Recently Pavlo was asked: “Business is picking up nicely from last year. I find myself outsourcing more of my business functions to keep up with my delivery. When should I employ more people and insource if the current outsourcing model seems to be working well? Is this strategy sustainable?”
Listen to this podcast from The Money Show where he responds in a discussion how to design a solid outsourcing model that can enhance your business’s growth.
Why did you outsource in the first instance?
The lockdown shock should have forced most businesses to focus on capital preservation and shedding costs as a result. After that, the following action ought to have been resetting the business to meet the new reality. A harder-to-find customer, more apprehensive and skeptical, nervous of spending. Once you get that right, it’s all about rebuilding your business in such a manner that it responds almost instantly to the shifts and changes in your customer behavior. This is all about keeping the focus simple and your business agile. What you used to do in-house that was outsourced to lighten the cost load and risk in the business saw many of us outsource services.
How did you outsource to get it working so well?
We spoke about the onion method on previous occasions. With 3 layers of inner, middle, and outer layers, use it as a framework to outsource. What is core and strategic to your existence, you own and never outsource. What is strategic but not core, you outsource to a matching partner whose service you are buying is core and strategic to them. This requires a medium-term commitment and takes the form of a strategic partnership rather than just a service provider.
Can you correlate your growth to outsourcing?
If your model is working well, why? A good partner is only as good as the service they provide. That service is only as good as you have defined and delineated it and how you empowered your partner to succeed at delivering it.
The entire automotive industry works on this basis through tier 1,3, and 4 suppliers. Using a combination of JIT and Kanban systems, the provider of tires knows precisely when and how to deliver the individual set of tires for a car on the line. Supplying and delivering tires Is outsourced in terms of inventory, storage, delivery, etc. This drops the cost of car manufacturers and keeps that car affordable.
In our business owner’s world, the simpler operating model, due to a tighter and narrower focus on core and strategic activities, a well-defined outsource requirement, and partner selection means that he can keep his eye and attention on fewer moving parts. Simplicity is scalable, and scalability is growth.
Does it affect valuation?
What makes your business special, how it works, what makes it happen, are you growing, and what’s your role? 5 levers drive valuation. A well-designed outsourcing model that great strategic partners service helps each of these levers to support your valuation.
Let’s correlate the outsourcing example to each of them.
- Special – a business that is expert in understanding and engaging customers distinguishes itself from it competitors who rely on product and price advantages
- Function – fewer moving parts make a simpler business improving its efficiency and productivity
- Team – a simpler business allows for a more coordinated and integrated team. Of 10 000 surveyed companies that wanted to grow, 95.4% of their employees were unaware of the growth strategy. Too big means too slow.
- Growth – a simpler business means more time leading growth than running operations
- Dependence – a simpler business is easier to transfer reliably
In all cases, outsourcing leads to a better final valuation and, as we all know, this is the end game!