question

Is outsourcing a good strategy for small businesses, or should they stick to hiring in-house staff to do functions like accounting, taxes and payroll right?

Jamie Diamond

inDinero

answer

Internalizing routine functions is generally a suboptimal solution. In decades past, it may have been the best choice, but given the myriad choices for outsourcing available today, I see very few cases where filling these positions internally makes much sense. In general, the answer is yes, it is smart to outsource, but there are a couple of caveats.

First, do not outsource things that are likely to become critical to your competitive advantage. If your key competitive advantage is built around design, then don't outsource your design work. If intellectual property protection is key to your business success, hire a good intellectual property lawyer. Every business needs to be able to protect and exercise control over their key competitive assets, so before outsourcing, ask yourself: "How important is this process to winning?" If it's a key component, do it in-house or via a well-designed, long-term contractual alliance, not simply through a ­commodity provider.

The second caveat is to keep these transactions at arm's length, and as President Ronald Reagan advised, "Trust, but verify." These are business relationships, and they should be handled professionally. Do not allow these outsourcing relationships to become embedded too deeply in personal relationships, which may happen over time. Be sure to audit the work every so often, review the relationship and make sure that the commitments are being fulfilled. Do not let inertia and comfort get in the way of verifying the performance of the agent you hire. As you note, these are critical tasks, and they need to be done well.

So take advantage of outsourcing, but approach it with skepticism and use it for critical, but not strategically important, processes. Finally, always "trust, but verify" when managing these relationships.

About the author

Dave Deeds is the entrepreneurship chair of the Schulze School of Entrepreneurship at the University of St. Thomas Opus College of Business.