On Management

Dec. 21, 2004
Strategic outsourcing can be powerful medicine.

Most businesses were born because someone had a better way to meet customers' needs. Many functions must be performed in any company, but not all are equally critical to the needs of the customer. The most critical ones are "core" to the business. Others (like paying the bills) are necessary, but not core. Understanding the core competencies that make a business special is a critical step in any decision on outsourcing. If you are not very good at something that you must do, it may be wise to outsource it -- unless, of course, it is core to your business. Outsourcing is defined as: A strategic decision to obtain goods or services from independent organizations outside of a company's legal boundaries; to purchase goods or services instead of making or doing them. Outsourcing is most prevalent in administrative and support functions, not in "value-creating" ones. However, in recent years more companies have been outsourcing value-creating activities to leading companies such as FedEx and Solectron that have reshaped the old sourcing model. The new model often involves strategic partnerships in which the supplier provides a higher level of integrated value -- including closer linkage and rapid response. It is important to understand the consequences of any strategic outsourcing decision. Here's a starter list to consider: Strategic issues:

  • What is "core" to your business?
  • What is your true competitive advantage?
  • Are you willing to share information openly?
  • Should you outsource entire products, or just certain components such as raw materials or services? Operational issues:
  • Does your organization have adequate capacity?
  • What is the ideal facility configuration?
  • Should you outsource the same way across all parts of the company -- or differently in different markets, countries, or product lines?
  • Is the technology broadly known or is it proprietary?
  • Is the demand variable with business cycles or seasonality?
  • Who has the best skills and best practices -- you or someone you can buy from?
  • What is the turnaround for decisions required to respond to market/customer needs or to meet competitive threats? Structural issues:
  • Is there a culture match and trust between your company and the outsourcing partners?
  • What are the desired terms and duration of the agreement?
  • Are intermediaries involved -- and should they be?
  • Will there be formal contracts or informal agreements?
  • Can true partnerships be forged, or must it be an arms-length buy-sell?
  • Are joint ventures, acquisitions, or mergers a better option? A few words of caution:
  • Make sure that you aren't trying to run from problems that are yours to remedy. If you simply shift them to a vendor, they'll be further removed from your ability to deal with them.
  • Don't lose or give away what makes you unique!
Outsourcing the right work to a contractor with complementary skills and a compatible culture can be a powerful strategy. The time to be wary is when outsourcing requires sharing too much core know-how of your business. One of the best ways to decide when and where to outsource is to benchmark which company is best at value-added (core) functions and various noncore functions. Then you can decide whether to improve or outsource. But like any powerful medicine, use it with care. A poor outsourcing decision can have disastrous results. John Mariotti, a former manufacturing CEO, is president of The Enterprise Group, a consulting business. He lives in Knoxville. His e-mail address is [email protected].

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