Bringing an Outsourced Service In-House
Many variables to consider.
When considering the various products and services we can offer our customers, most, if not all, of us utilize some outside help in the form of specialized vendors or subcontractors. One of the more difficult challenges in business is deciding when to stop spending your money on an outside service and move the work in-house.
When facing this decision, most companies make the mistake of just looking at the cost of what they are currently paying and comparing it to the anticipated cost of providing that product or service themselves. Cost is certainly the primary consideration, but because there are so many other factors to consider, making a decision without considering all the ramifications is risky and can lead to a poor decision. Over the past year and a half, our company has undergone this process with regards to our installation services. It may be worthwhile to share some of the key factors that we considered before moving away from subcontractors and setting up our own installation division.
Consider your manpower
One important factor is personnel. Before you take on a new service or product line, ask yourself if you actually have the people to pull it off. It may seem like a simple problem to resolve, but having qualified personnel to build a new line of business can be challenging. In the case of our installation department, we had to make sure our team was trained in multiple areas, including vehicle wraps, point-of-purchase displays, wall murals, fixtures, exterior signage, pole banners, window displays, and others. Getting a team fully trained in these areas is very difficult and requires extensive field experience to really get the hang of it. We were fortunate enough to have a couple of men who had done some installation at prior companies and had some of those skills.
Regardless of the line of work, building a team with the necessary capabilities requires some patience, an excellent training program, and great management. Your people will ultimately be the key to your success or failure when providing new services to your customers.
Create a business plan
Another key consideration is the logistics of your new line of business. Before you jump into something new, put together a business plan that outlines some of the issues you can anticipate. What about the required space in your building? Will you need to allocate some of that? Will you need to add additional equipment? I know when we started up our installation department, we certainly underestimated the amount of money that was required in just equipment, tools, and supplies.
What about insurance needs—both worker’s compensation and general liability? Will there be outside training costs for your employees? If you are offering a new product line, you will need to address the amount of inventory or raw materials that you will be required to purchase and stock.
While there are likely several more considerations, the point is that you need to sit down and really map out the business requirements. You’ll be amazed at how many little things you think of that need to be part of your plan.
Ensure a smooth transition
While building this new segment of your business, the transition must be seamless to your customer. The quality and service cannot slip just because you are now doing the work yourself. Trust me, your customer won’t understand. One of the best ways to ensure your quality does not suffer is to build a strong management team.
One of the mistakes some companies make when starting a new division is to try to fold the management of that division or service into your existing leadership or management structure. This usually doesn’t work. Typically your managers will either dedicate the majority of their efforts to the new and exciting business segment, ignoring their current responsibilities, or conversely, will pay minimum attention to the new business so their current job duties aren’t neglected. Having dedicated management in charge of training, personnel, quality, and customer service will greatly improve your chances of success.
Evaluate the potential costs
So far we have considered personnel, logistics, and management. After evaluating these factors, now you should be ready to deal with the financial side. It is likely that your initial decision to consider developing this particular segment of your business was tied to financial reasons. There is a point where the amount of money paid to outside companies becomes overwhelming, even irritating. You’ll find yourself asking the question, “Why don’t we just do this ourselves? It can’t cost as much money as we are spending!”
In our case, Ferrari Color was paying several hundred thousand dollars to other installation companies. However, it took over a year of careful analysis and planning to develop a business plan that would be profitable for us. I believe that we transitioned successfully into our own installation division because we spent the necessary time and effort considering all the potential costs we could incur. Even then, we missed some, but nothing so significant that it turned our financial model upside down. By crunching the numbers and including all the factors discussed previously, you should get a good sense of whether or not expanding into a new business line will be profitable for you.
This process doesn’t have to be overly complicated. The key is spending the necessary time to ensure that you have covered all your bases. You will most likely overlook some of the small things, but those won’t make or break you. Just focus on the things you do well in your business as strategic advantages and identify your weaknesses as areas to pay closer attention. Once you decide to pull the trigger, make sure you give it your best efforts. Starting a new business segment will probably be frustrating and challenging, but it can also be very rewarding and ultimately save your company a lot of money.