- Internalizing vs Externalizing Work: A Fine Balance
- Factors To Consider
- Baseline Considerations
- Procurement Strategy Guideline
- Success Stories
Procurement strategies should make full use of freelancing services more so than ever before. In a century dominated by big data, digital disruption and fast-paced business, increasing your company’s use of agile talent is simply a must. The aim of this piece is to help in developing a procurement strategy for a freelancing age. This extended paper dives into critical questions that procurement leaders must ask themselves when examining which products and services can be outsourced. We will explain how a fine balance between internalization and externalization can occur, and factors to consider before beginning a procurement strategy. We will also show a sample of success stories that have achieved this fine balance, and demonstrate a structured guideline for developing a procurement strategy in the freelance age.
Internalising vs Externalising Work: A Fine Balance
The Federal Trade Commission generalizes that “[f]irms with products that are complex or technologically sophisticated will tend to internalize production through foreign direct investment. companies that face a lower risk of imitation, or are less technically advanced, will tend to license production to non-affiliated [persons].” Deciding on whether to internalize or externalize research, development, production and/or distribution of a product or service may not be as clear. In reality, companies have to find a fine balance between the two seemingly pole opposites in order to do business in a manner which a company has intended. We will herein discuss aspects of internalization and externalization, and how a fine balance can be achieved.
Internalisation and Critical Intellectual Property
Internalization involves the research, development, production and/or distribution of a product or service that is regarded as intellectual property with a company’s own resources. According to WIPO, “Intellectual property (IP) refers to creations of the mind, such as inventions, literary and artistic works, designs, and symbols, names and images used in commerce.” The goal of owning IP is to promote innovation and creativity in the economy and ensuring monopolistic or close-to-monopolistic profitability.
Externalization and Talent Outsourcing
Externalization involves the research, development, production and/or distribution of a product or service that is regarded as not intellectual property with external resources. Such resources can include professional freelancing, consulting services, and third-party service providers. In the today’s freelancing age, the use of professional freelancers may likely be more valuable than the use of consulting services or third-party providers. Individuals from within the company may be mentally institutionalized and thus myopic to customers’ real needs, thus may not be able to conjure their inner creativity. Using external resources such as freelancing can bring new perspectives and generate value from outside the institution by bringing in specialist skills and experience.
A Balance between Internalization and Externalization
While both externalization and internalization decisions may seem like complete opposites, many successful companies pursue a balance of the two – such that a unique balance of the two is more profitable and more productive than pursuing only either of the options. In fact, in many cases, businesses find that externalization of particular business processes can help the company to focus their internal resources on their core strengths, and allow external sources of talent to innovate upon weak points.
Factors to Consider
Before a decision is made about which business activity should be internalized or externalized, there are four main factors to consider first. Business Model The first question that must be asked by a corporation is “What is my Competitive Advantage?”. That is, is this product or service proprietary to your business? To what extent is this proprietary i.e. should your company be the only company to own ownership rights, production know-how, and/or R&D process of this product or service? Are you referring to the ‘platform’ which provides the products or service, or the end-product or service which shall be deemed proprietary to your company? A map may help to answer this question:
Your company should also ask which levels of the company would such a procurement strategy help? A pyramid from Denali Group is presented:
The business also needs to determine how certain procurement objectives are related to corporate objectives. Denali Group provides a table to better understand these relationships
Procurement & Corporate Objectives:
Once your company has clarified exactly aspect of the product or service should be proprietary to the company, then we can continue further with other equally significant factors to consider. Financing Limitations Limitations in operational capital will mean choosing between freelancing and employment of talent, in the short-term or long-term for either combination or a unique combination. Unique sets of combinations might, therefore, depend on either the fundraising stage of the company or a company’s business model. Based on Fundraising Stage by Entrepreneur:
It is definitely worth noting the long term cost savings to companies of using top freelance talent vs traditional consulting firms. That is, since consulting companies can be filled with much bureaucratic paperwork and can involve multiple layers of unforeseen expenses, freelancing provides an efficient and cost-effective alternative; professional and qualified freelancers typically have the same level of experience or better than consulting firms’ employees, and can be more flexible to work and communicate with.
Procurement strategies will also involve legal concerns. Depending on the funding stage of the company, different legal agreements can be enforced and/or customized for the particular business activity with the freelancer. A sample includes:
Prior to an agreement on a procurement strategy with a freelance provider or piece of technology like Expert360, security issues must also be considered. Are the projects that will be offered secretive or critical to the intellectual property of the company and can the professional freelancer be trusted to work in the interests of the company? While this may be a hard question to answer, corporations can reduce risk by engaging in risk management activities to improve the probability of success of a contract. Such risk management exercises may include:
Fortunately, some freelance marketplaces like Expert360 enforce a strict vetting process for their freelancers. This means that a significant amount of background screenings and due diligence are done in advance for those that will be hiring freelancers in your company. You can read more about Expert360’s vetting process, here.
