How do you decide when to outsource? Do you determine whether a task should be outsourced based on whether it’s “core” to your mission or “non-core”? Or do you make the decision based on cost analysis?
Outsourcing, when done right, can increase enterprise value. But when it’s done wrong, it can create headaches, cost too much money, and result in products or services not up to your company’s standards – or, even worse, not up to your customers’ standards.
So what makes the difference? How do you outsource effectively?
According to Susan Cramm in The Harvard Business Review, the key is outsourcing the work and not the leadership. “When outsourcing,” she writes, “you can’t manage through the contract, you have to manage through the people.” Delegating tasks to an outside vendor or Subject Matter Expert is no different than delegating internally, she insists. “You have to stay close in the beginning to ensure that objectives and success measurements are well understood, the approach makes sense, accountabilities and roles are clarified and the team jells,” she writes. “Then you have to stay close enough throughout the project to see what others aren’t seeing, catalyze the right conversations, and ensure that the right mid-course corrections occur.”
In other words, don’t just hire an outside firm to create something for you – software, for example – and then leave them to their own devices. It might seem that the point of outsourcing is to create less work for you, but taking a hands-off approach creates more work in the long term when the people you hire don’t do the work the way you expect them to.
At Indian River Advisors, we work hard to help our clients complete transactions at the highest value. Very simply, our clients outsource their corporate development plans and objectives to our firm. When the transaction(s) is complete, our firm is dismissed. We know that if you pay attention to what drives value in your company, when you want to sell the company or enter into a similar corporate transaction you will be able to do so at the highest valuation. Knowing when to hire outside experts, including hiring a corporate development firm or investment bank, is part of what drives value.
In an article about how hiring outside experts transformed his family business, Rod Lorenz writes about taking over a flooring company from his father. Though his company is on the smaller side, the lessons he learned about when to hire experts are relevant for all companies, no matter the size.
Lorenz thought that being around his dad his whole life, listening to him talk about flooring at the dinner table for example, had prepared him to lead the company. But he was wrong. He knew how to do some parts of the business well – but other aspects were out of his wheelhouse. Hiring outside experts not only saved the company, it helped it become more profitable.
First, he hired a consultant, who could help him better see his strengths and weaknesses. The consultant showed him he could not be “Superman,” one guy trying to do it all. The consultants encouraged Lorenz to hire outside folks with expertise he didn’t yet have: an outside sales person, a service manager, and production manager. These outside experts freed him up to focus on business management.
Second, he hired an outside marketing team, and their advice about email marketing, he writes, generated $1.5 million in revenue over the last five years.
Most recently, Lorenz hired outside help to grow his business. “I think every company gets to a certain plateau where you examine: Are we going to get to the next level or are we satisfied with where we are?” These outside experts helped him and his team see the company differently, and as a result they were able to transform the working environment, making it more positive and productive.
In the Forbes’ article “How to Make Room for Outside Leadership,” Brandom Dempsey writes about his own company’s turn to outside experts – and how it transformed his business for the better.
Dempsey notes that small businesses sometimes remain small because “owners choose to keep their organizations owner-led and owner-executed, meaning they continue to handle a lot of day-to-day operations and remain the sole managerial decision maker in their organization.” This approach can feel more comfortable for some business owners, Dempsey argues, but it can also impede growth and “damage the value of the business.”
2016 was a good year for Dempsey’s company – profits were up and he was closing a lot of new deals with bigger clients. He and his partner were working long hours. And they could see that this new growth was showing them something: though he and his partner had driven the company’s success in the past, they could now see they were holding the company back. They needed outsiders to help. “If we were going to continue to grow, which meant keeping our employees engaged and customers satisfied,” Dempsey writes, “we had to start adding professional management to do the things that we had done in the past. We had to consider the value we brought to the business and focus on eliminating the activities that didn’t drive that value.” To grow as leaders meant making “the scary transition from owner-led/owner-executed to owner-led/professionally-executed.”
The transition was demanding – it required cash and time and challenge – but the decision allowed the company to “mitigate risk, as key dependencies are spread among multiple people.” Dempsey writes, “If we were hit by the proverbial bus, we’re more confident that our business would not only survive; it would remain valuable.”
Dempsey and his partner hired a few key professionals who were experts with more experience in crucial aspects of their business. They also hired leaders on the strategy side of their company. Then they made sure they gave these outside experts as much support as possible. This transition challenged Dempsey’s self-worth, and it was sometimes confusing. But it’s brought more success to his business than he ever could have imagined.
If you have questions about when or how to hire outside experts to help grow your company – or if you have more general questions about maximizing the enterprise value of your business – please contact Marshall Graham, the founder and Managing Partner of Indian River Advisors, at (202) 494-0360 or email him at email@example.com. Marshall has over 30 years of experience as an investment banker and corporate development consultant. He founded Indian River because he recognized that few middle market firms were well prepared to enter into a corporate transaction. Part of that preparation includes understanding when to outsource and how to do so effectively. Marshall looks forward to working with you.