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Can outsourcing work for SMEs?

by Neal Gandhi, chief executive of Quickstart Global.

For big companies, outsourcing works. If you’re Barclays Bank and you want to write a new core system and want to outsource that development to Infosys in India, it is absolutely the right thing to do. It’s a big project that’s going to require millions of man hours. It’s got a defined scope and it’s going to need to be very structured, because Barclays as a company is very structured, so the fit is perfect.

For small companies and start-ups, outsourcing can also work very well for non-core operations such as legal, accountancy and IT services. Whilst companies need to be careful in choosing the appropriate partner, these are functions which can easily be briefed out. However, for areas of the business which need control over who delivers them and how, outsourcing brings disadvantages for the smaller businesses which do not have distinct processes in place to keep projects on track when they are out of sight. As a result they can come across the following challenges:

You have a lack of control: Just when you have a great team member who understands your business processes and is really productive, they get moved over to another client and you then have another person in their place. You cannot control who is working in your team.

There is, inevitably, a lack of integration. An outsourced team can’t become part of your team; therefore they will not feel part of your company and understand your business culture – which can have a detrimental effect on productivity levels and quality of work.

You have limited day-to-day flexibility, which is normally a core requirement for SMEs. Outsourcers are very process driven, and SMEs generally are not.

There aren’t always cost benefits. People often outsource projects that last less than a year and subsequently don’t receive the perceived offshoring cost benefits or return on investment because the high planning, training, communication and travel costs mean that the wage differential can be severely reduced, while the training investment is lost when the project ends.

Lastly, there is a lack of IP protection and subsequently you can get IP leakage. If you are experts in something you have to teach an outsourcer your domain knowledge and, over time, the outsourcer becomes an expert as well. The next thing you know these guys are pitching that expertise to your competitors. They can’t help what they’ve learned and, as a third party company, they’re going to try and leverage that as much as they can. Larger companies are typically outsourcing non-core activities where IP is not as much of an issue.

So if outsourcing isn’t a good fit for your operations what are the other options for small companies? Well, for ad-hoc project work you should give it to a freelancer, or find a domestic company which already has an offshore model and expertise in place.

If you have on-going needs then look to build your own team abroad, in a location which meets your strategic needs. You can set up the team yourself, which does have a number of risks attached, or do it via a partner where you retain control but employ their local - or should I say global - expertise. And the final option is to consider a merger or acquisition to bring in a team in the relevant location.

For SMEs and start-ups which need flexibility, speed and control, have changing priorities, or where IP is a critical consideration, offshoring (be it DIY or assisted) is likely to be the best solution.

Legal services company Myhomemove faced exactly this dilemma. Having worked with traditional outsourcers in India and Sri Lanka for over four years, they were looking to move to a different model which would allow them to manage the staff in a way which fitted their company culture and ethos and gave them more control over decisions such as salaries, conditions and career paths of their staff. They considered setting their own operation, but were concerned by the complexity and bureaucracy involved.
By offshoring their operations through a partner they were able to have absolute control over day to day operations and culture compared to a traditional outsourced relationship and without the risks of setting up their own legal entity.

Whatever your needs do make sure you understand the different routes you can take and weigh up the pros and cons very carefully. Some companies make the mistake of confusing offshoring with outsourcing, and disregarding both models as a result. They are distinctly different and should be considered according to their individual benefits and disadvantages.

Neal Gandhi is the chief executive of Quickstart Global, which helps companies to expand globally, and is the author of Born Global which offers practical advice to entrepreneurs.

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