Resourcing Efficiencies – Part 3

20 May 2021
 

Outside of an organization’s core competencies, on-demand services can add tremendous value to an organization’s operations. The perception that on-demand, external services are more expensive, or less cost-efficient, than internal resources is based on assumptions which, when examined closely, do not hold up. The actual cost and inherent inefficiencies associated with maintaining internal capacity is vastly underestimated, a fact that will be demonstrated in detail.

There are three core issues with analyzing the true cost of internal capacity are examined; the actual costs of employees, inefficiencies due to multitasking, and the inability to react to changes in demand. These three factors are often misunderstood and, as a result, underestimated when calculating the cost efficiency of an organization’s output. Below we outline our thoughts on the inability to respond to shifts in demands and why these principles are so important in understanding your business’ unrealized growth.

We will continue our discussion next month on countermeasures to help businesses boost efficiency. 

 

Inability to Respond to Shifts in Demand

Using a team consisting of entirely internal employees will be static in nature. As such, your organization will struggle to deal with shocks of demand. A demand shock is a sudden, unexpected event that dramatically increases or decreases the demand for a particular good or service. While it is a concept that is usually used to explain macroeconomic trends and industry-wide developments, it is a useful concept to understand in order to fully appreciate the costs of operating solely using internal resources.

In response to a positive demand shock, be it due to external factors or a sales strategy taking full effect, demand for an organization’s goods or services will surge. In most cases, the organization will not have the capacity to ably respond to this demand. It takes a significant amount of time to find, hire, and train staff to ensure that they can deliver results to standard. As such, the organization will miss out on revenue due to an inability to engage with customers in the first place, or on penalties for lower quality or untimely delivery of results. An inability to respond to such a surge in demand will, likely, ensure that such a surge does not occur again. If customers observe an inability to respond positively in circumstances such as these they will not be return customers, and the organization’s reputation will suffer. Without the flexibility to add immediate capacity, positive demand shocks will have, at best, a negligible effect on the business and could even harm the long-term outlook.

 
 

Conversely, when a negative demand shock occurs, due to an economic downturn or one of an organization’s offerings becoming outmoded, demand for an organization’s goods and services drops sharply. In response, an organization entirely made up of internal employees will suffer a drastic outlay of resources. Firstly, the damage will often be done before the remedy is found, especially if the drop-off in demand is due to an internal source such as a decline in quality. Costs will already be sunk into producing a product or service which is much less valuable than it was previously. Losses are inevitable. To redress the balance, costs will be cut. The number one cost, staffing, is always analyzed in these scenarios. Attempting to make permanent staff redundant is a timely and costly exercise. As such, it may not even make a material impact on the health of the business – as mentioned, the damage was done when these employees were working on what now has no value. Changes could not be made dynamically enough to respond to these circumstances, leading to the dissolution of these employees’ roles and, perhaps, the organization.

The lack of responsiveness due to a dependence on internal capacity, then, has costs associated with both increases and decreases in demand. Added to this is the fact that almost no organization is able to entirely accurately predict the demand for their goods or services on an ongoing basis, even in the absence of demand shocks. Business models based entirely on fulfilling demand using internal capacity alone will always be limited in their ability to maximize the potential value of their business.

 

Click here to see all of our past articles and our exploration of on-demand services will continue next month!

 

Contact us at projects@virtusgroups.com for any business or advice inquiries.

 
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Resourcing Efficiencies - Part 2

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