19 Jul How to play offense with your strategic outsourcing game
Early in my consulting career, I met the owner of a growing company who continues to be one of the most respected businessmen in Florida. He forged ahead with an interesting business model for his real estate development firm. He chose to buy prime property in the midst of the great recession.
To do this, the leadership team decided they would limit their full-time staff to just the key partners. Each agreed to take a minimal salary in exchange for a percentage of the profits. Apart from their receptionist, all were partners with a vested stake in the business. All were focused on the true business function of buying property for eventual sale. Instead of staffing the business with accounting, legal, IT and HR departments, they outsourced it all. This structure enabled them to focus on the buying and eventually selling of property without the distractions of managing large numbers of people on site.
It also allowed them to keep the core small and control their culture. As I witnessed this model in action and have continued to contemplate the implications, its wisdom has become clearer. Accordingly, I have modeled my practice on teaching and providing with this model in focus. Using the overused analogy of football, it’s a lot like PLAYING OFFENSE versus DEFENSE.
This analogy came to mind again as I pondered the coaching choices of my alma mater, the University of Florida. After a time of great success followed by the departure of our coach, a new coach was needed at the helm. UF hired a defensive mastermind that had previous success as an assistant coach. Alas, after a few short, crushing years he was dismissed after abysmal performance. The next time around, the athletic association hired an offensive coach, and the team exceeded all expectations his first year. I’ve since noticed the pattern that most new coaches come from the offensive side of the ball, since to win, you must put points on the scoreboard.
Scoring in the business game
To score in business, you must bring in revenue. This includes everything from sales to product development and delivery. On financial statements, this is represented as everything above the gross profit line, so that translates to sales minus the cost and effort to produce the product. This is the offensive side of business. Everything below the gross profit line is overhead so that means accounting, legal, IT and HR departments are all defensive departments.
If we take this lens to look through, accounting is all about proper recording so that liabilities, payroll, taxes and investors can be paid properly. Legal plays defense by making sure that contracts are fair and fulfilled and that laws and covenants are not broken, etc. IT plays defense most spectacularly by their mantra “just don’t let the server crash.” HR is not far behind with a focus being to avoid lawsuit.
Adding to the team the smart way
Most small and growing companies would be best served by an offensive model where the executive team focuses entirely on producing revenue. Furthermore, I believe that the defensive functions should be outsourced to proven outside providers. Here’s why:
- CEOs and COOs should focus on the most efficient product development and delivery.
- Outsourcing the overhead departments allows easier scalability producing better efficiencies.
- Outsourced providers, by nature, have a better handle on changing technologies that affect their other clients, which may be beneficial to a small company. It doesn’t take long for most in-house departments to lose track of changing outside technology that could positively affect their own company.
- While business is greatly varied above the gross profit line, overhead departments are largely homogeneous across industries. Accounting and labor laws are largely the same regardless of industry.
- Culture can be better maintained, and the possibility of a cancerous hire in overhead departments does not taint the entire business.
- It’s easier to change vendors than it is to fire an employee. Contracts can be cancelled without the issues of extended severance or risk of lawsuit.
The offensive model is one with apparent wisdom when applied to the right business – in all seasons.
Blair Fonda is Director of CFO Services and has held executive finance positions with Enterprise Rent-A- Car, Gate Petroleum and MountainStar Capital. He founded Madison Development group specializing in redevelopment of residential properties, raising capital, managing acquisitions and sales rental operations. This led to his CFO consulting practice where he advised companies of all sizes, municipalities and non-profits.