Thinking Ahead - Outsourcing by Early-Stage Companies

by Pillsbury Global Sourcing Practice
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[author: Michael A. Steinig]

Change is hard. Big change is harder. And big change in big companies is extremely hard.

So it is not surprising that when it comes to large outsourcings, the amount of change can be a deal-killer. The friction costs of outsourcing can result in hurdles that are just too high to overcome - even for deals that ultimately produce significant savings and that clearly would be in the best interests of the company.

These friction costs of moving forward with an outsourcing transaction go well beyond the obvious "hard" costs of the service provider's transition charges and cost of severance. The "harder" friction to overcome includes:

  • Internal organizations' inertia and protection of their turf (let alone people protecting their jobs),
  • Lack of consensus and committed leadership within the company,
  • Limited resources and time to engage in an effective outsourcing strategy and process, and
  • Institutional knowledge that is not easily transferable to a service provider.
In the end, these frictions often lead to decisions not to outsource and instead to retain the status quo (or something as close to it as possible) because the sourcing becomes just too large of a jump for the company to make. This friction is exacerbated in companies that are larger, more mature and have become set in their ways - especially when those ways are inefficient and hard to reverse.

One way companies can minimize the frictions, if not avoid many of them altogether, is to consider outsourcing as early as possible in their corporate life cycles.

As new companies rise and grow, there are countless opportunities to source functions, including many that did not exist when today's long-standing companies were at a similar stage in their life cycles. More and more sourcing providers are offering services, often built around software products, that cater to the needs of these early stage companies. Many of these sourcing providers are start-ups themselves; and many others are companies with a long history of outsourcing that are taking a renewed interest in smaller companies to capture future market share.

There are challenges to leveraging outsourcing in early-stage companies. For one, outsourcing may be counter to the start-up mentality that some of the smaller but fast growing companies encourage and depend on from their personnel. In addition, the benefits may not be immediate - in fact, the near-term business case may be upside down at a time when company finances may be scarce. Last, outsourcing may feel like a giving up of control, which is hard for small companies to do...especially by their founders and early employees.

But it is critical that early-stage companies take a longer term view, and at least evaluate the benefits that outsourcing may bring over time. For example;

  • Outsourcing can give the company more scalability than it would have in managing the function internally.
  • Outsourcing should bring some discipline and controls, which will be more critical - and harder to implement - as the company matures.
  • Once outsourcing becomes part of the company makeup, other outsourcings will be much easier to do successfully.
  • As highlighted in the beginning of this post, the friction costs - both real and perceived - will only get worse over time.

Early-stage companies typically focus on their revenue growth plans and customer-facing strategies. But they also need to focus on a long term operational delivery strategy, and outsourcing or even just "out-tasking" should be an early consideration. Failing to do so can lead to some missed opportunities and difficult challenges in making changes later down the road.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Global Sourcing Practice | Attorney Advertising

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