For sharp results, conduct your business
with outsiders through outsourcing
By Jenny C. McCune • Bankrate.com

Outsourcing -- the practice of hiring a contractor to run a business function such as payroll -- is a largely unexplored, yet fertile territory for small businesses.

According to a small-business survey published last spring by consultant Arthur Andersen, just 42 percent of those surveyed use outsourcing and only 3 percent plan on trying it within five years.

Outsourcing's benefits to small businesses
Few outsource even though the benefits can be big for small firms. "In general, smaller organizations have less capital and other resources to invest; thus, it is more effective to let the outsource provider invest," argues Maurice F. Greaver, author of Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives (AMACOM, 1999).

According to Greaver, other benefits of outsourcing include:

• Enhancing your company's effectiveness since your company can outsource ancillary functions and focus on what it does best.

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• Increased flexibility to meet changing business conditions (fluctuating demand, for example).
• Improved customer satisfaction.
• Better operating performance.
• Opening an avenue to additional expertise, skills and technologies that would otherwise not be available to your company.

Some fear loss of money, control
Given the advantages, why don't more small businesses try outsourcing? Among those surveyed by Arthur Andersen's Enterprise Group, the two biggest reasons for skipping outsourcing was a fear of a loss of control (cited by 52 percent) and the expense (cited by 37 percent).

Those are legitimate concerns, says Marc Liebman, vice president of business development at the Everest Group Inc., an outsourcing consulting firm based in Dallas. "If done incorrectly, it's easy for the business to lose control," Liebman says. "It's also expensive to find or change vendors or to bring a process back in-house."

For outsourcing to work, a small-business owner needs to have a clear understanding of what will be outsourced. Know what the process is and how to interact with other company functions, Liebman says.

Stick to your knitting
Companies interested in outsourcing really need to decide what their core business functions are -- what makes them unique -- and only outsource what's considered outside their core competencies.

That doesn't mean that outsourced functions are not critical. It's just that it's more efficient to let others take over if they have more expertise in that particular function.

Say you're the owner of a small chain of toy stores. Your expertise lies in selling toys, not in computers. So you outsource your information technology department.

The outsource provider, in effect, becomes your IT staff. It installs computers, upgrades software and troubleshoots problems with your network. And when it comes time to launch an e-commerce site, your IT vendor builds and maintains your company's storefront in cyberspace. Or maybe your IT outsourcer isn't a specialist in Web site design, so you hire another company to perform that function.

Good outsourcing means truly forging a partnership with the outsource firm. Since it will be acting in your company's stead, it's important that your company and your supplier walk in step. Any incongruities will spell trouble for the outsourcing arrangement.

Common functions that are outsourced include: maintenance and support of computers, customer "help" desks, payroll, debt collection and human resources (everything from administration of benefit plans to employee assistance programs). Even manufacturing can be farmed out.

Finding and selecting outsource providers is similar to evaluating other suppliers and vendors. It requires drawing up a list of qualified providers -- companies with expertise in the functions that you want to outsource -- and then inviting them to bid on your outsourcing project. Bids are then appraised and references checked to get the best match.

Choose with care, create an escape hatch
The biggest disadvantage of outsourcing is loss of control. The way to get around that problem is to be careful when selecting vendors and when crafting outsourcing contracts, Liebman says. For example, contracts should include objective measures of performance and a timetable for meeting those objectives. Should a vendor's performance fall below a performance standard or otherwise come up short, your company will have a course of action to take.

In addition, contracts should include an escape clause that describes circumstances under which the contract may be dissolved. For example, if you and your outsourcing company part ways, this portion of the contract will explain what will happen to inventory, equipment and mailing lists. It will also set forth how much advance notice you or your outsource provider must give when terminating the contract.

For companies that believe themselves too small to outsource, there are alternatives. Hiring temporary help through an agency isn't technically outsourcing, but it can fill a gap in staffing. It's less expensive than outsourcing and can be done on a smaller scale. Or companies can subcontract out a portion of a business function. For instance, you could outsource the assembly of a component rather than your entire manufacturing operation.

As for outsourcing in its fullest expression, it can be a terrific way to get a company up and running or to help an existing company become more efficient. So don't consider outsourcing out of bounds. It can be a useful tool in the hands of a knowledgeable small-business owner.

Jenny C. McCune is a contributing editor based in Montana
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-- Posted: March 3, 2000