Reynolds and Son, a distributor of construction supplies and equipment located in Barre, Vt., first started outsourcing its payroll when the company operated a branch in Massachusetts.

"Keeping up with the laws and rates in two states, as well as the federal government, was difficult," says Barbara Goulette, treasurer and office manager at Reynolds and Son. "Our computer system was not as flexible as we needed. We looked at doing payroll on a PC, but decided instead to investigate some payroll companies.

"The outside payroll company we went with operated in all states, so they had the latest information on rate changes for the state and federal governments," she says. "They had a system that produced all the reports and the end-of-year W2s. In the past, we had typed them all, so the savings in personnel time was obvious, as was their timing and accuracy."

More and more distributors and companies are outsourcing aspects of their businesses. Outsourcing, by general definition, is when a company uses outside sources for services. Companies take a step back, look at what their competencies are and are not, and if they find some are deficient, contract an outside business whose expertise covers those aspects.

"Most companies will ask themselves a couple of questions that will highlight their potential need for an outsourcing company," says Vin Gulisano, senior vice president of global sales, marketing and business solutions engineering for APL Logistics, a provider of global supply chain and logistics services located in Oakland, Calif. " 'Are we performing these actions sub par compared to the rest of our industry peers?' and 'Are our costs above average for this function?' are a couple questions that need to be answered. The management needs to look at their business from a strategy perspective. Without these aspects taking up personnel and time, they could focus their capital and energy on other areas."

According to ID's 56th Annual Survey of Distributor Operations, functions outsourced by distributors (listed in descending order from most frequent) include: transportation, fleet maintenance, manufacturing, freight payments, inventory financing, communications/tracking, logistics/warehouse software systems, warehousing, customer service, vendor-managed inventory, order fulfillment and distribution/operation management.

"I ask companies if those functions are consistent with the other services in the organization," says Neil MacIvor, chief operating officer of New Product Innovations, a global design and manufacturing consulting company located in Columbus, Ohio. "Are their internal resources tackling them with the proper degree of consistency and availability? Outsourcing is the classic 'make vs. buy' argument. There needs to be a return on the investment."

Having decided to outsource their payroll, Goulette and Reynolds and Son interviewed the payroll companies in the area, looked at their reports, interviewed their references and called for consultation.

"First, figure out what your needs are," says MacIvor. "Have them clearly defined and have them itemized."

Starting a search with the industry trade publications and simply asking around are the first steps to finding an outsourcing partner. Investigate the top players in that outsourcing field.

"The real way to succeed is to find which company you work with the best," says Gulisano. "The core to making it work is having a relationship with the company. Pull them into the network and treat them as part of the team."

Adds MacIvor, "Link up with the outsourcer's top and middle management. Be sure that they will support you and your company, and that your business isn't a minor player in their scheme of things."

Reynolds and Son, unfortunately, learned the hard way that they were not as high on their outsourcer's priority list as they had hoped. The outsourcing company erred on the 401K report every month and Goulette had to continually redo it. The outsourcer grew so large that Goulette found it impossible to contact anyone in person. Reynolds and Son fired the company and, after conducting the same interview process, went with a smaller New England–based company.

"We had been with this company for several years, and had a great relationship," she says, "but they were bought out by a big company last fall and more processing errors have occurred. The payroll is always accurate, but we've had timing issues."

When interviewing potential partners, be sure the outsourcing company knows what it is doing. Take them to task over their customer service, i.e., response time, processes and the like; technical support, including systems and personnel to support the business; financial abilities to support their half of the agreement; facilities and equipment to perform the service; and past and current clients, since one can tell a lot about a company by who it's worked with.

"Theoretically, cost should be the last consideration," says Gulisano, "but it is one of the top concerns."

Each outsourcing company can figure the cost of outsourcing differently. Most contract costs are based on a ratio of a project's fixed costs (labor, materials, facilities) to its variable costs (overhead, packaging, profit).

As to benefits, outsourcing has many, including the fact that the outsourcer's job is to devote its resources to this one aspect of a business, be it financial or legal, etc. In general, this would mean that the service level would be higher. These outsourcers are providing a better service that should be less expensive than the company's costs in performing the function in house.

The decision for Reynolds and Son to outsource was easy, says Goulette, when they considered that someone outside the company could do the payroll better and cheaper, and with no impact on their customers. She considered it a win-win situation.

"I would definitely recommend outsourcing, if you don't have the time, personnel and knowledge or skill to do something in house," says Goulette, "and especially if you can assign a cost to that function and find that the outsource is a savings."

Observes MacIvor, "Outsourcing gives these businesses the opportunity to focus on their core interests. Internal resources are limited. And whatever resources you don't have, or don't want to apply, can be refocused, and your aspect can be outsourced easily."

To every benefit, there is a negative, as Goulette mentioned, and when her outsourcing company erred on reports and wasn't responsive, Reynolds and Son moved on.

With these functions being handled out of the building, companies must be extra vigilant with whom they partner.

"Some outsourcing companies can over promise," says Gulisano. "Companies to watch are willing to move forward without all your information, and consider your contract as nothing more than a job."

Reynolds and Son has considered outsourcing other functions of its business, notably deliveries, but they decided to continue with their own trucks, since another set of eyes at a customer's site helps them keep updated on their equipment and help make recommendations.

"Go through your organization and see what areas need help," says MacIvor. "If you are timid about it, sample outsourcing on a lower risk aspect of your com-pany to see if outsourcing is right for you."

Gulisano adds, "Outsourcing is not a one-size-fits-all experience. Talk to people in your industry about their experiences. More importantly, learn from them. If you don't, you will make a costly mistake."