Friday, April 26, 2013

Outsourcing vs Off-shoring

Here is an well written piece by Pat Nichols on the benefits of outsourcing.  Pat Nichols runs Transition Leadership International, a business that serves nonprofits dealing with turnarounds, mergers, and other major strategic changes:

Let me draw a distinction before exploring this further.  In our recent, troubling political discourse the term “outsourcing” has, oddly, become a synonym for “off-shoring” of labor.  By outsourcing, I mean contracting for the performance of functions that might otherwise be conducted by wage-earning or salaried staff.  Whether those contracts are domestic (as they are with the vast majority of nonprofit outsourcing) or international (as with much corporate customer service and some manufacturing) is an important consideration from an economic and, sometimes, ethical point of view but the position of an ocean isn’t relevant to whether a contract represents outsourcing.

Neither, for that matter, is the question of whether the contract is intended to be temporary or long term.

Stories of Success

In the organization I mentioned above, the biggest issues we faced were existential.   We needed to fundamentally rethink and update our understanding of the mission and the business model to serve it.  As is often the case, we had many constituents strongly resisting change to their beloved organization.

Staff wasn’t credible in getting these issues on the table because they hadn’t performed adequately in a couple of key managerial areas:  providing good customer service through the use of our database and producing timely and accurate financials.  I decided to outsource both functions to the same firm.  After years of frustration, we had both sets of issues materially resolve in less than 90 days, allowing us to get on with the rich strategic issues facing us.

This resolution simply would not have been possible had we chosen to hire a new CFO and a new database manager, asked them to diagnose the problems then retrain or hire key people and manage the new team to success.  We almost certainly would have doubled the time required.  And, in the instance above, we actually saved a bit of money.

Another client and I outsourced our messy accounting problems and, a month or so into the clean up, we lost the CFO.  If that CFO had been an employee we would have suffered a severe setback.  Instead, the outsourcing firm had a strong replacement in place within days and the transition was nearly seamless.

Yet another client was a highly visible start-up—in the news and in the rifle sites of a number of critics.   We outsourced everything initially, knowing that we would bring much in-house over time.  Most notably, we needed to build a communications strategy and function simultaneously.  Hiring a firm that knew our field was the crucial first step and it paid great dividends, not only in communications delivered but in bullets dodged!

Let me also knowledge that the decision as to whether to outsource must be adapted to management style and strengths, to short term and long term imperatives, to highly specialized skills or knowledge and, of course to culture.  Bringing or keeping functions in-house is often the right strategy. 

A Presumption in Favor of Outsourcing

Citing “fit” and “culture” too often is a disguise for valuing a misguided control over mission and is used to preclude serious consideration of this option.   In fact, I would argue that for an organization of $5 million a year or less, some form of shared services (including outsourcing, shared employees, an association management company, etc.) for back-shop operation should be the presumed best strategy.  Though that dollar standard is a bit arbitrary, smaller groups are very hard pressed to hire the quality of skills and experience they need in those back-shop areas and many, many organizations suffer real mission damage because of their operational weaknesses.  (By “back-shop” I mean, of course, accounting, database management, office management, human resources, etc.)

Though with larger organizations the presumption might be a bit softer, I think nearly all organizations should take a hard look at outsourcing options.  Even my recent clients, who have been in the $15mm to $60mm range, often find great value in having an array of skills, the bench strength and the occasional access to highly skilled, highly specialized personnel.

I hear other supporters of outsourcing suggest that it works well if limited to non-core functions.  But I would take issue even with that as a blanket limitation.

First, the startup I mentioned above felt that communication was a core, not a support function, and none-the-less found great value in outsourcing it initially.  Further, if the CEO function is not a core organizational function, it is at least THE core function in uniting mission with programs, with people, with fiscal resources, with reporting, etc.   And, of course, my kind of role, serving as interim CEO, is itself a form of temporary outsourcing.   Its value is well established in the corporate world and has grown remarkably among nonprofits during my 17 years in the field.  

Usually, people’s careers are disrupted by outsourcing decisions.   That is, I am persuaded, a bad thing.  However, underserving the mission for which an organization was created, and underserving the public that forgoes taxes on its efforts—those are worse things!  And, there are ways of managing these transitions humanely, even beneficially.  In some instances, for example, the outsourcing companies convert key personnel to their own payrolls.

So, the nut of this argument is that our commitment to mission requires us to take a hard look at how to manage our organizations as well as possible and that outsourcing almost always merits consideration.  With smaller organizations, I would urge a presumption in its favor.    To shy away from getting the best value available because of an impulse for greater control is a disservice to our organizations, our missions and, ultimately, the well-being of those we serve. 

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