitment the vendor is providing is of continuity of service- this includes cost of replacement, resource redundancy, bench, etc. The vendor also assures economies of scale since his indirect costs such as technology, infrastructure are apportioned over multiple clients.
Do I have the resources and skills to improve the process?
Usually the back end (non-core) processes rank low on priority when it comes to investment in resources, technology, upgradation. Being non-core, they are usually staffed poorly with people of suboptimal skills. As a result, these processes fail to catch up as the organisation grows and usually crash. Processes are not only to be built to scale but also need to be improved to make them more efficient and responsive. Does the organisation have the resources and allocation to make such investments. If the answer is no, outsourcing will work better.
Am I able to hire and retain resources for executing the non-core processes?
Depending on the size of the organization, some of these processes do not justify full-time resources. Then the choice is either to hire a part-time freelancer or recruit someone who is later asked to multitask for other processes which the resource is not competent or interested in. For instance, if you hire an Accountant and ask him to double up as a HR resource. He will not like it and may not stay long in the organisation. In the bargain both the functions will suffer. If an organisation needs a team of say two Accountants – one senior and one junior and it is able to hire such a team, what is the growth path both these individuals can be shown? Unless there is a very compelling personal reason, why would a professional with a career in mind will stay where he sees no growth? High attrition in support functions is quite common in social sector and it impacts operations because there is heavy dependency on that individual.
In summary
The evaluation process is not black and white. It goes through various shades depending on the assessment. Hence it is possible that if the assessment is an on-going process, the decision may undergo a change.
Outsourcing of non-core functions has been very effectively leveraged by the corporate sector to bring in process efficiencies, implement best practices, leverage technology, and also save costs. When it comes to processes and operations, there is no fundamental difference between the corporate and social sector.
As the social sector grows and takes in more of corporate funding, pressures on being efficient, cost conscious are going to increase, it is time the social organisations seriously leverage the learnings of the corporate sector in outsourcing.
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