Making Money Outsourcing Parts of Your Business and Specialising
The key to making money outsourcing is not to look for suppliers or partners that you can pass a bit of your operations to. That is too easy. There are no end of businesses who will help you with yours and the reason for this is that they will make money. That is just another way of creating a competitor.
The best place to be making money outsourcing is your customers. It provides the pathway to where you need to specialise.
Let’s take a step back first and think about why a business benefits from specialising. It’s as simple as comparing a cottage industry to an industrialised one. The industrial revolution was the harbinger of many changes. Some good and some bad.
The Industrial Revolution
For business, the changes were good, leading to vastly increased production through specialisation. An increase in the scale of production that lowered per unit costs enabled this.
The invention of the steam engine was a key piece of technology that was a great enabler of this process, but it did not do this by standing alone. The cost of using this new technology is economical when applied on scale. This caused being choosy about what you would produce in your new factory.
From that point, you could choose to outsource by trading with other businesses or trading with a different division in your own business.
Trading with other businesses allowed the price mechanism to drive efficiency throughout an economy. It was also clumsy because it required negotiations and contracts that come with high transaction costs.
Throughout history, businesses that went down the track of trading with other businesses were like shooting stars. They blazed for a time and then disappeared into the pages of history.
Businesses That Last
The ones that linger are the ones that chose the path of keeping it all in-house and trading with divisions.
Companies that have been household names for generations or are likely to be have taken this approach. Think Ford. Think Alphabet (Google’s parent company).
The now famous example of where outsourcing has gone wrong where a service that was produced in-house had moved to the marketplace is with the government’s use of PWC for obtaining advice and analysis. Read this article to find out more about “Blacklisting PwC won’t stop outsourcing“.
What does that mean for your typical small to medium enterprise? They don’t have the means or aspirations to go down that track and take the outsourcing approach. They have to make do with outsourcing to the market and potentially creating competitors.
For examples of business models that are making money outsourcing internally, look to the following examples.
Supermarkets long ago displaced general stores where you would go up to the counter and ask for what you wanted. You would wait while the storekeeper assembled all your goods. They are masters of making money outsourcing.
They moved the counter to the front of the store and invited the customer behind it and asked them to choose what they wanted. They turned the store into a warehouse where customers would walk up and down the aisles looking for what they wanted.
The advent of the supermarket trolley had a profound impact on the traffic of goods as the elevator had on the mass transit of people. Both had a huge impact on the success of modern cities.
Serve Yourself
A much later innovation was to create the self-serve checkout so that not only was collecting your grocery items outsourced to the customer. So was paying for them. Customers are the target for making money outsourcing. Not other businesses and certainly not more staff.
Another example is the petrol station.
It has been a long time since you could drive into one of these and wait while an attendant asked how much fuel you wanted and then put it into your tank. They would even check under the bonnet to see if you needed oil for your motor or fluid for your radiator. Making money outsourcing meant moving those tasks onto the customer.
If you want a pie or a sandwich while you are lining up to pay for the petrol, just go to the cabinet and choose it yourself and put it in the bags provided.
Even your local coffee shop has taken this approach. You are more likely to be directed to the water station if you want a glass of water with your coffee rather than have someone deliver it to your table.
This tendency to outsource to the customer has led to specialisation.
Business Specialisation
Supermarkets are big logistical centres. Their primary task is to keep the produce coming in and stocking shelves. They do this while keeping spoilage of fresh foods to a minimum and making sure they sell groceries prior to reaching their use-by dates.
To do this, they have outsourced some tasks to customers. Having customers choose, pack and pay for their shopping is their way of making money outsourcing.
The kitchen at a McDonald’s store is a great example of where a lot of specialisation has occurred. It looks nothing like a kitchen. It is a factory run by kids that produces a homogeneous product. They wear factory clothes with some fancy colours for branding.
It has several counters where a customer can come and collect goods when they are ready. Either in the store or at the drive-in window. These stores are replete with outsourcing to the customer. Having customers choose, pay and consume outside of the business is how they are making money outsourcing.
They encourage customers to do the ordering and pay at a machine in the store or in a driveway leading to the store. They then encourage customers to bring their own furniture so they can eat. Their cars with seats, drink holders and their lap.
So, if you have a business and the new kid in the office says “you should outsource” some tedious part of your business. Be careful about taking up the suggestion.
While there are many ways of making money outsourcing, if you outsource it to another business you may just be creating a competitor. Think about how you can outsource it to your customer. They will do the work for free.
Here is the dilemma of a small to medium-sized business. They do not have the endless capital required to make the upfront investments that will lead to ongoing cost savings. Although some tasks are best outsourced, it’s important to think about where it sits in the operations of the business.
The Gig Economy
There has been a big push in recent years to outsource deliveries using gig economy businesses like Uber.
My belief is that the jury is still out on the long-term outcome of that approach.
The amount of money that a service provider in those gig economy businesses makes is not that great. If we bring them into the normal industrial relations paradigm that employees operate in, it may price them out of existence.
At this stage, it is a matter for individual participants in the gig economy to look at what they earn. Money is a more valuable commodity when it is scarce and therefore low-paid work will be done when there is no alternative. This freedom is slowly being taken removed.
Industrial relation laws are moving to take that decision out of the hands of the gig economy workers. High-cost conditions are being imposed on the businesses that use them. The backlash that is occurring against the gig economy is driving this outsourced task back onto consumers.
There is a paradox here. Even outsourcing that was directed at individuals who could not compete with the businesses they serviced is struggling to work.
The businesses that were forced to use the services of the gig economy will be happy to get this lost revenue back into their own pockets. These businesses will find ways of making money outsourcing to their customer by finding ways of outsourcing directly to the customers.
