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Ask before you outsource
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November 27, 2000: 10:18 a.m. ET
Consider cost, benefits in deciding to do work in-house or to outsource it
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NEW YORK (CNNfn) - If you are considering outsourcing some of your business operations, you may face a tricky decision in choosing what functions to turn over to vendors and what to keep in-house.
"Companies today are creating value in different ways than the old brick-and-mortar companies created value," said Mike Puntoriero, managing partner in the Orange County, Calif., office of accounting giant Arthur Andersen.
"It's relationships, knowledge of the customer, value chains, things of that nature" that mean more these days to companies -- and to investors, Puntoriero said.
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Technology is moving so fast today that for companies to invest in systems of the past poses significant risks.
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Mike Puntoriero
Arthur Andersen |
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Certainly, the Internet has enabled a vast new marketplace for outsourcing. Using the Internet, a company can turn over everything from Web site hosting to payroll and benefits to a partner -- what he called "critical but non-core functions."
It's possible to outsource your software, accessing employee records or customer data remotely.
Some companies now are offering to take over the entire financial back office for you, handling everything below the level of the chief financial officer.
Indeed, Anderson and partners Microsoft and IBM this fall launched a new service called Enfrastructure, an infrastructure and facilities provider for high-growth companies, offering everything from office space to network services, along with a health spa and cafeteria, in southern California. The venture plans a string of such campuses across the United States and worldwide, offering their services on a "take it as you need it" basis.
Outsourcing arrangements of all sizes
But the outsourcing issue is not solely a concern of the high-growth startup, although such issues may be more critical to such companies. Nor is the option entirely a small-business matter. Arthur Andersen itself did a deal last year with General Motors (GM: Research, Estimates) to handle about $250 billion annually in payroll, accounts receivable and other financial transactions.
Whether you are a startup or an established venture, a small business or a giant, Puntoriero suggested asking yourself these five questions when you consider outsourcing:
Does the activity directly touch your customer? If it does, it likely is a core function that you should own, he said. "Amazon (AMZN: Research, Estimates) knows a tremendous amount about you," he noted, and such information is key to many businesses. "The depth of information they have about their customer is what is going to drive value."
Does your business have unique knowledge or processes that are difficult to replicate? Keep a razor-sharp focus here. "What distinguishes Dell (DELL: Research, Estimates) is the ability to design a custom-built computer" and deliver it, a process that moves the order from the company's home page to your front door in a matter of only a few days, Puntoriero said. "They have to own that process."
Is it necessary to make large investments in technology, systems or infrastructure in-house, or can off-the-shelf solutions be modified quickly and easily to meet your needs? Unless it is vital to your business, let somebody else do it. "If you're going to have to reinvent that technology," you face "tremendous cost and quite frankly a tremendous distraction," he said. "Technology is moving so fast today that for companies to invest in systems of the past poses significant risks."
Are you running up costs on in-house staff for initial work whose skills cannot be transferred to ongoing operations? If not, consider outsourcing this function. When you consider the cost of finding, training and then losing people to do development work, you realize what "a long and time-consuming process" you face here, Puntoriero said.
What strategic relationships support the value proposition for your customer, and what support the process of building your company? If the relationship affects the value you bring your customer, then it is yours to own and develop. But if it only supports your operation, then turn it over to someone else to handle it for you. Puntoriero pointed to Andersen's deal with General Motors: "Nobody values GM for how they pay their people." 
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Arthur Andersen
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