Frequently, companies prefer working with external vendors because internal providers are often understaffed or clients require a new service that is beyond capabilities of present staffing, and they have products or services that they need *right now*. Outsourcing vendors, who make their livings responding to clients’ demands, learn to be very agile. But do they really have a monopoly on responsiveness?
In fact, there’s no reason to believe that people who work for external service providers are naturally responsive, and people who work within companies are not. And there’s no reason an internal service provider can't expand its capacity to satisfy clients’ needs, given the opportunity.
If clients have money to spend outside, then they have money that could be spent inside as well. If they give that money to the internal provider, staff can use it to hire contractors (perhaps the same contractors that the company might otherwise have hired directly). In other words, staff can expand their supply to meet demand.
Of course, if you want staff to manage those contractors for you, you’ll have to pay them a little markup. But then, the same is true when you ask an external consulting company to assign their partners and managers to actively manage a project.
To make this work, internal service providers must be proactive in their use of vendors and contractors.
Smart entrepreneurs are pleased to expand their businesses; and they make every effort to build the habit of buying through them rather than around them, maintaining their preferred-vendor status.
The problem is, not all internal staff think like entrepreneurs. Instead, they may believe their job is to do the best they can with the resources they’ve been given. This is the opposite of an entrepreneur, who knows he or she has a business to run and acquires whatever resources are necessary to satisfy paying customers.
The solution, again, falls within the realm of culture. Imagine a culture with principles like these:
- If customers choose to buy our products (i.e., if the value and return on investment is perceived by customers), it is their responsibility to provide funding (or gain a priority on previously budgeted resources). Once they do, instead of resisting the additional work, we welcome the business.
- As long as the work is funded, we expand supply to meet all demand.
- We proactively adjust fixed capacity to match anticipated demand (for example, by acquiring capital infrastructure and establishing relationships with vendors and contractors).
- We line up contractors in advance of the need, using standing contracts and pre-training where appropriate.
- We treat outside vendors and contractors as extensions of our staff, and retain accountability for their work (termed “extended staffing”).
Culture is a way of teaching people the entrepreneurial behaviors that they need to succeed. In this case, it can be used to teach staff to be responsive to any paying customer.
Even with an entrepreneurial culture in place, there may be obstacles to responsiveness. Staff may not be allowed to expand supply to meet legitimate demand.
In certain job markets, for example, demand for qualified people is growing so quickly that salaries rapidly inflate. For example, the late-1990s rush on year-2000 computer programmers induced 12%-plus increases in salary compared with an average 4% in other professions over the same time period.
Faced with rapid inflation, traditional job-grading systems may not be sufficiently flexible. If scarce professionals can't be offered competitive pay, loss of staff (turnover) and difficulty with recruiting will threaten the organization’s survival. In the meantime, an inappropriate job-grading system forces the firm to use a greater percentage of contract employees, regardless of cost.
Of course, even if they aren’t able to hire needed staff, internal service organizations can bring in contractors as readily as can clients. An inflexible compensation system may increase costs, but it alone doesn’t induce outsourcing.
Similarly, caps on headcount may constrain an internal service provider’s ability to hire more people. Of course, headcount caps don’t save money. To the contrary, they drive costs up by forcing an internal service provider to use relatively more expensive contractors in place of permanent staff, or they prevent staff from reducing costs by hiring permanent employees in place of long-term contractors.
Headcount caps may increase costs, but they don’t force outsourcing.
Sometimes, executives attempt to control the costs of a function by restricting the size of the internal service provider, with limits on gross expenses. This prevents a successful internal service provider from expanding to meet clients’ demands. It forces staff to be unresponsive, which forces clients to work with outsourcing vendors even when internal staff could give them a better deal. Caps on gross spending limit the market share of internal suppliers, but they don't limit corporate spending.
In a well-designed internal economy, executives control demand rather than supply.
By managing the spending power given to the business units within a company, executives can ensure that costs are conserved without biasing clients to favor outsourcing.
So the bottom line is this: There’s no reason an internal service provider cannot out-compete outsourcing, if it’s willing to invest in a customer-focused, entrepreneurial, business-within-a-business organization, and tackle the challenge of replacing bureaucratic caps with market economics.
© 2005 NDMA Inc.
Learn more about culture here:
Get a detailed introduction to the concept of an internal economy here:
Read about the business-within-a-business organization here:
Read about market economics here:
Wresting Control of Priorities from Your Internal IT Team
Why Your IT Team Needs a Full-time Internal Consultant
How To Get Your IT Staff to Give You Service Like Your Service Provider
5 Reasons Management Considers Outsourcing (And Why Those Reasons May Be Shortsighted)