Outsourcing means thinking critically about what your sticky customers are actually buying that makes you remarkable

March 1, 2013
J Michael Marks believes the issue is you. I guarantee you that if you sit and talk with your employees, there is something you're doing that you're not

J Michael Marks believes the issue is you.

“I guarantee you that if you sit and talk with your employees, there is something you're doing that you're not very good at,” said Marks, managing partner of Indian River Consulting Group. “It's distracting, it takes away from being truly unique, there is somebody else who does it better, faster, and cheaper, and all you need is to go look.

“Outsourcing is the answer. This is because of technology, because of virtualization. The small guy can go kick big-guy butt really well. The issue is you deciding where you want to invest so you can create the room so you can go and create the secret sauce.”

In “Gaining Competitive Advantage With Virtualization (aka Outsourcing),” Marks said most people ended up running a wholesale distribution business because they had a problem with authority and couldn't hold a job for a long time. Their attitude was, I'm going to do it all. I'm going to do everything. I can make 200 decisions a day.

Now there are small, independent companies that are very flexible. They want to go out and compete with big companies. How do they level the playing field? Outsourcing.

He said the bottom line is that when “little guys gang up to compete with big guys, they have only two choices: get in a group or outsource, as these are the only ways to balance the economics.”

He said the traditional definition of outsourcing goes like this: The contracting out of a business process, which an organization may have previously performed internally or has a new need for, to an independent organization from which the process is purchased back as a service.

“Most people say outsourcing of manufacturing is sending it off to Mexico, China, Malaysia, or wherever it's cheaper,” he said. “But how do you make it compellingly easy for a customer to choose you? The real answer for outsourcing is the strategic definition: Do what you do best and buy the rest. Just remember that outsourcing is a bit like getting married, as it is much easier to get into some situations than to get out of them. What is it that you do best? What is it that makes you remarkable?

“Everybody's heard, ‘Manufacturing in the United States is gone. Everything has gone offshore.’ But since 1972, manufacturing output — the value of goods manufactured in the US — has quadrupled. We are the leading manufacturer in the world. Period. End of discussion.

“With manufacturing employment, we have gotten very productive. We have engaged in global sourcing. In the 1960s, 40% of our employment was in manufacturing. Now we're down to almost six digits. A lot of hard-hat jobs and factory jobs have been replaced by robots. That's how we got the productivity.”

He said that old definitions no longer work. Manufacturers that are globally sourcing through alliances are in effect distributors. Distributors who provide private-label products are acting as manufacturer-brand managers. Free agency is one of the rapidly growing forces.

“When you start thinking about the big idea of outsourcing, think about what you do best, and buy the rest,” Marks said. “If you simply compete by offering ‘great service with great people’ and ‘everyone is good enough,’ the race to the bottom on price will start, changing the game. Think critically about what your sticky customers are actually buying from you without using the old words of service, relationship, or trust. What makes them stick? That's what makes you remarkable.

“Consider what your firm's three greatest strengths and three greatest weaknesses are. Candidates for outsourcing meet two criteria: the process or function has been a long-standing weakness, or at least a pain in your rear; and the process or function is not something that is critical to a customer choosing you as a supplier. Your potential outsourcing partner must have the same importance to you that you have to them, or someone will get hurt.

“You never outsource your sweet spot. The reason customers choose you are the family jewels. Protect those, polish those, and invest in those. Everything else is a candidate. Think about something to outsource. Think about where you stink. Where are you a high-paid apologist? As long as it's not a core part of your business, that's a candidate for outsourcing. If you're a small firm, do not go to UPS Global Logistics to set up the outsourcing program. Think about markets aligned by size. Make sure you are as important to them as they are to you.”

The beauty of public warehousing

Outsourcing examples:

  • Physical.

    “Pubic warehousing is one of the fastest-growing industries in the US, with over $1 billion in fees during 2010. Many Corian and granite slab distributors don't own their own warehouses or delivery infrastructure. They outsource it.

