We live in a global and connected world. When you work for any sizeable company you will at some point consider expanding out of your country. The reasons might be numerous from expanding your sales force to new markets, thought tapping a larger and more diversified labor pool to lowering your labor costs. When you decide to expand the operation you need to make a decision between building your own captive center and outsourcing to some external partner. I won’t focus on what should drive your answer to the question whether outsource or not. At least not today. I want to talk about what to consider when you make the decision to outsource. There is a list of questions you want to ask yourself and get some answers to.
How will you manage?
You may outsourced some of the work but that means you can ignore it completely. How will the interaction with your outsourcing partner look like? What time will you still need to invest? How will you ensure that you are getting what you expected?
Where do you go?
Why are you outsourcing will define where should you go. Do you want to outsource your payroll to an external provider because you don’t have competence in-house? They you can stay in the same city. Do you want to outsource your software development because you run out of talent in your town? Then you can still stay at least in the same country or continent. Do you want to outsource your technical support because you want to lower the costs? Then you may need to go offshore.
How do you find the right partner?
The same way you find anything else these days. You ask around, find references, and search on the Internet and compare. It is important to realize that every company has different needs and unique way of operating so what worked for your neighbor may not necessarily work for you.
What are the risks and questions to ask?
You can divide all the potential risks and questions to investigate into several buckets. Let’s call them: Resources, Environment, and Costs
Resources (talking about people here) are why you are outsourcing, so you need to be pretty sure you get what you need:
- Availability of resources – will the partner be able to provide the resources you need and may need in the future?
- Cost of labor – what will be the impact on your cost model and how will it most likely evolve in the coming years?
- Ramp-up time – how quickly can you get the resources? Does the partner have some people sitting on a bench or will everyone be hired from outside?
- Ramp-up scalability – you need a team of five today, what if your business takes off and you will need a team of one hundred?
- Cultural compatibility – where will the team sit and how compatible they will be with your culture? (And I mean both national and company culture.)
- Educational standards – what are the educational standards in the country in question? Let’s not make any assumptions that the bar for basic education in the workforce is the same as in your country
- English language proficiency – or any language proficiency for that matter. Will you be able to communicate with your partner team? Will the team be accepted by your customers?
- Multi-lingual capabilities – what languages can you get in that country and that particular partner? (If that is important to you at all.)
Infrastructure and environment may not always be visible at first glance but can have a serious impact on your business long-term:
- Geographical accessibility – how easy it is to get to the location of your partner? (airports, roads, visa policies)
- Government support & subsidies – may not be too relevant when deciding on pure outsourcing relationship but will play big role if you would decide to build your own captive center
- Bureaucracy – again hopefully not a big impact for outsourcing since in reality the only thing you should be responsible for is some sort of contract or master service agreement and then statements of work Corruption level – again more relevant to building your own captive centers but even when outsourcing to a country with high level of corruption you may find yourself in situations where you cannot get good transparency into what your partner is doing and it may backfire one day in case they get into troubles since your company’s name will be associated with them
- Legal maturity and legal implications – obviously you want your contracts with the partner to have some meaning and be enforceable
- Political stability – military coups, wars, or frequent changes in government can have really negative impact on your business. What if your partner company comes tomorrow and says “government just closed us down”?
- IP protection – in some industries (software development being one of them) the protection of intellectual property is rather important and in fact it can be one of the key assets your company has. The same goes to security of your data and data of your customers or clients
- Tax implications – for an outsourcing relationship there shouldn’t be a big difference in which country the partner sits, something that can be very different the moment you would decide to open a captive center there
Direct and indirect costs associated with outsourcing will differ wildly based on what function you want to outsource by the list below should cover majority of concerns:
- Pricing model – many different options here and you should always consider what the right thing for your business is and not what the outsourcing partner will push towards you. Is it beneficial to have a fixed-price contract (FP) or pay for time and material (T&M) or reimburse the costs with some fee on top of it (CR)?
- What is/is not included in price – make sure you understand what is not covered by the contract and may pop up as additional costs. Travel or some special equipment comes to mind
- IT Infrastructure – what is the IT infrastructure at the partner? How will it integrate with your own (if needed)? Will there be additional charges you will be asked to cover?
- Security of data and systems – how are the partners systems being secured? Will you data be in safe hands? What is the impact on local privacy laws?
- Collocation with employees working for other clients – this is again a security issue. Will your team sit in the same room with teams working for other clients? What if they work for competitor?
- Development processes used – when it comes to software development you want to understand the impact the partnership will have on your development process (suddenly you have a remote team) and whether the partner processes align with the industry standards
- Management maturity and daily supervision – what is the experience of the top management of the company and who are the middle managers you will be dealing with on daily basis? Will you be able to work with that team?
- Working time (shifts, overlaps) – where are they located and in case of different time zone from your own how will you interact?
- Attrition level – what is the attrition level in the country and the partner? If you would be training new team every half a year because the old one left you may find yourself spending lots of time and money and getting little in return
- Escalation paths – how will you escalate any issues with the team or deliverables? How do you ensure that any issues are being handled promptly?
- Flexibility in contracts – what wiggle room you and your partner have in the contract? What about non-solicitation clause? What is the exit strategy if things don’t work out?
As you can see there are many things to consider when trying to outsource a piece of your business to someone else. However, when done properly it can have a tremendous positive impact on your ability to execute, scale and give you the flexibility needed in times of uncertainty.
What are your thoughts on outsourcing? What are your primary drivers and what are the things you focus on when making the decision?
Originally posted at LinkedIn.