When Does Outsourcing Make Sense?

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There’s a lot of technical expertise now in India, the Philippines, Vietnam, etc. who are able to program, design, and interact with customers at only a fraction of the cost compared to their US counterpart. This has spawned a lot of hype around outsourcing.

Outsource and you can scale. Outsource and unlock the Tim Ferris Business Lifestyle. I earn 5X and someone else can do this job for me at X, therefore it’s inefficient for me to do the job. Does it really make sense for me to take out the trash or should I just pay somebody else to do it? Maybe I can get my VA to send my girlfriend a love email text everyday at the same time… The 2 minutes of time it takes me to write the text is worth roughly $3.33 to me but $0.33 to my VA… Not to mention the additional time it would take for me to get back into my workflow…

Despite my tone, I’m all for outsourcing (I outsource a lot myself) but only if it makes sense. So when does it make sense? Well I’ll get to that shortly. Since there’s a lot out there about the advantages of outsourcing, I just want to touch a little bit on the disadvantages of outsourcing.

 

Agency Costs

 

In economics, there’s a term called ‘Agency Cost’ which says that the interests of the person doing a job for you will never be fully aligned with your own interests. In other words, people only give a shit about themselves. If you hire somebody to do copywriting for you, they’re never going to do the job anywhere near as well as if you do it yourself because, well, it’s your business, not theirs.

They’re only interested in what they’re getting out of it which is their salary/hire fee. They’re not going to take ownership in the job the way that you would, irrespective of whether it’s the best PR agency in the world or if it’s somebody you found in India through oDesk.

There are different ways people try to reduce this ‘invisible’ cost. Large corporations grant millions of options to CEOs to get them on the same boat as the shareholders (if you want to find companies where CEOs have real skin in the game, look for companies where a good chunk of the CEO’s net worth is invested in the company). But if they have ownership (i.e. shares in the company), then they would be more incentivised to perform. There are literally hundreds of studies on the best way to reduce the agency cost which are outside the scope of this post. Treehouse for example gives its employees lots of perks to motivate them and retain good employees.

 

Lost Learning Benefits

When you outsource, you lose associated learning benefits. For example, if you outsource customer service, then you miss out on customer feedback. If you outsource manufacturing, then you lose innovation benefits. You will need to decide if the cost-benefit makes sense in your case.

 

Opportunity Cost

 

If you’re deciding between learning to program and paying somebody else to do it, then obviously paying somebody else to do it will will get you what you need almost straight away (whereas learning to program will require learning time). If you earn $100 an hour and you can pay a programmer in India to do it for you for $13 an hour, then it’s a win-win, right? Well, it depends on a mixture of your financial circumstances, current abilities, amount of free time, your interests & passions etc.

If you’re the CEO of Intel or the Mayor of New York City, then it simply makes no sense to learn how to program. Your time would be far better spent thinking about the ‘big picture’, the overall strategy and direction, negotiating big deals, thinking about whether your industry is facing big changes. The opportunity cost for learning to program would simply be too great. Figuring out how to save Intel or NYC a billion here and there, for example, would yield shareholders and city residents respectively, far greater benefit than learning about functions. So Bloomberg learning to program probably isn’t the greatest use of his time.

If on the other hand, you’re earning a comfortable salary that can support your lifestyle and you can put savings away, then you can decide what the best use of your time is after work. If you’re going to try and set up an online business, you may focus your time more on marketing, SEO, copywriting etc. than doing the programming yourself as those can be outsourced away relatively cheaply. But if you hate anything to do with marketing and don’t want to spend a few hundred hours on getting it right, but you do enjoy the technical aspects of the business, then there’s no rule that says you have to learn marketing. You can outsource it to a professional firm while you do what you love. Though I recommend that you read Eric Ries’ book, the Lean Startup, and Ash Maurya’s Running Lean so you don’t waste time developing something the market doesn’t want.

If you’re unemployed with a lot of spare time then it makes a lot of sense to do virtually everything yourself. Make a list of everything you need to learn, prioritize the items and start learning and doing!

 

DISCOVERING YOUR CORE COMPETENCY

For me, the choice of whether to outsource boils down to:

  • What Am I Good At and What Do I Enjoy?
  • Where Do I Add the Most Value?
  • How Much Spare Time Do I Have?
  • How Much Spare Funds Do I Have?

What you’re good at and what you enjoy — they will go hand in hand because you will naturally excel if you do something you enjoy. Unfortunately it’s unrealistic sometimes to only focus on what you’re good at because running businesses mean you have to deal with things that you don’t like, e.g. administration, tax, accounting, paperwork and other mundane things. Thankfully, more and more of these can be outsourced and done much better than you may be able to do yourself. But, if you’re strapped for cash at the start, you’ll probably have to deal with all of the boring shit yourself. If you choose to work with something you love at the start, it will make the rest of the process a lot easier. I didn’t use to enjoy writing but after being forced to write for some of my businesses, I have come to love writing (I occasionally write op-eds for newspapers).

The reality is that you will need to make a compromise between what you’re good at and where you can add the most value. It might happen that the highest value add would be in email marketing for your business. In this case, it would probably make better sense to learn the ins and outs of email marketing while the programming is being outsourced. The less spare time (and more spare funds) you have, the more intensely you should focus on outsourcing the lower value things. If you have no spare funds and a lot of spare time, then you should focus on prioritizing your tasks.

The key to figuring out what to outsource starts with documenting all of the activities that you are doing. You can start with a document that lists what you can think of off the top of your head, e.g. blogging, writing newsletters, doing some web development, setting up Google Analytics, writing ads for Google Adwords, customer support, graphic design, etc. If you want to be really detailed about this, you could try using rescue time and get a detailed analysis of how you spend your time.

Then rank your tasks by how valuable they are to your business. The most valuable at the top, the least at the bottom. This is not an exact science so you don’t have to assign a dollar figure. Just use your gut feeling. Look at the bottom of the list — the lowest value add — those are the things that you should be looking at outsourcing. As you do your day to day thing, this list will grow. I run a language site and I use to edit all of my videos myself which took at least several hours for a simple 15 minute video. I knew it was a huge time suck but I didn’t think anyone else would be able to do them properly at an affordable price. But one day I decided to list the job on oDesk and found someone amazing to do it for me.  I couldn’t believe my luck. This person would do a great job for only $5! I give her bonuses sometimes so it works out to be $8/video. That was a big win for me because it cleared up a huge chunk of my time to focus on the higher value things. So if you haven’t already, try to outsource some of your tasks. If you haven’t outsourced before, it will take some time to get it right.

Document the lower value tasks — how they should be done so that it will make it a lot easier to outsource (and advertise!). Some tasks will be self-explanatory and probably won’t require a process manual — e.g. audio transcription. But then again, maybe you want your audio transcriptions in a certain style, to be properly formatted with headings and subheadings, and posted directly to your website? In which case, document the process. It will make everyone’s lives a lot easier and give you better results in the end.

 

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