When Should You Consider Subcontracting?

When Should You Consider Subcontracting?

The thought that they can, and should, execute all the processes of their value chain by themselves is very typical in many small businesses and amidst freelancers. In some cases, it is possible that we are perfectly capable of doing everything, but does it compensate us as well, and is it better to take the outsourcing approach?

An outsourcing policy, also known as subcontracting, should allow the company to achieve at least some of these objectives:

    • Cost-saving
    • Greater flexibility in your production process
    • An improvement in the level of customer service

Deciding whether or not we should subcontract a part of our processes is an exercise in delimiting borders and relationships with other agents in our environment (such as suppliers and distributors). In the turbulent environment in which small businesses and freelancers have to move today, a high degree of flexibility is necessary to adapt to the market at all times that allows us to offer quality to customers who are increasingly demanding.

What key aspects should be taken into account to decide whether we should outsource a process of our business? Next, we will see some key aspects to consider to be able to compare both situations and make a decision accordingly.

Outsourcing And Supplier Relations

The suppliers to whom we are going to outsource a process have to obtain their share of profit. With subcontracting, what we are doing is introducing one more agent in the value chain, a decision that will be justified if he/she is able to provide the product or service with a competitive cost in the medium and long-term. The best way to achieve that profitability is through the economies of scale obtained in the process over time, policies of continuous improvement and the elimination of waste, i.e., all that does not add value to the client.

If the negotiating position of the supplier is stronger than ours, we may be blocked at some time or be forced to accept unwanted conditions. If we opt for the subcontracting of a process, it is quite advisable to assess the possibility of alternatives, avoiding staying in a weak position that could affect our business at any time.

Outsourcing can be profitable, but not all suppliers are able to measure up financially. Examining the good health of the financial statements of the suppliers to whom we intend to outsource something is very important in order to guarantee the future stability of the relationship that will be established between both parties.

Outsourcing And Product Strategy

The subcontracting of a process must be compatible with our production chain. It is no use having a fantastic provider that is in Australia and only serves orders by road or an excellent lawyer if he/she only works at night through fax. In the same way, we will definitely not be served by a supplier who is not reliable in the marked delivery times. For any fault of his, we will end up paying in our production process (delays in delivery to customers, the extra cost of stopped activities, etc.).

Quality is also an important factor since the responsibility for a product or service to meet customer expectations is not outsourced. Distribution of the workload to be outsourced among several suppliers encourages competition among them and allows us to have alternatives in case of supply or quality problems. As for the minimum volume of production to be contracted, the ideal is that it suits our real demand. Be careful with what is agreed in the contract as there can be very unpleasant surprises if our demand for a product is radically cut and we have committed ourselves to buy a volume of production that we cannot place in the market.

Outsourcing And Company Strategy

Outsourcing a process should grant us a greater degree of flexibility as compared to the option of our own production, such as avoiding the acquisition of expensive machinery or raw material difficult to buy in the market.

Outsourcing allows you to eliminate some critical entry barriers in a given market, being able to save them through an outsourcing contract with a third party, who is a specialist in a subject that we do not master and that does not belong to our core business. On the contrary, this overcoming of impediments can be expensive if we outsource key technology and knowledge in our business to third parties. Confidentiality agreements, providing fair and necessary information are, among others, controls to take into account if we do not want to lose competitive advantages.

Therefore, as we have seen, opting for an outsourcing policy in a process requires a detailed study of the above aspects in order to determine if the production is more profitable in itself or you will be served better through a third party. A good way to do that is to assess your needs thoroughly before making a decision.

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