Deciding to Outsource

Outsourcing is a type of vertical partnership, where the non-profit transfers an entire business function to a partner. Types of outsourcing include contract manufacturing, Business Processing Outsourcing (BPO), Information Technology Outsourcing (ITO) and innovation outsourcing (Product design & development).

By outsourcing, non-profits can focus on their own core competency and reduce manufacturing, overhead or human resource costs.

Some models of outsourcing include, off-shoring to an international partner, captive off-shoring to your own facility in another country, or reverse outsourcing where the international partner opens an office in the home country.  Nearshore outsourcing is partnering with a provider in your own zip code or time zone. Home shoring is hiring domestic workers in their own homes and farm shoring is outsourcing to domestic rural areas.

There are some risks of outsourcing. It is difficult to calculate the true costs and cost savings in advance of outsourcing and there can be concerns over quality. Your non-profit will become dependent upon the partnership and switching costs can be high. By relying on an outsourced partner, competitive advantage may be diluted and sharing of trade secrets can foster new competition. Depending on the macro-economic trends, political backlash could also occur.

When deciding when or how to outsource ask yourself what type and to what degree. This will depend upon the nature of the business process, how critical it is, the characteristics of the task and the capabilities of the partner. It is better to keep core intellectual property and skills in house as well as mission-critical activities. Also if the task is to complex to communicate easily, keep it in house. For simple, lesser critical activities and incremental innovation outsourcing may be a good option.  

Make sure your outsourcing partner has the skills and resources to complete the job.  Pay particular attention to governance and controls, it limits innovation but is necessary to control quality.  The controls should be ‘ex ante’ meaning before work rather than ‘ex post’ during work.

In summary, outsourcing offers lots of benefits to non-profits and risks can be mitigated by using best practices while selecting and managing the partnership.