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The word “outsourcing” has been attributed to Nobel Prize winning economist Ronald Coase. The term evolved over decades from farming out basic blue-collar jobs to a new form of outsourcing specialized and highly skilled services called white-collar jobs.
Our focus is domestic (U.S.) outsourcing, defined as a firm’s use of contractors and independent contractors. These include suppliers or vendors of goods (such as manufacturing inputs) or services (like accountants or staffing firms), franchisees and independent contractors (such as freelancers, independent consultants or on-demand workers).
Since the 1990s, this tactical option is now an essential component of current business strategy. It is such an integral part that outsourcing companies are also outsourcing. Specialization continues to narrow in terms of technical focus and companies look to hone their “make versus buy” decisions to eke out more profitability. Does outsourcing truly cut costs? Yes. Here’s why.
Market value: Regardless of who does it, the market sets a value for the “work” which typically shakes out in similar price ranges. Exceptions include bidding wars for your contract or incentives. Apples to apples, the rate should be similar enough to be based on something other than price (reputation, referral or recommendation).
Your precious time: Your time is worth millions if applied correctly. Do-it-yourself won’t maximize efficiency. Jobs need to be done right. You transfer liability to the vendor via contract. It is fast versus putting the task into your work queue — and, depending on the vendor, can be done on demand. You are creating time through economies of scale (they do this all the time in volume), and since you’re paying them, they have the financial responsibility to get it done.
Human capital: The real value of any business is dependent on management of people. Do people get laid off? Not in our experience; it’s the opposite. Employees that performed in-house functions are offered new opportunities. Higher-value-added tasks in core competencies retained in-house preserve your competitive advantage. These unique resources — from your culture to your thought leadership — are your lifeblood. When people have the time to brainstorm how to better serve your customers versus doing routine tasks (that have been outsourced), innovation results. This propels you forward, gives you staying power.
At The Applied Companies, we are not big enough to “do it all.” Outsourcing keeps us aligned with our strategic goals, allows us to do the things that we do best and focuses critical internal positions on the customer experience. Developing the relationship with our customers is more valuable to us than a short-term interaction like handling an IT crisis.
Watching the significant transition of our industry, human resources, has been fascinating. HR has gone from a department (or a single person) of paper-pushers to a true strategic partner, reinforcing our company culture, making sure we hire right-fit employees for ourselves and our customers and shaping the future.
Other industries use similar outsourcing techniques. In 1963, Warren Spahn (at age 42) pitched 363 innings. Today a Major League pitcher with more than 200 innings is a superstar. So what do we do after that? Bench him and save his tired arm in exchange for the closer who gets $20 million a year.
Outsourcing is not going away. It is only going to evolve. How will you leverage it to your best advantage?
Jim Annis is president/CEO of The Applied Companies, which provide HR solutions for today’s workplace. Celeste Johnson, The Applied Companies’ COO, contributed to this article.