When Not to Outsource

In earlier articles, we discussed How to Outsource and When to Outsource. Today, we turn to when not to Outsource.

At first blush, we expect not to outsource when our candidate does not meet at least one of the criteria for outsourcing listed in When to Outsource.

  1. Better Results: Your outsourcers can get you better results, improving any one or more of quality + time-to-deliver + cost without negatively impacting the others.
  2. Negative Impact: Managing the process internally has a negative impact on or distraction to other critical businesses.

However, that is not quite right.

The primary criteria listed above for When to Outsource are necessary, but not sufficient. Even if one of the above criteria is present, sometimes you still should not outsource.

So when should you not outsource? There are two categories of reasons: fundamental and technical. Both matter.

Fundamental

Fundamental reasons are those that are core to your business. Sure, you could outsource, and it might help in the short run. But in the long run, you undermine your business strategy by doing so.

Core Competency

“Core Competency” is probably one of the most overused terms by management consultants. However, at its core (pun intended), it means something very important. If an activity you do is critical to your business and a key differentiator from your competitors, never outsource it. You will lose control over that activity, and your supplier may even become your competitor.

Back in the 1990s and early 2000s, Dell Computer’s core business was selling computers, custom-configured and nearly-instantly ready. Much ink has been spilled describing Dell’s manufacturing process – my operations professor at Duke business school had served as an advisor to Dell – but the key element is that the efficiency of putting together the common components (CPU, memory, motherboard, case, keyboard, CD drive, monitor) to create the custom computer you ordered in less than a day was a core reason why Dell was able to offer custom PCs at low prices. Any attempt to outsource the assembly line would have been ludicrous.

The challenge with a core is that, at times, it is extremely hard to know what truly is core to your business and what is not. Is it your customer relationships and support? Your manufacturing? Or assembly? Is it your ability to manage hardware? Middleware? Or software? Or is it something else entirely?

To use social media examples, no one uses Twitter or Facebook because they have great data centres or event processing software. We use them because they give us reliable feeds of information we care about.

So perhaps data centres and servers and software really are not core to them?

At scale, which is where it truly matters, the ability to manage the half a billion tweets per day is crucial to keeping customers happy. That, in turn, only can be done if Twitter has direct internal expertise in a lot of its technology stack. As many have said, you can rebuild Twitter product in a day, but you cannot get the network of customers in a day. But it is equally true that you cannot build Twitter product that can support its scale of customers in many days.

DNA

There are certain elements within a company or its markets that are so critical that certain skills need to be part of the corporate DNA.

For example, Apple designs its own chips, the A-series that power iPhones and iPads. Technically, Apple did not need to design its own chips. Intel has dominated the market for desktop, laptop and server chips for years, with AMD in second place. Plenty of ARM-design chips have been around.

Since the core of the iPhone is the experience, the entire ecosystem, why would it matter if Apple used its own chips or purchased them on the market? After all, Apple does not manufacture glass or mine metals for the case!

Indeed, the chips powering the initial iPhone versions were outsourced. However, over time, as the market became competitive and new functionality a key driver, Apple needed to have a closer connection between the product and its components. The chip itself began to be a key driver of what the phone could do. Even though competitors often caught up within months, and sometimes launched capabilities ahead of Apple, that close connection became crucial for Apple’s products.

Apple needed to have the skills and vision around chips in the iPhone/iPad DNA.

Thinning Away

A company can becomes so thin, so anorexic, just a veneer of just sales and marketing, that there is no real value-add left. Customers and competitors then find it easy to bypass the “thin veneer”, and a once-dominant company is left empty.

It is very easy for companies, especially those driven by hard-charging sales or marketing executives, to begin to believe that the market position, brand or sales relationships are the only truly valuable asset in the company. After all, if sales just sells what the product team gives them, as if they were an internal provider, then why not outsource it? They have been hearing for years that the market brand and sales relationships are the engine that powers the company, so why not cut the costs and headaches of dealing with product management, manufacturing and operations?

