CT Moore is the founder of Socialed Inc., an inbound marketing consultancy based in Montreal. In this second of six weekly columns, CT explores how businesses of all sizes can achieve greater efficiencies by actually outsourcing certain things to third parties instead of doing them in-house.
Businesses of all sizes (startups, SMBs, local businesses and large enterprises) have one thing in common: they have to minimize costs in order to maximize profits. If you don’t have a full account of your hidden costs, though, bean-counting can actually end up costing you a lot more money than it saves you.
Basically, some business expenses are closer to investments than costs. The trick is to (1) be able to recognize the difference between an investment and an expense, and (2) know which of the investments are good ones. When it comes to deciding whether to outsource some part of your business, there are three times the cost of outsourcing is more of an investment than expense, and usually a good one.
1. It’s not part of your core business
One of the clearest times to pay someone else to do something for your business is when that thing is not part of your core product/service offering. When something is not part of your core product/service offering, trying do it in-house can divert resources from keeping things running smoothly, and end up hurting your bottom line and your growth.
Take a restaurant, for example. A restaurant’s business model is built around providing food that is prepared and consumed in a sanitary environment. This is why the staff is constantly cleaning the kitchen and dining areas. Clearing the tables and washing dishes does not fall to a janitorial company.
Similarly, a restaurant wouldn’t try to grow or raise its own ingredients. That requires knowledge, infrastructure, and much more capital than it takes to run a restaurant. At that point, our restaurateur would have to be farmer, investor and distributor, and would ultimately end up with more produce than the restaurant could ever use. The endeavour would be unprofitable and ultimately disastrous.
2. There’s urgency
The time it makes the most sense for a business to outsource something is when there’s urgency. Sometimes, your business has short-term or unanticipated needs that require immediate attention (and/or execution), but diverting internal resources to deal with it internally will disrupt the operation of other, more important parts of your business.
Consider a seasonal rush. Many businesses are subject to seasonal fluctuations that require them to operate at heightened levels, but not for long enough to warrant permanently investing in the necessary staff or infrastructure to do so. In these cases, it’s often more efficient and profitable to outsource this seasonal overflow.
Similarly, unforeseen shifts in the market, such as brief spikes in demand, often warrant outsourcing. For example, you might outsource some fulfilment of a sudden influx of orders to a partner, another franchisee, or even a competitor, choosing to share a piece of a bigger pie rather than have a smaller one all to yourself.
3. There are other opportunity costs
Things that are urgent or are not part of your core business share one thing in common: opportunity costs. The opportunity cost of trying to handle a sudden (and unforeseen) spike in demand for your resources or products/services is lost sales or market share. Similarly, the opportunity costs of trying to tackle something that is not part of your core business are (1) superfluous overhead and (2) inefficiencies that stem from distractions and diversions.
There are countless other opportunity costs, however, that your business will encounter, and being able to recognize and anticipate them (and make the right trade-offs) can often mean the difference between breaking even and turning a profit.
Sometimes, all hands are already on deck, and re-allotting resources just to save a few bucks only slows the momentum of your business’s growth, ultimately costing you more in the medium- to long-term.
Identifying your core business
If you’re going to have a full account of your hidden costs, you need to really understand what your core business is. Once you do, you can look at business decisions through the right lens.
Do you really need to do this? How urgent is it? And what are the opportunity costs of trying to do it internally? Once you can answer these questions (accurately), you’ll have the intelligence you need to make the most strategic decision possible about whether to take something in-house, or outsource it to a third party.