To create a successful procurement strategy, the current baseline of your company must first be properly defined and fully understood. Baseline is herein understood as, according to the Business Dictionary, a “[c]learly defined starting point (point of departure) from where implementation begins, improvement is judged, or comparison is made”. That is, is the procurement strategy beginning from a value baseline or an efficiency baseline? A value baseline for a procurement strategy means understanding how your procurement strategy is currently adding or creating value; an efficiency baseline for a procurement strategy means understanding your organization’s current operational efficiency and effectiveness. A table by Denali Group is presented as a sample of value and efficiency metrics to consider when defining the baseline for the intended procurement strategy: Typical Value Benchmarks & Data
Procurement Strategy Guideline
Components of a Procurement Strategy
According to the Denali Group, we can scientifically dissect a procurement strategy into its inputs, its strategy, and its outputs. The chart herein shows their method:
Depending on the product or service that is being considered for a procurement strategy by a freelancer, the company would have to decide exactly which input data is relevant and what to expect from its results. The table on the above covers a whole array of potential data inputs and information outputs. In reality, a business should expect a particular set of data inputs for its intended specific output only. For example, if a private company required work done to improve the valuation of its business as it is preparing for a fundraising round, then it would have to expect a variety of asset-based, cost-based, or cashflow-based valuations – each with differing multiples. To do this, it is likely that the company would only be required to provide corporate financial data and business unit data, and not market or economic data, and expected results might also include forecast and projected financial data used for its improved valuation of the business. Success Stories
EquitySoft Investments successfully internalized the initial development of an excel-based trade execution system in order to later on internalize and re-develop its own in-house trade execution system. EquitySoft wanted to develop medium-high frequency (machine learning) trading strategies for wealth management but was unsure about whether to use an Excel API to connect to brokers for automated trade signals, or to use an institutional grade broker with colocation in order to reduce latency of signals. Hence, its CEO hired a freelancer to develop such an Excel addin in order to test trade signal latencies and realized that an expensive IT infrastructure is required for a relatively slow execution method – this is not worthwhile. In a few years, when EquitySoft had developed an appropriate outline for its trade execution system, it was finally backed by sophisticated investors and hired a professional financial engineer to develop a system that is both cost effective and low if required latency. EquitySoft realized that the machine-learning trading algorithms were proprietary to its business model – since this was what they pride themselves in as the solely unique company specialized in AI wealth management in Vancouver, Canada. Because these algorithms were their algorithms only, they need not internalize the development of the trade execution system. Hiring a freelancer to develop the Excel API was hence very strategic in testing if such an API is sufficient for its algorithms’ required minimum of trading speed.
IIPMR has successfully externalized the creation of training content and internalized the structuring and creation of its training curriculum. By externalizing the curation of individual training topics to professional and qualified consultants and freelancers, IIPMR can focus on developing the higher-level component of its unique selling proposition, i.e. the entire structure of their courses and programs that lead to professional certifications. According to Market Research Experts, the top Supply Chain Certifications ranks IIPMR as #1. IIPMR realizes that its focus should be its certificates and developing its reputation and brand image as a reputable institution. Hence, they have externalized the development of individual courses while internalized the development of total certificate programs for its clients.
Apple has succeeded in internalizing the development of the iPhone and externalizing the development of its applications by allowing freelancers to develop applications for its iPhone. On June 11th 2007, Apple announced at the Apple's Worldwide Developers Conference that the iPhone will begin supporting third-party applications using the iPhone’s Safari engine; Apple was worth USD$29.3 billion then. Today, partly because of Apple’s decision to continually focus on innovation of the iPhone and its applications (along other Apple products), Apple is worth USD$772 billion today – a 26 times growth in market valuation! In fact, with the continued use of freelancers to develop the iPhone’s applications, Apple’s app store revenue alone grew from USD$4.2 billion in 2009 to USD$28 billion in 2016. Apple understood that the iPhone was proprietary and key to its business model – that no other company must have iOS platform and a similar design to its iPhone, priding itself for ingenuity, simplicity, and user-friendliness. That was its competitive advantage. The iPhone’s applications, however, would require an understanding of what the public needs to use the iPhone; hence, what better way to meet the public’s demands of applications by allowing them to develop what they needed to buy and use the iPhone. This is the key to how Apple uniquely blends the internalization of its iPhone while externalizing the iPhone’s applications.
Before your team decides on a procurement strategy in a freelancing age, the company should understand what externalization and internalization of a product or service mean and what they entail. In reality, most companies that are successful have a unique blend of internalized products and/or services with externalized products and/or services. Deciding on a procurement strategy is indeed not an easy decision. The company must consider how and in what manner a procurement strategy improves or compliments its business model and if is has the right amount of and is in the appropriate stage of financing. The company also has to consider how to deal with any legal issues associated with freelancing work by strategically deciding how it will use legal documents to protect its business interests. In addition, the company should systematically mitigate any potential security risks and avoid or minimize potential conflicts of interest by choosing the right freelancer for the procurement project. Once these factors have been dealt with appropriately and strategically, the development of a procurement strategy can begin with the chosen freelancer or consultant. The first consideration of developing a successful procurement strategy is to define its baseline – i.e. if this is a value baseline or an efficiency baseline. Thereafter, components of the strategy must be outlined and sourced so as to develop a systematic strategy. The company then thereafter follows through a details and systematic step-by-step guideline for a procurement strategy to ensure that the project between the company and the freelancer is a success and produces long-term results. There are a multitude of success stories that have produced favorable results by uniquely combining both internalized and externalized projects. These include not only private companies like EquitySoft Investments and IIPMR, but also publicly traded companies tech-giant Apple.