No Problem - We'll Just Outsource!!

By Hillel Glazer, TCV Growth Partner -

Outsourcing, the act of getting another entity to do work for your business that your business would otherwise have to do, is as ubiquitous as it is practical. That is, immensely. Which is precisely why executives hardly give outsourcing another thought.

Whether demand for a particular function (or ability, or interest, or competence) exceeds capacity, or a business simply doesn’t have the economies of scale to make or do something themselves, outsourcing is a convenient, obvious, and often more cost-effective solution. Outsourcing can be the only option for many companies such as startups who need to fabricate and manufacture products years before they have the funds to build their own factory—if ever.

Outsourcing can take a wide range of characteristics. Your company makes and sells hand-made crochet dolls? You’d never build your own e-commerce system. In fact, almost no one hosts their own websites or email anymore. And few people even think of that as outsourcing.

Lufthansa, the German flag airline, provides catering and maintenance for other airlines. Your community banker probably buys their entire online presence including online banking, bill-pay, and their mobile app from a company that isn’t even a bank but sells web and mobile banking for financial institutions. My company has never done its own accounting. The first company I hired (after email and web hosting) was an accounting firm.

Heck, a person wouldn’t be wrong if they described even TCV Growth Partners is a go-to for temporarily outsourcing certain executive functions. But so far all of the above examples share a common thread: the outsourced function(s) are not the core business.

But what happens when your business makes the sale of the century to a demanding client with a tight deadline? Imagine you’re a boutique designer and manufacturer of innovative custom solutions. In a good year you’ll deliver maybe forty units with your experienced, tight staff of about a dozen. Now your golden goose client wants 20 times that. In six months.

Before you agree and send the proposal you find a company that specializes in assembling from kits whole systems of reasonably similar complexity. In essence, you will design the system, arrange for all the parts to be sent to the assembler and have them assemble and ship the completed units to your client.

Problem solved, Right?

Yes.

And… another 10 problems created. At least.

These are the top 10 problems created by outsourcing your core competency. Especially for the first time.

1. You are not a company created to be a supplier management company. Supplier management is a discipline entirely of its own. Being an outstanding engineering design and manufacturing company doesn’t automatically make you a supplier management company. Most of the rest of this list are derivatives of this one point.

2. Becoming an expert in being a supplier management company doesn’t happen overnight. It totally makes sense that such a company would envision themselves as being just designers and engineering of custom solutions. That would be their core competency. Let someone else assemble. But that decision doesn’t magically make them ready to switch to being supplier managers. The company’s engineers and technicians aren’t contact specialists and lawyers.

3. Your client chose you for what you are able to do. If your assembler could do what you do, the client would have hired them. No matter how hard they try, or you try, an outsource resource doing your core competency for you is not you doing it for yourself.

4. You will never have enough insight into what’s going on to be able to deal with issues. When delivered units inevitably have quality problems, solving them will be a nightmare. Why? Because you don’t know what went wrong. Even if you plant one of your own people there.

5. Your reputation and priorities are no longer in your hands. You now depend on an entity you can’t control for how well your customer and other businesses think of you. How will you manage that?

6. “It’s our assemblers’ fault” will not work. This is on you. Your assembler will make any problems they have your problems and so will your client. They’re not evil. They have no choice.

7. The contract with your supplier is unlikely to protect you from everything that could possibly go wrong. Things will go wrong. That’s the reality of complex operations. If this is your first major foray into having another company do your core competency for you, pray you have enough margin, insurance, and recompense to have the assembler held accountable for their end of things going wrong. This is an art in and of itself.

8. Your contract with the golden goose probably doesn’t cover you for when things go sideways with the supplier. Deciding to outsource your core competency as the strategy to fulfill a huge order is about more than your contract with the supplier. It’s also about your contract with your client. It needs to accommodate potential issues that may arise from the supplier. While most customers won’t stand for this, there are a few ways to account for such contingencies. Namely, having to do with third parties to which anyone’s supply chain are subject to.

9. How will you protect yourself from the supplier (whether deliberately or otherwise) undermining your engagement with your customer? Say there’s a hiccup in the production. (There’s almost always going to be a hiccup.) You’re now behind schedule. The customer is unhappy. The customer exercises the (likely) clause in your contract to cancel the contract for default. The supplier leverages this to renegotiate the contract with the customer. They learn from your experience, they take advantage of the work stoppage to catch up, and you’re out of the picture.

10. Meanwhile, your actual core competency. You’re too busy managing the assembler to be paying any attention to the innovation and engineering prowess you were hired for in the first place. How’s that working for you?

We can’t say, “don’t outsource your core competency.” But we can suggest that doing so is not something to be taken lightly. It’s another shade of the question posed in my previous blog, “are you a product company or a services company?” Managing suppliers is a service and takes completely different competencies than engineering and design. Your operation needs to be set up to do it well. To discuss the implications of outsourcing major chunks of your operation, drop me a note at hillel@tcv-growth.partners. The case study in this post is taken from a true story that has yet to be finished. We wish the company luck.