    “UPS went public in the '90s to fund the creation of UPS World Wide Logistics. Nike can deliver any pair of shoes next day to a retailer in the morning in the US via UPS Ground because all of the finished-goods inventory is in a UPS World Wide Logistics warehouse. Amazon agreed to pay state sales tax to support putting local warehouses in major markets for same-day delivery. At a warehouse in Waco, Texas, they're delivering electric products to electrical contractors same day. Amazon's #1 growth opportunity now is in 828 markets. Many distributors have rented honor-based, self-service warehouses at the limits of their service areas with motion detectors, video, and no staff. Some distributors use local rapid-delivery courier services for delivery capacity. There are a lot of physical alternatives.”

  • Information.

    “NetSuite is owned by Oracle and provides large-scale distributor ERP capabilities over the web with a cell phone subscription business model. A 25-person distributor can run the same software as a billion-dollar one. Use Google Docs and put everything in the cloud. Make your customers sticky to you by using Skype and FaceTime from Apple. All of a sudden, you make customers sticky to you and essentially, like Caterpillar, you eliminate all the returns or disputes over core condition.

    “All this stuff is there. If you can't figure out how to do it, get a ‘propeller head’ off Craigslist. Fifteen percent of college students are iPhone app developers. This is not rocket science. You should have an app that any trucker or any repair shop can use to get there.”

  • People.

    “A floral distributor has a part-time inside sales force of over 200 reps who work out of their homes as contract labor. Build the church for Easter Sunday and think about Valentine's Day. Temporary-help agencies are developing special services at a high rate to circumvent Obamacare medical-benefit requirements in low-value repetitive work. Another example is part-time job-sharing workers who paid money to get ‘certified’ to do shifts in a warehouse and manage which one of them shows up. Everyone works to support the month-end rush of shipments, doubling the workforce.”

  • Off-the-wall.

    “Anybody notice that Best Buy and Barnes & Noble are dying? I read everything on my iPad. Everybody goes to Best Buy to look and then go online to buy. Showrooming is used in food equipment and other industries where someone provides a showroom with no sales reps or inventory other than the demo pieces. A showroomer is not taking title of inventory — they're facilitating the transaction. Manufacturers' reps come in to meet customers by appointment. Some provide sales advice for a fee. This is probably the future of Best Buy.

“Gillette offered $1 billion to buy Paul Mitchell Hair Care Systems, a virtual company of less than 100 employees. Wal-Mart outsourced their supply chain to McLane until they were large enough to bring it in house. Then they sold McLane to Warren Buffet.”

Marks said that as long as the service or process meets your criteria, and the partner is a size match, it is worth some investigation. The only two things that happen in a warehouse is that product is lost or damaged.

“What you do every day is hard,” he said. “Many of you can generate profitable revenue streams by becoming small-scale outsourcers in ways that support your core business. It is more important to learn how to do it right than to rush in solving all your large challenges.

“Find something that is a second-tier challenge off your list and build a proof of concept around it. Move on to larger challenges as your skills and experience increase.”

The advantages of outsourcing: reduced cost and often improved performance because of narrow focus specialization; and variability is often the largest advantage for small firms, and is especially valuable if you aren't sure what you need to do — especially in terms of Obamacare compliance — or how much.”

Disadvantages: requires a front-end investment to manage properly — strategic sourcing is the label for this activity; there is always a cost for disengagement; and any change in your requirements necessitates negotiation with a sovereign external firm.

He gave some program design tips.

“Don't let a sales guy set this up — it takes accountants and lawyers and multiple conversations,” he said. “Be very clear on performance measurement criteria and test that the data is both available and reliable. Hold back part of the fee as retention and pay over 100% back with good objective performance. Do a 90-day proof-of-concept with an easy exit if it doesn't work. Ensure that you have a minimum retainer type payment for ‘X’ instances of the service that you pay, whether you use them or not, and pay ‘Y’ for each instance over the threshold, with perhaps a kicker for huge volumes.”