Managing the Insource/Outsource Mix within a Restaurant Environment

With food comes passion, and most restaurant owners and operators manage their businesses with a special devotion not often seen in other industries. Ensuring every detail throughout the customer experience, as well as the back office, is executed according to a specific vision can lead to success, but it often means taking on functions internally that the business is not well-positioned to execute, or outsourcing functions that are best performed in-house.

Savvy restaurant operators know which functions should be outsourced and when, as the proper balance of insourcing and outsourcing can markedly improve performance. For distressed restaurants in particular, ensuring the right insource/outsource mix is typically a component within the turnaround process. Outside a turnaround situation, restaurant operators may be more flexible with the “when” and “why” of outsourcing. However, within a distressed organization, managing the mix is an imperative driven by the requirement to improve EBITDA as part of the larger turnaround effort.

In our experience with both healthy and distressed restaurants, outsourcing should be considered when an outside supplier can execute more cost-effectively, can deliver higher quality or efficiency, and/or when specialized expertise is required. Functions that are candidates for outsourcing typically include:

• Real estate
  • Lease negotiation
  • Property-tax negotiation
  • CAM audit
  • Construction

• Location upkeep
  • Cleaning
  • Repairs and maintenance

• Human resources
  • Payroll processing
  • Onboarding new employees
  • Recruiting corporate personnel and executives
  • Benefits design and management
  • Full-service HR needs

• Finance
  • Accounts payable processing
  • Financial accounting and reporting
  • Income tax planning and preparation
  • Insurance renewals and bid coverages
  • Legal
  • Utilities
  • Capital raising or M&A

• Marketing
  • Social media
  • Website development and maintenance
  • Media production and placement
  • Research and development of menu offerings

When outsourcing, it is important to ensure a process is in place to properly manage vendors. Contract terms must be clear with a detailed understanding of expectations on both sides. Quality must be monitored, and a clear process of escalating and quickly fixing issues must be in place.

On the other hand, certain functions within a restaurant environment should rarely be considered for outsourcing, including most of the core business functions. Core functions are directly customer-facing, embody culture or brand values, such as food quality or guest experience, monitor the “heartbeat” of business operations, and focus on service reliability.

Specific functions that should be off-limits for outsourcing include:

• Hiring, terminating, and training restaurant-level employees
• Restaurant supervision, including area and division management
• Health and safety training and monitoring
• Purchasing
• Financial management, including budgeting, analysis, and cash management
• Critical IT support, such as network connectivity or 24/7 store helpdesk

A cost-benefit analysis (CBA) can assist operators with understanding the true cost of insourcing. Considering payroll as an example, the payroll function represents significant risk. The cost of mistakes can be high, both financially and in their impact on the company’s workforce. A thorough CBA will uncover additional costs beyond labor, including office allocation, equipment and supplies, management, IT support spend, and employee turnover, all of which require significant investments to offset.

A good rule of thumb is that other costs associated with a fulfilling a process or function can add another 50% to 60% on top of payroll. For example, if a function requires $100,000 in payroll to execute, the addition of other costs could increase the true in-house cost to up to $160,000. Another CBA consideration is the scope of the functions outsourced: for example, reducing the number of accounts-payable clerks may not result in facility savings, but outsourcing both the payroll and accounting department may result in rent savings of an entire office floor.

Analyzing the insource/outsource mix is an exercise that can pay dividends for every restaurant. A proper analysis requires both an open mind and a quantitative perspective, and if done correctly ensures the right functions remain in-house and identifies outsourcing opportunities that will improve quality and efficiency, lower costs, and force standardization across the organization.

This article was also published in the Resturance Finance Monitor here.

About CR3 Partners, LLC

CR3 Partners, LLC is a national turnaround and performance improvement firm that assists, guides, and collaborates with management teams and their constituents facing any sort of transition, opportunity, stress, or distress. Based in CR3’s Dallas office, Sugi Hadiwijaya is a Partner, Gene Baldwin is a Senior Director, and Peter Feigenbaum is a Director.