The Outsourcing Decision Matrix
Analyzing the Make-or-Buy Decision
Logistics is often an area that can be outsourced.
When considering outsourcing, many organizations start with the same question: Which activities should we outsource, and which tasks should we do in-house?
For instance, imagine that you work in the healthcare industry. Should you outsource your cleaning staff, or hire in-house cleaners? Would the decision be the same for an IT company? If you worked for an airline, would you outsource your catering, or hire cooks directly? What if you managed a luxury hotel?
These are complicated questions, and the answers can have huge effects on your organization's short-term and long-term success.
Making the right decision can add significantly to your organization's bottom line in terms of cost savings and increased efficiency. Outsourcing can bring fresh minds to your business, and it can also free time up for innovation and other vital tasks. However, making the wrong decision can put your business at a competitive disadvantage. Perhaps you'll lose control of proprietary information, or receive components that don't meet your organization's quality standards.
So, how can you ensure that your organization makes the right decision?
The Outsourcing Decision Matrix helps you see clearly which tasks, processes, or functions you should keep in-house – and which can be safely outsourced. In this article, we'll examine the Outsourcing Decision Matrix and see how your organization can use it to make better outsourcing decisions.
Understanding the Tool
The Outsourcing Decision Matrix, shown in Figure1, helps you consider two important factors in outsourcing a task:
- How strategically important is the task to your business? Strategically important tasks are sources of competitive advantage.
- What is the task's impact on your organization's operational performance? Tasks which have a high impact on operational performance are those which, if done well, contribute greatly to the smooth running of the organization or, if done badly, greatly disrupt it.
The quadrants are as follows:
- Form a strategic alliance – Tasks in this quadrant are high in strategic importance, but contribute little to operational performance. So, although you need to retain control of them to ensure they are done exactly as you want, or you get the quality you want, they are relatively insignificant in terms of cost or smooth running and so not worthy of full in-house focus. This means that you should form a strategic alliance. For example, an auto manufacturer could align with an advertising agency. The manufacturer needs to be closely involved in the message and tone of adverts, but advertising has little impact on the day-to-day operational performance of the company.
- Retain – Tasks in this quadrant are high in strategic importance and have a big impact on operational performance. These tasks should be kept in-house so that your organization keeps maximum control. In our auto manufacturer, the assembly of cars would be retained as it is strategically critical – it should be one of the organization's core competences, in fact – and it makes a massive contribution to the smooth running of the organization.
- Outsource – Tasks this quadrant are important for successful operational performance, but are not strategically important. These tasks could safely be outsourced. They're simply not worth spending in-house time managing. For example, the auto manufacturer in the example above could outsource its delivery logistics to a specialist company. How you deliver cars to dealers is generally not a source of competitive advantage, as it doesn't touch the customer's experience, but how well it's done has a huge impact on operational performance. If transporters are late, stock builds up at the manufacturing plant, and dealers don't have the vehicles they need in their show rooms for customers to test drive. You can learn more about outsourcing in Working with Outsourced Suppliers.
- Eliminate – Tasks in this quadrant are not important to your organization's overall strategy and nor do they make a significant contribution to its day-to-day operational performance. Although you might not be able to eliminate these tasks completely, it's important to check why you're doing them. An example might be running a subsidized staff crèche. Although having an in-house childcare facility might help you to attract certain staff (strategic importance) or reduce absenteeism caused by childcare problems (operational performance), does the effort involved justify doing it? Perhaps it does, but equally, perhaps you might be better off paying your people a little more, so that they can afford to use independent crèches situated nearby.
How to Use the Tool
So how do you actually use the Outsourcing Decision Matrix to determine if you should outsource a task?
Step 1: Identify your task's strategic importance
Analyze the task's strategic importance to your business.
Is this task vital to your company's competitive advantage? Is it part of what makes your business unique? Does it play a major part in your customers' selection of your products or services over those of your competitors?
Step 2: Identify contribution to operational performance
Decide how important this task is to your company's day-to-day operational performance. Will your operations rapidly grind to a halt if it's done badly?
Step 3: Plot your task on the matrix
Now that you know where your task is on the vertical scale of strategic importance, and where it is on the horizontal scale of operational performance, plot the task onto the matrix.
The quadrant in which the task falls will give you a strong indication as to whether it should be outsourced, retained, strategically aligned, or eliminated.
Of course, this is only a starting point for your decision to outsource. You need to carefully consider the details of every situation. Our article on Working With Outsourced Suppliers will help you think about this.
With two-by-two matrices like these, it's not always clear where the lines between quadrants should, in practice, be drawn. In this case, for example, perhaps the line between the "Eliminate" and "Outsource" quadrants should be drawn at the 37% position, say, rather than at the 50% position? Use your common sense when interpreting your analysis.
The Outsourcing Decision Matrix will give you a good initial idea about whether or not to outsource tasks in your business. Tasks that are strategically important to an organization should usually be kept in-house. This enables leaders to control the most vital processes. Tasks that must be done for an organization to be operationally effective, but which aren't important to overall strategy, can often be outsourced safely.
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