How much outsourcing is too little, or too much? Are you hurting your bottom line by not knowing the answer?
|Best Practices Series|
Embrace Capacity Outsourcing
It doesn’t require that you redefine your core competencies
The one thing I think all AV folks can agree upon is that this Industry is cyclical to the point of distraction. Live Events generally has two or three super-busy, five or six somewhat busy, and three really dead months. Integrators suffer through swings created by verticals and channels. Education wants everything done in the summer, purchasing wants it done by year’s end, and corporate clients think you are waiting by your van to install their very special order – the day after they make up their mind. And regardless of any patterns you depend upon, some months just aren’t consistent in business levels. You will never change the way clients think or alter the triggers that drive seasonality, but you can change how you do business to ensure you can still make money.
Outsourcing is an old idea with some negative connotations, but the concept is critical to profitably growing a company. One approach to outsourcing is to sub-contract roles outside of your business core competency. Using an HR firm instead of hiring and maintaining an HR department is an example. But the idea that AV folks really need to embrace is how to expand capacity by outsourcing core competency skills. Live Events folks have always understood this. The freelance event professional community is very strong and accessible. The biggest challenge for Live Events is hiring sub-contractors early enough to secure the best talent. With the shrinking lead times of events, this is becoming more difficult.
The more challenging segment to convert to capacity outsourcing is Systems’ Integrators. Let me make this argument: any industry outsider would look at the typical SI income statement and gape at the low margins. They would note that the busier the time period, the worse the results. Ask a few questions and one will hear tales of woe about moving deadlines, unpredictable contracting schedules, impatient clients, lack of capacity, and backlogs in engineering, CAD, programming, etc… But, suggest that an integrator parse out some of their backlog to third-party suppliers and watch the sparks fly!
Overcoming Old-Economy Thinking
The other notion – also faulty – is that because a sub-contractor costs more, job cost will suffer and therefore the company will be less profitable. The basic flaw in this logic is that the integrator would have to turn away work in order to maintain this supposed quality standard at this perceived profit level. In analysis, I discover three key mistakes: One, the internal cost of labor applied to job-costing is too low. Integrators frequently do not account for non-billable direct labor hours in their job-costing formulas. In other words shop, travel, and training time are regarded as overhead costs. And then there is OVERTIME. The solution is to blend all direct labor into blended job cost per hour number that captures non-allocated time. This will increase your internal cost applied to job cost and make the outsourced costs seem more in line.
Third and perhaps the most telling defense against outsourcing is that the integrator doesn’t understand where its process constraints really are. A typical scenario is that installers are blamed when projects don’t finish on time – which in turn delays the next project. Upon analysis, I often discover that an inadequate amount of engineering, CAD, and programming resources guarantee the kinds of problems that will later impede timely installation. Ask any Lead Tech what holds up a job and they will tell you: wrong equipment specified, items missing from orders, incomplete drawings, and untested programming.
What Is Reasonable?
It is only fair that I draw a line in the sand and offer some business metric guidelines. If an integrator (or Live Events stager) were to analyze work loads and resources, they would discover that about 50% of the time their business model is actually profitable. If this workload falls into the middle 50% of business levels, then outsourcing should immediately help backlogs and improve profit for the busier 25%. If the optimum profitability is at the high end of the busy cycle, then the company is overstaffed. Optimization setup for the slowest periods suggests that pricing and job cost are too low. Overtime and mistakes are probably eating all your profits.
The ideal situation is to staff for the middle 50% of demand and aggressively outsource for peak (or expected peak) periods. More precisely, 20-25% of all installation, programming, CAD should be outsourced if you expect minimize overhead costs. If you find that you have a slow period, then schedule training, vacations, and maintenance accordingly. If your company is growing, then you may struggle to constantly increase staff and sub-contractor capacity at the same time, but that is exactly what you need to do.
A company that effectively utilizes outsourced capacity will also adapt a different internal operating style. Resource allocation and booking will require a lot of attention and flexible solutions will become more and more valuable. You will learn to book subs far in advance for projects that fall into expected busy periods. Key company resources will then be held back for last minute assignments. Fast Track installation teams will become the commandoes of time-sensitive, short-term assignments. Company process standards and best practices will help ensure quality of service, but will need to be teachable to your trusted sub-contractors. In short, integrators will want to adhere to Industry Standards instead of proprietary approaches.
If you are left with questions about how to cancel subs when schedules change or why you can’t alter your pricing structures to support the higher cost of outsourcing, then what you lack is experience. These are concepts that seasoned outsourcers have learned to handle and so can you. This all starts when you take a hard look at your actual job costs and process constraints and decide to overcome your Old Economy Thinking.
Do you have an opinion or idea to share? Email me.