Four Factors for Deciding When to Outsource Business Processes

Early on, when starting a business, most entrepreneurs tend to try to do as much of it themselves as possible.  The DIY approach makes some sense because, after all, money is especially tight in a new business, and the entrepreneur wants to conserve cash.

That’s an okay way to start out, but you’ll pretty quickly need to shift your thinking in order to grow.  As a business owner, you should be constantly asking yourself, “What’s the most efficient way to produce what our customers want?” Sometimes that may mean building it yourself, and other times that may mean buying it from someone else.  Here are a few factors to consider when making that decision:

1. Is It a One-Time Project?

A major one-time task can be an easy target to outsource.  If you’re only going to do it once, then you’ll only need to hire a service provider to do it once, and a service provider who specializes in that activity might have gotten very efficient at it.  For the amount of time that it may take you to accomplish the same task, the service provider might be able to provide it at a much lower cost, and that means that using the service provider is a more efficient option.

In contrast, if something needs to be done over and over again, then it will probably make more sense to bring that activity in-house and hire someone to do it on an ongoing basis and under your supervision.  That sometimes means that you might need to outsource an activity early on even though you might bring the activity back in-house after you’ve grown enough to hire a team to handle the activity.

2. Is It Highly Technical?

Generally, the more technical something is, the more sense it’ll make to outsource it because there may not be very many people who can perform the task well, and the ones who can probably don’t already work for you.  It may make more sense to hire the right person for the job and get the job done right the first time than to do a sub-par job on it yourself only to have to have the work redone at a later date.

3. Is It Outside Your Core Area of Expertise?

If something is outside your core area of expertise, then you will probably have to invest a fair amount of time in getting up to speed on the activity in order to do it well.  And you could be spending that same amount of time on your business’s core revenue-generating activities instead.  By spending time on that non-core activity, you’re giving up the revenue that you could otherwise have realized.

4. Does Spending Time on It Generate Any Revenue?

All other things being equal, activities that don’t generate revenue are ones that you might want to consider outsourcing.  The logic here is similar to activities outside your core area of expertise.  If you’re spending time on an activity that doesn’t generate any revenue, then you aren’t spending time on an activity that does generate revenue.

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There’s a major theme running through these factors, and it’s opportunity cost.  Early on, the opportunity cost of your time might be zero because you might not have generated enough business yet to have generated enough demand for your time.  In other words, you still have slack time, so taking the DIY approach may be the cheapest way of getting something done.

But once the demands of your business take up 100% of your business time, your time has just become a scarce commodity, and now you need to make trade-offs to allocate your time to the most valuable activities you can.  To make those trade-offs, always try to put a value on your time and spend it on the activities that have the lowest opportunity cost.