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Outsourcing and Opportunity

Kevin C. Desouza, Assistant Professor, Information School of the University of Washington

If asked to define outsourcing, I would tell you that there is no universally accepted definition. Outsourcing is tailored to meet the needs of an organization. You can take any two organizations, and most surely they will view outsourcing differently.

While the globally accepted term is "outsourcing," I encourage entrepreneurs I work with to view it as "strategic sourcing." That's because they are making decisions about work that will be managed by an external partner who will conduct it on their behalf. Strategic sourcing is a partnership, so selecting the right tasks and right vendors in a strategic fashion is important.

Focusing on Core Competencies and Opportunity Costs 

In my own environment, I outsource my e-mail and calendar, not because I am not competent to do these tasks, but because every minute I spend on those tasks I am not working on value-added work. That's where the critical nature of strategic sourcing comes in to play.

Every company, large or small, has limited resources. Perhaps the resource most in demand is time. The goal for an entrepreneur is to identify value-added tasks critical to business success and non-value-added tasks that steal time. To get here, we need to ask ourselves, "Am I spending my time on my core competency that brings value to my customers?" Those are the tasks that truly bring revenue into an organization.

Entrepreneurs need to be extremely cognizant of how they spend their time. They simply can't do it all and still create new products and services. Many believe they don't have the money to source routine tasks to outside companies. But consider how much time is spent on routine non-value-added tasks and how that time affects your bottom line.

Think about why you created your business. It is likely you had an idea and captured it in business plan to obtain funding. You understood that venture capitalists would not give you money if they couldn't see how your capabilities—the heart of your business--would translate into revenue. Your role as the entrepreneur is to develop those capabilities into products or services. Time spent on anything else is time taken away from your core competency. That lost time carries with it an opportunity cost.

Opportunity cost is defined by Wikipedia as "the cost of something in terms of an opportunity foregone (and the benefits which could be received from that opportunity)." It represents the benefits one might have enjoyed if a different direction had been taken. If we look at it that way, dollars spent on strategic sourcing are not wasted, but they give us time it to do value-added work that drives the revenue of our businesses.

Strategic Sourcing: 

Critical for Small Businesses 

Strategic sourcing is more important to smaller organizations than larger ones for several good reasons. First, large organizations have access to resources that they have accumulated over time. They often have cash resources they can dedicate to non-value-added tasks without doing immediate damage to the company. Smaller organizations often do not have that kind of cushion.

Additionally, if done properly, strategic sourcing can be a huge competitive tool for small organizations. For example, if I open a business tomorrow, I may not have knowledge or expertise in the areas of human resources, public relations, or bookkeeping. If I implement strategic sourcing, I can get that expertise, employ it only when I need it, and still have the time I need to focus on my own core competencies. For small businesses, this is huge advantage because it means that they don't have to invest resources into skills that they don't need full time

Tips for Getting Started  

My advice to entrepreneurs is to maintain core capabilities in house and consider everything else as an opportunity for strategic sourcing. Keeping several things in mind will help you get on the right track for selecting the right tasks and sourcing partners:

  • Understand the possibilities of strategic sourcing in terms of growing your business. It is an asset that can help you manage time and resources.
  • Identify those tasks that are taking you away from your company's most valuable resource: your unique capability and the time you have to implement it.
  • Consult Web sites where people offer specialized skills, such as Guru.com. Also utilize community resources to learn of providers who are doing good work in the areas of expertise you seek.
  • Break your projects down into small pieces and offer the tasks to two or three different providers. Then, select the provider that offers the best work at the best value.
  • Ask for references and always check them. Just the kind of references vendors provide tells you a lot about their experience and work quality.
  • Ask for work samples, or ask a potential sourcing partner to work on a small project as a test to check performance.

If done properly, strategic sourcing can be a key component of your business growth plan. It can provide you with more creative use of your resources without sacrificing the quality of work.

© 2007 Ewing Marion Kauffman Foundation. All rights reserved.

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