The Outsourcing Decision Matrix
Analyzing the Make-or-Buy Decision
How do you decide which activities to outsource, and which tasks to keep in-house?
Let's say you're a manager in the healthcare industry. Should you outsource your cleaning staff, or retain them? 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?
Outsourcing can have a significant impact on your bottom line. It can reduce overheads, bring fresh expertise to your business, and free up your time for innovation and other vital tasks. But there are risks, too. You could lose control of proprietary information, or end up with products or services that don't meet your company's quality standards.
So, how can you be sure that you're making the right choice?
In this article, we look at how you can use the Outsourcing Decision Matrix to identify which tasks or processes you should keep in-house, and which you can safely outsource.
What Is the Outsourcing Decision Matrix?
The Matrix, shown in figure 1, below, identifies the two most important factors that you should consider when you're thinking about outsourcing a task:
- The strategic importance of the task. Does the task in question give your business a competitive advantage?
- The task's impact on your operational performance. How much does the task contribute to the smooth running of your organization? And how much disruption does it cause if it's done badly?
Figure 1 – The Outsourcing Decision Matrix
The Matrix is divided into quadrants, as follows:
Form a strategic alliance. Some tasks are strategically important, but contribute little to operational performance, so could be outsourced safely to a trusted partner. A strategic alliance is a good option for these types of tasks. In an alliance, the partners share control of the task and work together, but remain independent.
For example, a car manufacturer could align with an advertising agency. The manufacturer is closely involved in the message and tone of the advertisements, but the content and production are handled by the agency.
- Retain. Tasks in this quadrant are high in strategic importance and have a big impact on operational performance. Retain these tasks in-house, so that you keep the maximum level of control.
For our car maker, the assembly process is strategically critical, and would usually be retained. It is one of the organization's core competences, and it makes a massive contribution to the smooth running of the organization.
- Outsource. Activities in this quadrant are important for successful operational performance, but are not strategically important. These can be outsourced with little risk.
For example, the car maker could outsource delivery to dealerships. Delivering cars to dealers is generally not a source of competitive advantage, as it doesn't affect the customer's experience. But it does impact operational performance. For example, if the transporters are late, stock builds up at the manufacturing plant, and dealers don't have the vehicles they need in their showrooms.
- Eliminate. Some tasks are not important to your organization's overall strategy, and don't make a significant contribution to its day-to-day operational performance. You could think about eliminating these activities completely.
But consider the potential impact of ditching an activity, as it may still be important to your team or organization. For example, let's say your company runs a subsidized crèche. It might be expensive to run, and it isn't part of your core operation, but it may help you to attract staff (strategic importance), and to reduce absences related to childcare (operational performance).
How to Use the Outsourcing Decision Matrix
So, now that we've seen what each quadrant in the Matrix means, let's see how you can use it to determine whether you should outsource a task.
Step 1: Identify the Task's Strategic Importance
Analyze the task's strategic importance to your business. Is it 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' choice of your products or services over those of your competitors?
Step 2: Identify the Task's Contribution to Operational Performance
Decide how important this task is to your company's day-to-day running. Will your operations "grind to a halt" if it's done badly, or not done at all?
Step 3: Plot the Task on the Matrix
When you've worked out where your task or process lies on the vertical axis of strategic importance, and on the horizontal axis of operational performance, you can plot the task onto the matrix.
The quadrant in which the task falls will give you a strong indication as to whether you should outsource it, retain it, eliminate it, or form a strategic alliance.
Of course, this is only a starting point for your outsourcing decision. You need to consider each situation carefully, and use your specialized knowledge of your organization, your suppliers, and your industry as a whole to judge each situation on its own merits.
You can learn more about outsourcing in our articles, Working with Outsourced Suppliers and Words Used in Outsourcing. The Supplier Segmentation Model can help you to determine the value that each of your suppliers brings to your organization. The 10 Cs of Supplier Evaluation is a useful approach to preventing problems with outsourced tasks.
The Outsourcing Decision Matrix is a good starting point for making decisions about whether or not to outsource tasks in your business.
Tasks that are strategically important to your 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.
For strategically important but operationally insignificant tasks, you may benefit from forming a strategic alliance with an external supplier.
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