Build a Better Business: What Economics Teaches Us About Outsourcing

Did you pay attention in your economics classes? Do you remember the basic principle of comparative advantage? It is the driver behind the economics of outsourcing. 

Classical British economist David Ricardo observed the trade between England and Portugal: sunny Portugal produced both wine and cloth at a lower cost, but England produced relatively higher quality cloth. The theory of comparative advantage dictates it made sense for England to export cloth to, and import wine from Portugal, because each country has a comparative advantage over the other in its production.

Almost 200 years after Ricardo’s writings, the theory of comparative advantage is alive-and-kicking: when companies play up to their relative strengths, all will benefit. 

Outsourcing the production of goods and services is crucial to growing a business even if you think you can do the tasks more efficiently yourself. Why? Because there is always an opportunity cost related to dealing with tedious and non-core tasks like, say formatting data in Excel, replying to customer inquiries or keeping the accounting books updated. The hours you lose in dealing with these tasks internally can be spent on activities of higher value. And higher value always means: activities related to what your clients really want from you.

In which areas do you bear more weight?

Prioritise, specialise

One of our own clients has a booming e-commerce business based out of Hong Kong. It is wildly successful but because of that it’s also generating thousands of product related inquiries a day. For that reason, it made more sense to outsource the English-speaking side of their customer service to the Philippines, for the obvious reasons of language and cost advantages. 

In another case, the IT department of a logistics company in Belgium relies on a team of 5 software engineers based in Manila, permanently tweaking the ERP system to fit the next clients’ needs. Doing that locally would consume a lot of management time and money: a serious opportunity cost, knowing that the Belgium based team wants to focus on what matters to the business, and that is spending time with the clients. Best to concentrate on building up the business by building client relations instead of bogging yourself down with computer code...

For start-ups, it’s expected that entrepreneurs get their hands dirty and be involved in all aspects of the business. However, in the long run, not being able to let go of these processes means the little things collectively eat up your time, keeping you stuck and unable to step up to a higher vantage point when running your business. Better build in the outsourcing model in your business case early on.

Outsourcing as an investment 

At the end of the day, economics teaches us that there is an attached value to our time. And while we like to see ourselves as all-knowing when it comes to our business, there are simply functions which can be more efficiently sourced elsewhere. 

The initial costs associated with outsourcing is no different to investing: it is investing in your business’s profitability and future earning potential. The wise entrepreneur will see that outsourcing allows them to get back to the roots of why they started the business in the first place: directly facing the clients with a great product or service.

Joeri Timp is a founder and director of Eastvantage. He has pioneered and headed large BPO operatons in the Philippines for two highly respected brands in Law and Human Resources. Joeri is a lawyer by trade and when he's not busy at work, he can be found trying to fulfill his dream of becoming a beer brew master.

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