So… What do I outsource?

Mark Engelmann
Mark Engelmann
    2 minute read

Ok, so you’re convinced that there are plenty of reasons why you should outsource, but you’re unsure where to begin? This is where you need to really think about your business strategy and what value your business is providing to your customers. When you understand this you will understand what your core and non-core capabilities are. It is the non-core capabilities that are the likely candidates for business process outsourcing.

For example, a mining machinery company specialises in the manufacture and sale of its machinery. It is the company’s cutting-edge equipment and client focussed account management that provides value back to the customer. Logic suggests that it is these two capabilities that make the company successful and are its core capabilities. But what about all the other business processes that are required to run the company? What about Payroll? Accounts Receivable? Accounts Payable? The Sales admin work? These are non-core capabilities.

Once you have clearly categorised your capabilities you need to think about the best non-core capabilities to outsource. I hate to talk economics now, but there is a really handy economic theory that can help with this. It is called Transaction Cost Economics and it goes something like this:

  • Every economic transaction has a cost (not just a financial cost, it could also have a resource cost as well)
  • Transactions can be internal (business processes such as payroll) or external (selling goods to customers)
  • Each transaction can be thought about in terms of: Frequency – how often does the transaction occur? Uncertainty – how certain are we of the transaction’s outcome? Asset specificity – what assets (computer, internet etc.) are required to facilitate the transaction and are those resources specific to only that one transaction? Or can they be used for other transactions as well?

You can manage the risks associated with outsourcing by outsourcing those internal transactions (business processes) that have:

  • High frequency
  • Low uncertainty
  • Low asset specificity

If you need help mapping your company’s capabilities and understanding which processes are good candidates for outsourcing then we can help you with this; and get you closer to your outsourcing goals. Give us a call to chat further - 1300 553 080.

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