Comparative advantage: the real case for outsourcing

Key takeaways

Comparative advantage means a business gains by doing the work where its edge is largest and handing over the rest, even work it does well. An owner who invoices faster than anyone still loses if those hours could win clients. The test is not who is best at a task, but what each hour could be used for instead.

• Being good at a task is not a reason to keep doing it.
• Compare what each hour could earn, not who is fastest.
• Owners and specialists gain most from handing over routine work.
• The idea dates to David Ricardo in 1817 and still applies.

What is comparative advantage?

Comparative advantage is the idea that a person or business should focus on the work where its relative edge is greatest, and trade for the rest. The economist David Ricardo set it out in 1817 to explain trade between countries. Absolute advantage is being best at something. Comparative advantage is giving up the least to do it.

• How outsourcing can improve business efficiency
• The opportunity cost of doing everything in-house

How does it apply to a small business?

It applies whenever a senior person does routine work well. A partner may process expenses in half the time a junior would, but every hour on expenses is an hour not spent advising clients. If that hour earns several times more in client work, the business is better off handing over the expenses, even to someone slower.

• Skilled staff stuck doing admin? What it costs you
• Outsourcing to focus on your core business: what changes

What does it look like in numbers?

In an illustrative firm, a director does 6 hours a week of admin and bills client work at £100 an hour. A managed team takes 8 hours to do the same admin at an indicative £12 an hour, costing £96. If the director bills even 3 of the 6 hours freed, that is £300 earned against £96 spent. Example figures, not a benchmark.

• Director: 6 hours a week on admin, worth £100 an hour elsewhere.
• Managed team: 8 hours at an indicative £12, about £96.
• If 3 freed hours are billed: £300 a week earned.
• The slower option still wins on the whole business.

• What is your time worth as a business owner?
• How to increase billable hours without longer days

Why do owners resist the idea?

Owners resist because they can see the cost of handing over and cannot see the cost of keeping. The provider's invoice is visible, while the client work not done is not. There is also pride: being the fastest person at a task feels like a reason to keep it. Writing down what the freed hours will be used for makes the trade visible.

• Why businesses keep work in-house when it costs more
• Time freed by outsourcing: how to spend it well

When does comparative advantage not justify outsourcing?

It does not justify outsourcing when the freed hours will not be used for higher-value work, when the task is small, or when handing it over adds more coordination than it saves. It also fails when the task is part of your value to clients, such as a founder's personal review of every proposal.

• When not to outsource
• How much of your time does an outsourced team need?

What does this look like in practice?

A pattern we see: the owner says the admin takes them only an hour a day because they are quick. Logging shows it is spread across the day in small pieces, and the real cost is the broken concentration around each one. The gain from handing it over is larger than the hour suggests.

• See client work
• BPO Solutions for UK businesses

Comparative advantage checklist

Use these steps to apply the idea to your own week.

• List the tasks you do that others could do.
• Estimate what one hour of your core work is worth.
• Compare it with the cost of handing each task over.
• Decide in advance what freed hours will be used for.
• Hand over the task with the largest gap first.

• Delegate vs outsource: which should you choose?

Next step

Send us a rough list of the routine tasks you do each week. We will help you work out which ones cost you the most in lost core work.