I have, unfortunately, seen companies go down this path.

Here is a little secret: no successful company ever is just a sales and marketing engine. In the end, every company must have some level of value-add above and beyond just reselling someone else’s product.

Yes, it is possible that your value-add is around customer service, warranty, imports and shipping for a wholesaler’s products. That would make you a value-added reseller (VAR). In that case your “product” is all of those additional services, all of that “value-added”. You need to manage and invest in all of those.

Before outsourcing, even if you can meet the necessary requirements, ask if outsourcing the particular activity will leave you with nothing but a thin sales and marketing veneer.

Security

Do you really trust your outsourcer? Will you always be able to trust them? These are critical questions to ask. It is very hard to switch sourcers once a relationship is in place. Your outsourcer tends to gain crucial knowledge of your product and processes, and how to build and manage the product or service.

You absolutely must be able to trust your outsourcer on any security issue that comes before them.

  • Did they put malware in your software?
  • Do they properly vet their people so that even if the company does not, neither do their people?
  • Are they reading, stealing and possibly reselling data that pass through them?
  • Do you have quality control to vet their output?

You might be tempted to create “filters” or quality control to automatically vet the output, thus making sure that nothing untoward comes from the outsourcer. Not only is this a reasonable procedure, you should do it no matter how much you trust them.

However, always remember, that no quality control is perfect, no matter how automated. Smart people will find ways to slip things through. Just like a good NDA is only as good as the trust you have in the person to whom you are disclosing information, but put one in place anyways, so should you have tests around an outsourcer’s output, but they are only as good as the trust you have in the outsourcer.

Compliance

Closely related to security is compliance. In many industries, you are required to comply with various regulations and statutes. Outsourcing a product or service does not  relieve you of compliance obligations; in many cases, it makes them stricter.

For example, technology service providers bound by data protection or privacy regulations have an obligation to control physical access to the disks on which sensitive data is sitting. If you outsource your data centre to TeleCity or Equinix or CoreSite, your obligations are not relieved. Fortunately, those companies often do a better job meeting security compliance standards than you do, but not every company does.

If you cannot meet compliance requirements cleanly, seriously reconsider outsourcing.

Technical

What if there are no fundamental, or strategic, reasons not to outsource? Sometimes, even with everything in place, you still shouldn’t outsource for technical or “side” reasons. They don’t mean very much on their own, but are required to get to some other goal.

Personally, I am a believer that every company that sells technology or technology-driven services, and especially start-ups, must have those skills in house, part of the corporate DNA, and must have a founder focused on the technology. It doesn’t matter that you are selling pet food online, and there are lots of shopping carts and Website generators ready to run. Unless this is a small “lifestyle” business, you need to have the skills to build, manage and grow right in house.

However, many investors simply will not invest unless those skills are in house.

Is that a strategic reason not to outsource? Of course not. The decision whether or not to outsource some or all of your technology skills should be based on the short-term and long-term needs of the company.

But if you need that investor money to grow, and every investor insists that they invest only in insourced technology, then it is a very good tactical reason not to outsource it.

A colleague of mine recently went through a process of replacing an entire technology stack based on Microsoft .Net with one based on Rails on Linux (server) and Angular (browser). Would he eventually need to replace the stack when the company grew? Probably. So why did he “waste” precious time at an early stage doing so? Because few investors will put money in a Web company based on a Microsoft stack for three reasons:

  1. They don’t want the company to spend money on licensing.
  2. They don’t believe that Microsoft technology can scale efficiently.
  3. They don’t believe people building Microsoft stacks are as world-class as those building on other systems.

Are any of these true? It doesn’t matter. This is what many investors believe, so if you want their money, follow it.

Summary

There are a few good reasons to outsource. Even if you meet those criteria, those are necessary but not sufficient. Before you do outsource, make sure you are not losing a crucial part of the skills and culture you need to manage and grow your company in the next year and in the next decade.

Do you have a process or product you are considering outsourcing but are unsure of the impact? Ask us to evaluate it for you.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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