2 Areas Not To Outsource

Part 1 Here

In my last post, I submitted that today’s outsourcing is not all that different from basic economic specialization.  We can see that due to advances in technology – particularly communications – the pool of places, talent and resources to draw from is now essentially global and nearing limitless.  Often times my customers ask me questions and I have to point out that the question they have asked is not a matter of “can” something be done, but instead “should” it.  That is where these options with outsourcing have left us.

So what areas should a successful corporation focus on?  Obviously those that offer the biggest return in cost savings.  Now those who have done business with me over the years know me to be perhaps obsessive when it comes to focusing on hard dollar ROI and having very little tolerance for the soft dollar pay-backs that are often used to justify technology sales.  That being said, one has to consider all the COSTS including harder to estimate impacts on other areas of the organization.  

For a great example, I will steal from a very smart fellow I met a few years ago named Brian Sullivan.  Brian runs a company called the “Auto Insurance Report” and speaks to executives about all manner of things.  If you think about the typical auto-insurance customer, they really don’t have a lot of interaction with the company.  Most interactions are either initial sign-up with the company or when they need to file a claim.  At the end of the day, my driving record (stellar BTW thanks) is what it is.  I drive the vehicle I drive and live where I live.  When all the actuarial tables are crunched, my risk is what it is and doesn’t change when I look at one company or another.  To simplify things (since this is not about insurance) lets call Risk=Cost in this conversation.  While I might see small changes from one insurance company to the next when getting quotes, they all should fall within a narrow range.

If some company charges more for the same coverage, then I either don’t understand all the extra value I will be getting, their administrative costs are way higher, or they are trying to soak me.  In the second two cases, that company will have to adjust to the market or not be around too long.  In the first case, their marketing is not doing a good enough job of communicating just how much better their service is.  If they deliver coffee and donuts to me every day that my car is in the shop, but I don’t know they do that, then their marketing is failing (assuming I care about coffee and donuts).  Now apply this to perceptions of the companies in the normal distribution of quotes.  If I perceive them as being easier to sign up / do business with / that I will get great service if there is ever a problem, then I will go with that company (again as long as prices are similar).  As such you might think I am saying “Never Outsource Marketing”.  In this example I am but lets go on to the next part of the example to flesh it out.

The other time that the customer contacts the company is to file a claim.  This situation in the best of cases is a stressful event to begin with if it is a fender bender and downright terrifying if someone is injured.  Pretty much, the customer is at least highly agitated from the first minute they get on the phone.  Some are looking for reasons to vent anger and can decide to go crazy as soon as they hear a slightly different (READ: Foreign) accent on the phone.  Putting someone in a faraway place, who very well may go through an extensive training program on how to handle these things is a recipe for disaster.  The worst can come out as soon as the flow-chart the outsourced staff is allowed to follow is slightly diverted from in any way.  They are in a situation where they can only say no and things can go south very quickly from there.  Sure, they lose the customer.  Worse though is that people can be bitter and let me tell you that this person will tell his “horror” story every time the subject of insurance comes up for the rest of his life.  Word of mouth is the most powerful force in marketing and can undo countless dollars spent on clever commercials.  Does the happy customer pipe up when insurance comes up?  Not likely and even if they do, it is a one liner like “I have MONDOInsurance and they are ok.” Hardly a balancing factor.

These examples bring me to the first thing that companies should never outsource:

1. Never Outsource Your Closest Contact To Your Customer

Consumers are starting to sniff out the “virtual” companies that are out there.  While I will go into more detail on what SHOULD be outsourced in the next post, I will say that if you outsource all the aspects of your organization to different vendors, it removes the feedback loop where your customers chart your course by telling you what they want and what they don’t.  At least equally bad, it has the potential to devalue your company to investors since barriers to entry are very low and your next competitor is right around the corner.

In the cases above, the only time the company has to really connect with the customer were marketing and the claims process.  Sure they can send things in the mail and all sorts of other opportunities, but the only place they actually matter is if you get these right.  Marketing – is core to being an insurance company in this case.  While outsourcing large parts of this function can give you short term gains, there is really nothing stopping your competition from doing the same.  In auto-insurance, you need to hire and retain the best people at understanding and communicating your story.

2. Never Outsource Decision Making

As it turns out, I am never wrong.  Ignoring the obvious jokes about asking my wife her opinion on this matter, I say this with some caveats.  I credit my success in business and my life in general to my critical thinking skills.  When I have solid information in front of me that I took the time to collect and weigh, my conclusions are near flawless.  One of the other skills that I have that ends up being very handy is that I am great at being wrong.  Being wrong to me is a wonderful opportunity to learn and I enjoy it when it happens.  Now before you close this post in frustration or I lose all my credibility with you, I will explain.

When I said I am never wrong, I am actually referring to my logic and decision making skills.  As it turns out when I am wrong, it is often a problem with the premises that I based my judgment on.  This happens a lot when I am impatient when it comes to collecting the data to make a good choice.  I find the best employees who tend to be the hardest to replace and most valuable overall share this trait in some way.  Find these people, retain them and give them the tools, information and time to make great choices.  Not to beat on the dead horse, but outsourcing decision making is one of the reasons that so many large lenders got in trouble in recent years.  The underwriting function was in many ways commoditized  and put multiple layers between the underwriter and the actual investor (person whose money is being lent).  Because everyone else was doing it, is not a great reason to outsource decision making.  Missing out on completely or at the very least muffling crucial feedback loops is a disaster in waiting no matter what industry.

If you have read this far, you might be thinking I am saying to never outsource anything.  While there are lots of areas you should not outsource lets not get out of control here.  It is not like every insurance company should own TV stations or print magazines etc.  Where do you draw the line between something to keep in house vs. something to allow to be done outside whether it is in insurance or any other industry?

Next Post: What Should Be Outsourced

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