Counting on business outsourcing

OUTSOURCING can be a cost-effective way for small businesses to grow and prosper, but it is vital that operators are aware of the potential pitfalls.

Counting on business outsourcing

OUTSOURCING can be a cost-effective way for small businesses to grow and prosper, but it is vital that operators are aware of the potential pitfalls.

"Generally, outsourcing is where you get a third party to provide services or goods to you," says M+K Lawyers senior associate Noelene Treloar.

"You might engage a consultant to build a website or develop a database or do product design and that's then sold or used by you in your business."

Treloar says the simplest and one of the most common examples is IT outsourcing.

"It can be quite efficient because otherwise you have to develop your own skill and expertise and stay on top of all technological developments," she says. "With outsourcing, you don't have to develop that in-house capability."

However, the potential cost saving comes with a host of risks attached.

These include things such as giving a third party access to confidential information, becoming too reliant on a third party provider for a particular skill set, making a poor choice of provider, and having no control over the conduct of the third party.

These risks can be minimised by having a clear understanding between the parties and putting it in writing from the outset.

That should include things such as a payment plan, a schedule for product or service delivery, who owns the final product and who owns what has been brought to the project.

"We would advise a legal agreement between the parties clearly setting out the obligations," Treloar says.

She also suggests asking for references and contacting others who have used their services, as well as maintaining regular communication.

"Have a limited trial in the first instance and see how it works out - do not jump in all at once.

"It's a balance between needing to move forward commercially and making sure you are aware of the risks and at least try to mitigate them in some way."

Pitcher Partners partner Leon Mok says outsourcing overseas can also present a range of new issues and risks to small businesses.

These risk can include understanding and complying with different laws in different jurisdictions - including taxation laws, dealing with foreign currency transactions and the need for perhaps a more sophisticated banking system, as well as any potential impact on things such as a "Made in Australia" status.

Mok says it is important that any small business considering outsourcing offshore should do their due diligence on their potential provider.

They should check their client base, track record and any other available information.

"The main thing is to do your homework to make sure you're ready for dealing with this third party; especially if they're out of Australia it can be very different," he says.

Things like word of mouth and dealing with someone known to another business associate can also reduce the risk, he says.

David Torelli, chief executive and co-founder of promotional products company High Caliber Line Australia, says his company relies heavily on outsourcing its back-end IT operations to India, and have done so for the past seven years.

Torelli, a member of the Entrepreneurs' Organization, says the company minimises the risk by holding back some of the company information from the provider.

The third party company is also run by a person well known to Torelli.

"We don't put everything in the hands of our operators overseas; we safeguard our business that way," he says.