Outsourcing over Employment; introducing the Pareto principle

Understood by many, yet only used by few; outsourcing makes sense.

Unlike the misconception most people have regarding outsourcing, it doesn’t always include off-shore companies, or low quality services.

Pareto principle, in summary, is an 80/20 rule, which can be applied to most things. The relationship is an imbalance between an input and an output, two factors, not always 80% and not always 20%. In fact, the relationship does not have add up to 100. 20% of employees could easily create 90% of profits. The principle simply shows an imbalance.

Examples of how the Pareto principle has a huge impact, daily

• 80% revenue goes to 20% of businesses
• 80% of leads come from 20% of the marketing budget
• 80% of a result comes from just 20% of effort

Or…

• 20% of staff create 80% of productivity
• 20% of a day is productive, whilst 80% is wasted
• 20% of marketing campaigns work, 80% don’t

The Pareto principle, in theory, relates to anything. Identifying where an imbalance is and how it can be altered has allowed many large corporations to profit. There is a realistic possibility that 20% of time or effort could produce 80% of an end result. What does this mean? A huge portion of time, energy, resources and money are being wasted.

How does this relate to outsourcing?

The employee

Junior Digital Marketer (Sam): £20,000 per annum

Main skills: Website Copywriting (years of experience, natural flair for great ads etc.)

Other skills: (adequate in terms of education, but practical experience and natural ability is lacking) Web design, copywriting, social media marketing, web analytics and email marketing

Hold the phones; don’t blame Sam!

Sam clearly has one core skill. The employer has probably recognised this, hence employing Sam, in the first place. Yet, they still prove the 80/20 rule correct, allowing Sam to spend 80% of their time on wasteful projects, when the real ROI, is with copywriting campaigns.

Why would anyone be so wasteful?

HR management is not exactly easy; finding good employees can be hard. Even when they are found, the work load is not always there. If an employee has free time, naturally their employer will move them onto another project; web design, or maybe PPC campaigns.

Consider Sam in a new perspective! Sam is productive 20% of the time (when he is copywriting), on a wage of £20,000. Essentially, £4,000 of their salary is well spent, with £16,000 being wasted.

Yes, it is understood that there are many variables not taken into account. Sam may be productive, to an extent, when producing PPC campaigns; but then holiday pay would probably offset that. Sam’s wage might be 20% less; but then again, lunch breaks and times of distraction have not been accounted for – the list goes on.

 

This is an abstract puzzle; put it together in a way that it can work, relative to how a business operates.

 

Pareto principle is not a “Holy Grail”. Each business owner needs to apply it to a mechanical component within their business; office wastage, distribution or HR. Are 80% of employees only producing 20% of the work? Are 80% of products only creating 20% of the revenue?

#1 Cost efficiency and quality assurance

Getting a fixed price on a project will mean better value. Outsourced work is billed to clients, based on productivity that is the 20% mentioned above. On that basis, the copywriting project could have been outsourced, for just £4,000, and will be much better quality.

 

Why? An employee is paid; regardless. Outsourcers are paid based on their overall output, which includes quality.

#2 Efficient allocation of resources

The copywriter will get results; when copywriting. Any time they spend on other marketing projects is wasteful. Example: A PPC professional may be able to get 2.5% conversion on a £10,000 campaign, where the copywriting specialist is is likely to get much lower; say 1%.

#3 Increased capacity

Being able to increase capacity (the ability to produce more, sell more and ultimately; create a higher revenue), with the same resources, is priceless. Many businesses have been victims of their own success, suffering from over expansion. They move from a home based £50,000 p/a operation, to an office based £250,000 p/a within 2 years. That can’t be bad!? It can, and here is why…

Most businesses have a maximum capacity. They can deal with 100 orders a day, service 10 clients per month or produce 1,000 items a week. For X revenue, Y expenditure will usually take place first.

If they are producing 5X, then they need 5Y. Dependant on the business, this could mean: bigger bank loans, expensive machinery, higher rent and extra salaries. Add up the sums and it equals risk. They are committing! When times get tough, cash flow is the first one to take a battering and many companies go under. Outsourcing allows a company to expand, with the same resources they have always been committed to.

Summary

Back to the original point; understood by many, yet only used by few; outsourcing makes sense.

Outsourcing key business related tasks allows a business to ensure they achieve:

• Great value for money
• High quality output
• Efficient allocation of resources
• Increased capacity