Outsource Considerations for Small Business

Today there are hundreds of companies trying to sell various back-office business process outsourcing (BPO) services to the small business market. While outsourcing is becoming a viable and potentially cost-effective method of doing business, there are certain factors that must be considered before entering into an outsourcing arrangement. You need to fully understand your business processes before you can effectively outsource them. Two key considerations are recommended:

1. Is the process core to the business, or is it a supporting process (non-core)?

An example of a non-core process might be paying the bills. While paying the bills is an important part of keeping the business running, it is not what the business is all about. If you own a flower shop, then making and selling flower arrangements is your core business. The process of paying the bills is non-core to your business.

To understand what is core and non-core to the business, you must create a business diagram or model. Modeling business processes for a small enterprise is not rocket science. It doesn’t have to be complex, it just needs to chart out most of the basic tasks required in your operations. It's unnecessary to apply too much big business process, methodology, and complexity when trying to map simple businesses. The KIS principle (keep it simple) is the very best approach when modeling the small to medium business. Your model should include how much of each thing is done, such as the number of bills paid each month.

Why does it matter if core processes are outsourced? You eliminate your reasons for being in business. With a flower shop, you’re there because you have the loveliest arrangements in the area. That’s what your business is all about. You don’t want to outsource your core competency, only the functions that support it.

In large companies modeling is a requirement when developing complex workflows involving a large number of job functions. Outsourcing has traditionally been applied to these larger companies and the tools were generally available only on a large scale. Today, the tools for small businesses exist, such as online access to small business software like QuickBooks Pro or Peachtree. Charting business processing and outsourcing is now a viable option for the small business.

2. Is the process strategically important to the business?

This question is more difficult to discern than the core/non-core one because it speaks to risk and business direction. To answer it, you must understand what your business is doing today AND what you want it to do tomorrow. Since your business strategy is critical to continued success, you must guard it closely from your competition and minimize your risk.

There are a number of areas that impact your strategic direction or risks. In the small flower shop example, the best source for flowers, greens, and talent to create the arrangements is strategically important to the business. The exposure of this information to outside parties represents risk. Outsourcing these parts of this business would be like the shop’s best arranger taking this information to another flower shop. The business could lose its customers, as the competitor could now produce the same arrangements for the same or lower costs. Therefore, you must identify the activities of your business that are of high strategic importance and keep those functions in house.

Other Considerations

Other questions owners should consider include, “What can I expect from outsourcing?” and “Will the benefits be realized?” These are more difficult to address, as the answer will vary based on the specifics of the outsourcer.

When considering outsourced business potential, most owners look for cost reductions first. While this is a compelling reason to outsource, it should not be your sole basis. Another important benefit to outsourcing is the potential to expand business and sales revenue without increasing operating costs. While the cost of per-unit processing is typically lowered, a larger cost savings is often realized with the increased business volume that outsourcing enables.

Another consideration is what billing method to use. Typically, it is advantageous to look for parity in billing methods. For example, if you have figured your processing costs on a per-transaction basis, then it makes sense to use an outsourcer who can give you comparative transaction–based rates. If you work from a per-time basis (so much per hour), then engaging an outsourcer on an hourly agreement makes more sense. Ultimately, you can work up a formula for the processing using either billing method, but creating comparisons of outsourced cost verses existing costs is easier when both are measured in the same scale.