Strategic Outsourcing Can Be Powerful Medicine
© John L. Mariotti 1999
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Most businesses were born because someone had a better way to meet a customer's 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 the first and most critical step in any decision process on outsourcing. If you cannot be very good at something that you must do, it may be wise to outsource it--unless, of course, it is core to your business. Then you had better "get good" at it.
Before we go any farther, let's state a basic definition. Outsourcing: 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 still most prevalent in administrative and support activities, not in the "value-creating" ones. However, in recent years, more companies have been outsourcing value-creating activities to leading companies like FedEx and Solectron, who have reshaped the old sourcing model. The new model often involves strategic partnerships where 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. They can be far-reaching and have tremendous impact on your business. The issues that must be considered are countless, and differ for every situation. Here's a starter list to consider:
Strategic issues:
- What is "core" to your business?
- What is your true competitive advantage?
- Can you be good enough at everything?
- Are you willing to share information openly?
- What to outsource? Entire products--or just certain components, raw materials, or services?
Operational issues:
- Does your organization have adequate capacity?
- What is the ideal facility configuration?
- Should you do "it" 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 are the time frames for decisions required to respond to market/customer needs or to meet competitive threats?
Structural issues:
- Is there a culture match and trust between the 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:
- "You can run (from problems) but you can't hide (from them)." 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.
- Outsourcing, like delegation, does not mean abdication.
- The switching costs from make to buy, or vice-versa, may be high.
- Don't lose or give away what makes you unique!
There are many advantages in outsourcing to third-party contractors who have special skills, unique knowledge, different resources, or technology that you need not own. Outsourcing the right work to a contractor with complementary skills and a compatible culture--and where there is something in it for both partners--is a terrific 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 use this powerful medicine is to benchmark whoever is best at the both the value-added (core) functions and various non-core functions. Then you can decide whether to improve or outsource. But like any powerful medicine, use it with care. A poor outsourcing decision can lead to disastrous results.
