courtesy of flickr.com/photos/markhillary/

As we discussed in the last post, outsourcing is all the rage nowadays.  All the cool companies let their virtual assistants in Bangladesh handle SEO, blog content, and even sending flowers to their significant others after a fight.

But can outsourcing ever be bad for your company? Could outsourcing actually kill your brand?  According to many business strategists, the answer is a definite yes!  I’m here to give you some factors to consider when deciding whether to do it yourself or delegate it to your pal Manesh in India.

In the last post, we looked at resource-based analysis, which pretty much states you should continue doing whatever gives you competitive advantage, whatever sets you apart from others in your market, and outsource the rest.  That’s a decent rule of thumb, I say.  But the academics have come up with another way to examine your options, what is called “transaction cost analysis”.

Transaction Cost Analysis is considered to be the more nuanced and sophisticated approach.  It is composed of three parts:

1. Asset Specificity
2. Frequency of Transactions
3. Uncertainty

Let’s look at each in detail.

1) Asset Specificity

Asset specificity has to do with how unique your product is, or rather, how unique the inputs to your product are.  The reasoning goes like this: if the supplies needed for your product are common, then there are probably an abundance of suppliers.  The more unique your supplies become, the fewer suppliers there will be in the market.  As the number of suppliers in the market decreases, the power of remaining suppliers increases.

And supplier power is bad for you and your company.  The more power a supplier has, the more control they have over the price you pay.  So, according to the rule of asset specificity, if your asset is specific, then there are probably few suppliers available (and these suppliers will have great power), so you will want to make it yourself instead of outsourcing.  On the other hand, if your inputs are a common commodity, then it is probably more cost-effective to buy them (outsource) rather than make them yourself.

2) Frequency of Transactions

How often do you need inputs from your suppliers?  The answer to this question will determine whether to outsource or make it yourself.  If you are planning on ordering the product often, then it is worth the effort to invest in resources to make it yourself.  However, if your product will only be sold for a short time, it’s better to outsource.

3) Uncertainty

To define the factor of uncertainty, ask yourself these questions: How much will the wants of my customers change? How often will I need to innovate and change my product?  If your product is constantly changing and adapting to customer desires, then it’s better to make it yourself; do not outsource innovation to a third party.

Why not?  Two reasons: It is more expensive to pay an outsider to drive the innovation of your brand and once your creativity is outsourced, face it, it’s not really your brand anymore. On the other hand, if the product does not need to change very often, then outsourcing is a good idea.

I hope you’ve enjoyed this examination of the arguments for and against outsourcing. After reading The 4-Hour Workweek, I wanted to outsource my whole life (well, just the boring parts).  But a closer look has taught me that if you aren’t careful, outsourcing can kill your brand.  Stick to the two methods I have shown you (resource-based and transaction cost analysis) and outsourcing will take your company (or life) to the next level!