A successful entrepreneurial enterprise is more than an innovative or disruptive idea. Success in the enterprise context is about building basic infrastructure to act as a mechanism to convert ideas into value. Peter Drucker emphasized that successful entrepreneurship, a core feature of enterprise success, is the byproduct of discipline and not of magic, mystery or wild creative ideation.
The importance of discipline suggests that success relies, substantially in part, on the enterprise’s ability (through the individuals within the enterprise) to increasingly learn skills and practices and consistently deliver value to its customers and clients. We refer to the mechanism created as a result of this disciplined value-creation approach as the “business infrastructure”.
Well-designed and well-constructed business infrastructure depends on the availability of capital – both financial and human – and, optimizing the use of available capital is the lynchpin of business viability. That is not to say, however, that even most successful companies will never experience shortfalls or become vulnerable to stagnation. Such is particularly true of large and traditionally decentralized organizations, or those with more fragmented operations.
Financial capital generation, though not an easy endeavor, is a relatively straightforward one. The enterprise may increase net revenue through increased sales or decreased costs or seek outside investment (oftentimes a combination of these strategies). Human capital development is similarly intuitive.
The enterprise may increase the capabilities of its current individuals and teams through training or acquisition. Just as reaching out to parties outside of the organization can be a boon to the financial capital available to the business, outsourcing services to third-party consultants or highly trained and established prospective employees, can provide a similar quick boost to available human capital.
For enterprises that operate in a resource constrained environment, however, the financial cost of outsourcing human capital development is prohibitive. For these companies, a group that includes virtually every startup and a great number of small, privately held businesses, a shift to insourcing talent development allows for the organic and resource efficient growth of a sustainable business infrastructure that enhances self-sufficiency, maximizes the capabilities of the enterprise to deliver customer value and minimizes long-term hidden costs.
The decision to insource or outsource a certain performance input is complicated by the fact that both options can be effective in achieving the desired outcome.
Outsourcing has its benefits. Highly trained talent is more inclined to understand key problems facing the enterprise and has the experience required to devise methods to execute the appropriate solutions. Although a direct road to the desired end state, outsourcing means losing control over how problems are solved while sacrificing the opportunity to build internal business infrastructure that enables long-term value creation. Stated plainly, outsourcing means relying on a transient third party and their ability to produce sufficient results beyond the short term.
Rather than outsource, the enterprise should find ways to insource as often as possible. For tasks that exceed the scope of in-house talent, investment in the education and training of employees is paramount. Enhancing human capital in this manner enables a more iterative process for value creation management, promotes a culture of inward investment and provides a platform for employees to develop as they accomplish an increasing level of complex work.
As an example, let’s look at the enterprise’s marketing function. Every enterprise at some point must decide how to market its services or products and remain competitive. Outsourcing this function requires first communicating to a third party the enterprise’s ethos and the value of its service or product, then the business relies on the capabilities of the third party to understand, design and communicate the vision to target customers.
The addition of third party marketers creates a disconnect between the knowers and the doers. Investing in the education of a team member for marketing, in this case, removes the added segment and enhances the enterprise’s ability to perform the marketing function. Perhaps, most importantly, it empowers the company’s marketing personnel and contributes to the development of business infrastructure.
Enhanced Ability of Team
During the “startup” phase, the need for a diversely-skilled team is paramount. Enterprises face challenges from all directions and the more diverse the team’s abilities are, the more the team can understand and attack these problems. Insourcing encourages an enterprise to constantly educate its employees and broaden its teams’ understanding of new skills and market trends. Outsourcing trades such enhanced development of internal competencies for the trend to want to simply “get things done”.
In a dynamic business environment, a strong fixation on immediate performance at the expense of internal capabilities undercuts long-term customer value creation. Some of the less tangible but arguably more impactful benefits of insourcing include: providing professional development opportunities and talent management advantages that ultimately increase loyalty and strengthen the respective organizational culture. Teams that learn to rely internally are often more resilient, dynamic, and effective long-term.
Looking again at the role of marketing for the enterprise, there are a number of marketing organizations capable of performing great work. For a cost, likely in the tens of thousands of dollars, an enterprise can get its marketing arm operational and headed in the right direction. The problem arises, however, when the following year the company’s new products or services evolve and the entity is again faced with the need to design a marketing campaign.
Under an outsourcing-focused strategy, the choice is to either go back to the same marketing firm and pay them again or to rely on the now outdated and ill-fitted marketing strategy from the previous year. Insourcing invests in the education of employees to handle marketing such that the organization’s marketing capabilities grow in tandem with the careers of the marketing employees. It is this mechanism that evidences the value of the educational investment over the life of the employee’s tenure – a much better value proposition.
Many enterprises, especially startups, have constrained budgets and every dollar must be spent intelligently. Outsourcing work, especially larger projects occurring over longer periods of time, often comes with hidden costs. For example, what may have started as paying $10,000 to have someone help with marketing has turned into $14,500 because the outsourced firm needed more time with a designer or required a higher grade print material.
These hidden costs add up over time and can prove disastrous from a budgeting perspective. Insourcing, on the other hand, enables the enterprise to have real-time awareness of spending and product quality. Due to profitability alignment, an in-house team member doing the required work will eliminate the risk of being “up-sold” or overcharged, in addition to aligning the of such performance with enterprise’s culture.
It is notable that insourcing can be time intensive, yet most enterprises, especially fledging enterprises, make up for in bandwidth what they lack in financial resources. Thus, more startups and small privately held businesses should adopt a more intentional human capital development strategy centered on investing in the education of their employees to the greatest extent possible, such that the business infrastructure is created and managed internally for the benefit of long term value creation.