In July 2015, my 12-year-old SUV, with 220,000 miles, finally breathed its last breath. It was time for me to buy a new car. But, instead, I decided to try a little personal experiment with the “sharing economy.” Based on a back-of-the-napkin calculation, I determined that it might actually be cheaper to completely outsource my driving to Uber (or its competitor, Lyft). Using a source like Edmunds.com, it’s easy to find out the “true cost of ownership” of any car you might have your eye on. Looking at comparable replacement vehicles, my “true cost to own”– fees, fuel, insurance, maintenance and repairs – was around $4,000 annually, not even counting the actual cost of the car. $4,000 is a lot of Uber rides! I wondered: could I completely outsource my driving and come out ahead? I decided to conduct an experiment for three months, chart it all out on a spreadsheet, and test my theory.
That was almost 14 months ago, and I can report that, as of today, I don’t own a car. But recent stories about Uber’s $1.27 billion loss in the first half of 2016 caused me to wonder whether my outsourcing provider will be around for the long haul. And that got me thinking about some of the other lessons I’ve learned about outsourcing, which may be helpful to pass along.
So, if your company is thinking about outsourcing any of its basic functions, here are some things to think about when evaluating your choices.
In Calculating Your Cost Savings, Make Sure You Count All Your “Costs Avoided”
Some of my cost savings from outsourcing my driving are obvious –fuel, insurance, maintenance and repairs. I work in the urban core, and parking is not cheap, so I factored that in too. But I hadn’t considered all of my avoided costs. It hadn’t occurred to me that the money I would usually tip a valet to park my car at a restaurant, or to feed the meter at my dentist’s office, was now going to stay in my pocket. If a roundtrip to the dentist in Uber costs me $11, but it would have cost me $5 to park, then my Uber trip actually cost me $6, not $11. These little extra “avoided costs” might seem trivial at first, but they can add up over time. In measuring the pure dollars and cents of a potential outsourcing relationship, make sure you count everything you can count.
In Measuring the Total Benefits, Remember that not Everything is Easily Quantifiable
Some benefits of a great outsourcing relationship cannot be easily measured. For instance, since outsourcing my driving, I get immediately to work every day when I get into my car – answering e-mails, checking and making adjustments to my calendar, or making phone calls. The same is true for my trips home. My round trip to and from work every day is roughly 17-20 minutes. That’s 20 minutes every day that I am no longer spending at my desk. It has become some of the most productive time in my day. It’s not an easy thing to measure, but it’s a definite benefit to outsourcing my driving.
And there is another thing that I never considered – which is that outsourcing my driving definitely makes me feel less stressed. I am much more relaxed when I get to the office and when I get home than if I had fought even a little rush hour traffic in either direction. This is a definite benefit of the arrangement, even though it’s tough to measure. The point is to think about how you might measure the intangibles of your outsourcing arrangement. Customer satisfaction surveys to your users, for example, might be a way to capture data that you can’t necessarily count.
Does Your Vendor Provide a Way to Constantly Measure and Control Quality, or Even Better, Allow You to Do It?
One worry in every outsourcing relationship is quality. Will my vendor’s quality be as good as if I kept control of this business function myself? One “must” in every outsourcing relationship is the ability to measure your vendor’s quality constantly, report any quality issues in real time, and seek redress immediately. As an example, Uber allows riders to rate every ride (1 to 5 stars), immediately after the ride has ended. In fact, it’s impossible to order another ride until you have rated the previous ride. If you have a bad experience, and you rate a driver as “1 Star,” Uber will ask you to provide additional detail. Uber acknowledges every poor rating within minutes, provides follow up with a personal customer support rep within the hour, and empowers its customer support reps to offer ride credit to address any legitimate customer gripes. In addition, Uber follows up with every driver regarding every low rating and notifies the driver of the reason for the low rating, as reported by the customer. Low ratings related to safety are cause for immediate deactivation of the driver. And an average driver rating of less than 4.6 will also lead to deactivation. (The driver can be re-activated if he or she completes additional customer service training.) This is “gold star” quality assurance, and nearly every outsourcing vendor can put similar quality controls in place.
In addition, you should encourage your vendor to increase its quality assurance, and give you opportunities to “take back control” of quality assurance. For instance, in some markets, Uber has rolled out a service called “Uber VIP.” It is only available to Uber’s best customers (riders who ride at least 10 times per month). The service provides for “VIP” riders to solicit rides only from Uber’s highest-rated drivers. The rides are slightly more expensive, but it is a way to put control over quality back into the hands of the customer.
Maintain Flexibility to Terminate Your Outsourcing Arrangement at Reasonable Intervals
Perhaps one of the best things about my relationship with Uber is that, if at any time I decide I don’t want to outsource my driving anymore, all I need to do is go buy a new car. No contract to terminate, no hard feelings, no layoffs, nothing. Most commercial outsourcing arrangements don’t have such a “no-strings-attached” characteristic, but you should still consider and build into your contract the ability to get out of the contract – at least at reasonable intervals – if you decide to go another direction. Different arrangements are easier to get out of than others, depending on what function you have outsourced. If your vendor has made a significant investment in taking over your IT function, it’s fair for the vendor to have some guarantee that it will be able to recoup its investment and make a profit if it does a good job. But you should go into every outsourcing arrangement with an eye toward how you’re going to get out of it if it doesn’t work out, or if changes to your business require it, and build reasonable exit opportunities into your contract, even if it means that an early exit may cost you some money. The freedom to get out of a relationship that isn’t working for you anymore is something that you want to preserve, even if the only way to preserve it is to agree on the front end that you have the right to buy your way out.
There are probably a hundred other “dos and don’ts” to think about in regard to any outsourcing relationship. (Here’s a link to at least 15 more.) Outsourcing my driving has been a fun experiment, but you don’t want your decision to outsource a major function of your business to be experimental. Do your due diligence and explore as many possible ramifications as you can, in advance. It’s always a good idea to look before you leap.