Since writing our view on outsourcing, we’ve received a number of questions. While most people indicate that the article was useful, the most common question is “Why can’t I just outsource everything?” Here’s your answer:
You absolutely CAN outsource (or even purchase) everything. The consideration of whether or not to outsource, as we’ve indicated earlier, is roughly the same as whether or not you should buy something. The two differences are cost and the ease with which someone else can do the same thing you do. “Buying” something (I mean off the shelf, packaged software, software as a service, etc) means that it’s available to just about everyone today – potentially with some small modifications to fit their business needs. As such it usually costs less than outsourcing but is also more easily accessible and implementable by your potential competition. “Outsourcing” something means that you are going to have someone else implement (code) your idea or run your servers (in a hosted rather than a SaaS model), which usually implies higher cost and a bit more difficulty in transferring technology.
In either scenario, you must be willing to say that you are willing to be like “everyone else”. In other words, you are willing to give up the competitive differentiation that a homegrown solution might offer such as creating a higher barrier to entry, lower barriers to exit, switching costs, etc. If an outsourcer can develop your code they will take that experience and apply it to someone else. They may not use the actual code they write for you, but they simply can’t help but use the past experience. This means that the job to copy you just got a little easier, which in turn means that you lowered the barrier to entry for competition. And of course if you purchase a solution, then you are also making a decision that you will not differentiate yourself in that particular area.
None of this is bad. In fact, there are many cases where you SHOULD outsource or purchase software or services. Most companies and organizations tend towards isomorphism, which means that over time they all look (or should look) to leverage the best known practices to increase efficiencies and reduce costs. It’s hard to imagine that you are going to differentiate yourself in your accounting systems, customer support systems, sales lead systems, etc. You might add a unique set of routing rules, etc – but these systems are so standard that the best practices are built in to most pieces of software.
From a product perspective, if your business objective is to be a “low price leader” rather than to compete on technology or to simply “run with the pack” and use standard features while maintaining good margins then it also makes sense to buy or outsource.
But what if you want to have the world’s best product, stock, or media recommendation engine? By definition you can’t “buy” that as everyone else would have the same thing. If you outsource it, everyone else might not have your code but the firm that develops it for you can’t help but add it to their experience; they might not copy it but it certainly will influence their future activities.
As we’ve described before – don’t outsource or buy those things that you feel should or will differentiate your business.
