In Part I, I talked about the general problem of outsourcing and why it often doesn’t make sense from an operational perspective.

Now, I’m going to outline two situations where I believe it does make sense to outsource an operation. The first scenario is when the need for the outsourced skillset is only occasional or if the need is only applicable in exceptional circumstances. For example, as an individual I would put my relationship with various specialized tradesmen such as plumbers, electricians, or locksmiths in this category. Depending on my relative capability in a particular area, I might take on the task myself. I can change a lightbulb and even hang a light fixture, but when I need a new circuit run, I’m calling a professional.

Most small (and even some medium) businesses run their IT in this same manner. There’s probably someone in-house who handles day-to-day IT issues such as changing the tape in the backup system (assuming they have a backup system) or installing a new workstation for an employee, but when it’s time to buy and configure a new server or recover from a major failure, it’s probably money well-spent to call a specialist. Even though the business is paying a premium for the specialist’s high-value time, they are still saving significant amounts of money compared to trying to maintain that skillset in-house.

The other scenario where outsourcing makes sense is when the function is so far outside the realm of expertise that the business doesn’t even want to “change the lightbulbs” themselves. The obvious functions I put in this area are Accounting, Legal, and Human Resources since the cost of a significant mistake in these areas could easily end in bankruptcy, civil liability or worse.

In these cases, the view of Outsourcing as risk insurance is quite valid. Outsourcing the function to a trained professional significantly reduces the risk of an audit, lawsuit, or even criminal investigation brought on by ignorance of the law. There still exist risks in this relationship–the business is at the mercy of the specialist and must trust them to be doing their job diligently. Nevertheless, I would say that the risk is still less than if the function were in-house since a credible outsourcer will typically carry some sort of bonding or Errors and Omissions Insurance of their own.

There is one final factor implicit in the nature of the relationships that I’ve described here–the relative lack of “friction” created by outsourcing the function. Yes, it may take longer to drive to the accountant’s office than if they were right across the hall, but that can be controlled to a certain extent by choosing an accountant (or lawyer or HR Agency, etc.) who’s in your neighborhood, whom you communicate well with, and who’s honest.

So when all is said and done, Outsourcing is still a business decision just like any other. There are costs and risks associated. They key is to not get so focused on any one aspect that the decisionmakers fail to see the forest for the trees.