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How Entrepreneurs Should Decide What To Outsource In Their Startup?

Via LinkedInHave you ever thought about making decisions?

For some, the process, if I call it that, is relatively straight forward – just a quick evaluation of options, decide and move on.

For others, a long drawn out and agonising process.

When you get into this, it’s actually very interesting because it’s based on many factors – both rationale and emotional. You can even look at it in terms of conscious and unconscious behaviour and also how the phenomenon of bias can impact outcomes.

Several years ago I undertook an academic literature review of outsourcing decision models.

Yes, I know… you’re probably thinking I should get a life – after all who in their right mind would do such a thing?

Well surprisingly quite a few people in fact!

Academics and industry practitioners over the years have looked into this and have come up with all sorts of things because ultimately they wanted to improve outsourcing decision outcomes. As a result, some excellent frameworks have been designed just to do this.

At the same time, these researchers, realised that when the appropriate frameworks are used, the most optimal outsourcing outcomes are achieved. However, when no framework is used and the decisions are being distorted through the more emotional or irrational means, then desired outsourcing outcomes are rarely achieved!

So the morale of this story is incorporate these proven decision making models to achieve better outsourcing outcomes – right?

Oh but you’re an entrepreneur aren’t you!

You don’t need any fancy model or framework do you?

Yes?

No!

What if you could get better outcomes from your outsourcing?

This is critical to know because one of the key criticisms of outsourcing decisions is that organisations (particularly startups) fail to distinguish the criticality of the activities and services that are outsourced.

So let me cover off on just a few of these “models” that I think will be useful to you and your startup or growing business…

The first one is the “Perry Matrix Analysis”

The Perry Matrix Analysis was conceived by Perry, Stott and Smallwood (1993) based on the concept of “unit of competitive advantage” (UCA). It takes into account whether the support work is UCA-oriented (i.e., distinguishes the business from its competitor) and whether the support work is value-adding in nature.

perry_matrix_analysis

The Perry Matrix Analysis provides four classifications of sourcing arrangements based on the interaction between the nature of work/function (y-axis) and type of capability (x-axis) as follows:

Value-Added Work With Proprietary Capability: Work classified under this quadrant enhances the UCA of the business and plays a vital role in differentiating the business from its competitors. The combination of this, along with its proprietary nature (i.e., it contains secret or unique characteristics) means that there is strong reason for it to be retained in-house. With this type of work, companies need to develop periodically to provide the best internal capability possible.

Value-Added Work With Generic Capability: Work classified under this quadrant enhances the UCA of the business but is not of a proprietary nature. Under such circumstances, it is recommended that companies conduct a thorough evaluation of the external service-provider capabilities and internal capabilities in order to ensure ongoing access to the best capabilities possible. This approach is similar to best-sourcing.

Essential Work With Proprietary Capability: Although work classified under this quadrant is only of an essential (i.e., non-value-added) nature, its proprietary nature discourages outsourcing. Thus, such work should be retained in-house but due diligence must be observed to ensure that the work is well managed in order to achieve cost-effectiveness and meet quality standards.

Essential Work With Generic Capability: Work classified under this quadrant is considered to be a prime candidate for contracting out (i.e., outsourcing) as it neither enhances the UCA of the business nor involves proprietary capabilities. Companies must conduct performance monitoring of the outsourced work to ensure service compliance by the service provider.

The Outsourcing Decision Matrix

There is a similar version to The Perry Matrix Analysis and is often referred simply as The Outsourcing Decision Matrix and has at its axis “strategic importance” versus “criticality to operational performance” when considering outsourcing a particular task and provides four quadrants:

outsourcing_decision_matrix

Strategic Alliance: Tasks in this quadrant are high in strategic importance, but contribute little to operational performance. So, although you need to retain control of them to ensure they are done exactly as you want, or you get the quality you want, they are relatively insignificant in terms of cost or smooth running and so not worthy of full in-house focus. This means that you should form a strategic alliance.

Retain: Tasks in this quadrant are high in strategic importance and have a big impact on operational performance. These tasks should be kept in-house so that your organization keeps maximum control.

Outsource: Tasks this quadrant are important for successful operational performance, but are not strategically important. These tasks could safely be outsourced. They’re simply not worth spending in-house time managing.

Eliminate: Tasks in this quadrant are not important to your organization’s overall strategy and nor do they make a significant contribution to its day-to-day operational performance. Although you might not be able to eliminate these tasks completely, it’s important to check why you’re doing them.

Availability of automation and robotics will be a further consideration in your decision making process

Now these models of course are useful for businesses which are up and running, as it is easy to identify all the activities or tasks that could be evaluated for outsourcing (and by the way, you should be continually evaluating this as circumstances change all the time).

What about businesses yet to be established?

Well I think these are the most exciting because you are building from the ground up and as your business is established, then you can scale in a managed or controlled way.

For example, as a solo entrepreneur, you may just decide that you will scale your business on your own but supported by strategic alliances and outsourcing partners. You remain as the creative genius that you are, but you delegate (outsource) all the rest to others.

Now wouldn’t that be a cool thing to do?

Source : LinkedIn | How Entrepreneurs Should Decide What To Outsource In Their Startup?

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