WHAT IF... you reduced costs to deliver on your value proposition by outsourcing parts of your value creation?
Outsourcing some of your value creation activities can not only help you cut down costs, but also yield other benefits for your business model, including an increase in production quality, reliability and outreach. Outsourcing is particularly interesting if your business model requires production or delivery steps that other market players are specialised in. Potential for benefits from outsourcing also increases if you can use the downtime of manufacturers or logistical enterprises to create win-win situations for you and those that you outsource to.
Turning challenges into opportunities
In order for a start-up in the waste, water and sanitation sector to be fully functional, it will have to perform a whole range of activities that will greatly vary from one another. Initially, any young enterprise will have limited budget, experience, skills and knowledge.
Allocating the right resources to each set of activities can prove to be challenging. If a company invests too many of its resources in non-core activities (activities which are not directly linked to the value creation of your service/product), it risks not having enough resources left for the activities necessary to deliver on its value proposition. Similarly, if a company neglects some of its non-core activities, it could jeopardise its entire business model.
It is often the case that production capacities are not in place for delivering comprehensively on a company’s value proposition and building them up from scratch would require heavy upfront investments that may be hard to juggle for an emerging enterprise.
On the other hand, other companies in the market possess well-developed production capacities which they may not even use at full production capacity. This provides fertile ground to come to a mutually beneficial agreement. The same could be the case for logistics, sales and other key business areas of start-ups.
Tapping into specialised services that are readily available in the market instead of spending resources on trying to get everything done by yourself (potentially at a lower standard) can therefore be a very attractive option to young companies.
Moving towards a strategy
Faced with a variety of tasks to deliver on you value proposition, you have two options: either invest time, resources and efforts in setting up the structures for performing the activities in-house, or, pay or otherwise engage a specialised company to do it on its behalf. Applying the latter option to well selected business activities can help cutting down costs, increase of quality by getting an external company to deliver a far more specialised service or freeing up resources and time for core activities.
Outsourcing is an increasingly popular business practice that consists of hiring an external company to carry out one or several activities that would have traditionally been done in-house. A key element of this strategy is therefore the identification of readily available companies in the market that are better equipped than you are for carrying out some of your company’s activities.
To complement your water, sanitation or waste business model, various key activities could be considered for outsourcing, including but not limited to:
- Logistics: Especially when it comes to resource recovery and reuse from waste or wastewater, the source of the waste steam and the point of use of the reuse end-products are often far apart. Transportation costs related to the collection of waste can also be a key financial burden
- Production: Setting up a full production line requires heavy investments. For decentralised (waste)water treatment solutions you may be better off to revert to established manufacturers of tanks, pipes, technical equipment, etc. to produce the parts you need for your solution rather than setting up your own production site
- Operation and Maintenance: If you have a value proposition that promises functioning water or sanitation services that build on a product, you will have to ensure adequate operation and maintenance. plumbers or other service providers in your area of work may be able to take these tasks off your plate.
- Marketing and Sales: Developing and producing a water-related product like a filter or test kit requires completely different capacities than selling it. Working with retailers or partners that target the same customer segments may be more cost efficient and effective than investing into setting up your own sales force.
- Campaigning and communication: Awareness-raising and demand creation are key challenges for green entrepreneurs. At the same time, there may be overlaps with objectives and interests of environmental NGOs, government institutions or civil society initiatives related to your market. Check if you could partner up with them to reduce the burden on your end.
Aside from reducing costs, what are potential benefits of the Outsourcing Strategy?
- Freeing up resources for the core aspects of your business: By outsourcing non-core activities, the company can essentially focus on what it is good at. Outsourcing also means that you need to employ fewer people, cutting down on fixed costs.
- Tapping into a wider talent pool: Outsourcing to specialised companies gives you access to their specialised staff and capacities.
- Scalability and flexibility: If your company outsources some of its activities, this offers your company plenty of flexibility for scaling up your activities if you are experiencing rapid growth.
Are you wondering if outsourcing is the right approach for your business? Although not exhaustive, here are three key points that you should take into consideration before applying the strategy:
- More resources have to go into communication and coordination. Maintaining good and efficient communications with your new contractors can prove challenging at times, especially when they are based in different parts of the world and have a different work culture
- One of the biggest trade-offs of this strategy is that you have to cede part of the control over your value chain. It is therefore vital that whatever service is being outsourced meets the standards set out at the start of the contract. Failing to do so could put you at risk of compromising the value proposition of your company.
- One final point to look out for is how outsourcing will affect your customer service experience (if at all). This will depend on what activities of your business model you are outsourcing, who your contractors are and what relationship you have with them. Identifying the differentiation elements and the added value of your company will enable you to make better informed decisions when outsourcing. For example, if your differentiation factor is that the staff that deliver your service are very personable and friendly, you might not want to risk outsourcing delivery activities in your company, as it will be harder to control how they deliver your service and could potentially risk a loss of customers.
Outsourcing should be about “making your life easier”, so to speak, so no matter how cheaply or how efficiently another company can do work for you, if outsourcing your activities comes with too many trade-offs then it becomes more of a hindrance than a help. Therefore, before you make the decision to outsource, make sure that you have carried out a thorough risk analysis and that you prepare for any eventualities.
When outsourcing is done strategically, and the value proposition as well as the company culture are protected, it can yield significant benefits all-round.
Case Study 1
Compost Baladi is a Lebanese waste management social enterprise that was founded in 2017 in response to the on-going waste crisis in Beirut. It primarily repurposes organic waste and provides waste management solutions for different scales of operation.
Compost Baladi outsources its logistics to a specialised delivery company. The company was faced with two options when it came to deciding how the waste was to be collected and transported to the plant: 1) it could either own the infrastructure and resources needed for the collection and transportation of waste (including waste truck, hiring a driver and collection staff, petrol etc.) or, 2) it could outsource it to a specialised company and free up resources for focusing on their core value generating activities (composting). Being a young company and wanting to concentrate on its speciality (composting), Compost Baladi decided to go with the latter. The company managed to secure a strategic local partner that would not only provide a collect & transport service but would also cover all the necessary logistics and risks associated with the handling of waste.
Case Study 2
Innovating Green Technology (IGT) is a young Lebanon-based company developing a broad variety of tailor-made solar-based approaches to water, sanitation and energy-related challenges.
As part of their portfolio, IGT has launched a solution called PRO-Shield, an innovative solution for the overheating problem faced by solar water heaters, especially in regions with extensive sunshine such as the Middle East. Overheating of solar water heaters can cause up to 30% losses of water, reduces the life span of the heater by half, and decreases the solar water heater efficiency by 30-40%.
In order to reach customers, IGT partners with providers of solar water heaters that distribute the PRO-Shield mechanism as an add-on. IGT thus cuts down on marketing costs (e.g. reaching out to customers interested in purchasing or already owning a solar water heater) as well as the transportation and distribution of the PRO-Shield itself.
The PRO-Shield product. Source: IGT (http://igtlb.com/)
So far, there are very few empirical research studies available on the outsourcing pattern among small- and medium-sized enterprises (SMEs). The purpose of this paper is to examine strategic outsourcing among Icelandic SME service firms, from 2009 to 2018.EDVARSSON, I., DURST, S. & OSKARSSON, G. (2019): Strategic outsourcing in SMEs. Journal of Small Business and Enterprise Development. In: Journal of Small Business and Enterprise Development: Volume 27 Issue 1, 73-84. URL [Accessed: 29.07.2020]