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The Pros and Cons of Outsourcing

Should you outsource business functions or is it better to keep them in-house?

Q: Is outsourcing really a good way to grow my business?

A: Outsourcing has become a big deal in our economy. There are articles and books written on it all the time, and you can attend countless seminars and speeches on the subject. I just did a Google search on "outsourcing" and got 1,130,000 links. You can find a lot of information on this subject, and a lot of opinions on how to do it right or screw it up!

One popular way this is described is that you should decide what you are good at and outsource everything else--i.e., focus your company on your core competency, and let someone else do the rest. That logic is sound in theory, and to a certain degree in practice, but like everything else you can take it too far. The key is to understand your business and its goals and decide how outsourcing might help you attain them.

When deciding what to outsource, some things (legal services, printing, health insurance, etc.) are fairly obvious, and most businesses outsource them. Some functions are a bit less obvious, and people opt to outsource these task depending on their personal expertise. For example, if you have an accounting background, you probably keep your own books and file your own taxes. There are other things many people could--but probably shouldn't--do themselves. For example, most people could create a basic website or design their own logo, but the differences in the end result between doing it yourself and hiring a professional can be significant.

There are some crucial aspects of your business you should probably not outsource. You need to keep an eye (your eye!) on them at all times. These include cash-flow management and, in many cases, customer interaction.

Some tasks make sense to outsource initially and bring in-house later. If, for example, you aren't very experienced at hiring a receptionist, you could turn to a temp agency to hire one for you. They will charge you a premium, but for that you get significant value--they will understand your requirements, advertise for people, screen them and place them at your site with no risk to you. If they don't work out for whatever reason, you just call the temp agency and tell them to send someone else. When you find the right person and decide you want them long term, you can pay the temp agency a fee and make them a regular employee (i.e., transition from outsourced to in-house).

While the above scenario is common, you don't have to consider outsourcing until you have enough work for an employee. One advantage of outsourcing is flexibility--it can be a lot easier to cut back on a vendor than an employee. Think of how you would feel if you had to tell an employee who is dependent on her job that you only need her half-time now. Another advantage is that you don't have to become an expert in a particular area--you can depend on the outsourced company to be the expert, as in the above website/logo example.

Perhaps the biggest benefit of outsourcing is its ability to save you money. This will, of course, depend on the size of your company and what specific tasks you outsource, but in general, if you think it through, you can save money. For example, my company outsources its IT services (help desk, computer support and maintenance), and we pay significantly less than we'd pay for a full-time IT person to give us the same level of support. We also outsource our bookkeeping and office administration, with similar savings. As we grow, we'll continue to reevaluate these decisions--it may be that the business case for the IT outsourcing remains good as we grow but that we might eventually hire someone to offload other work from our current people, and since we would be paying them anyway, we could get them to do the bookkeeping as well.

One disadvantage to outsourcing is that you are putting part of your company in someone else's hands. You have to ask yourself if you can trust them, if you think they'll stay in business and if they can adapt to your growing and changing needs.

The best advice I have is to carefully think through each function in your business and figure out which tasks make sense to outsource.then just try it! In most cases, common sense will see you through.

Keith Lowe is an experienced entrepreneur who is a founder and investor in companies in several industries. Lowe also mentors new entrepreneurs; serves as past chairman of the board for Biztech, a nonprofit high-tech business incubator; and is a co-founder and officer for the Alabama Information Technology Association.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.

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