Potential Benefits of Outsourcing
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Near-term
Benefits:
Function difficult to manage or out of control
Resources not available internally
Reduce and control operating costs
Cash infusion
Make funds available
Long-term
benefits:
Free resources for other purposes
Shared risks
Accelerate reengineering benefits
Access to world-class capabilities
Improve organisation focus
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Current enthusiasm for outsourcing stems from its many potential benefits. Quinn, et al. (1990) claim that outsourcing gives organisations the freedom to focus on core competencies. Klein (1990) recommends outsourcing for lower, more predictable costs and for relief of managerial responsibility for areas where they may be poorly trained. Welch and Nayak (1992) add that, along with focusing on high value-added activities, outsourcing converts fixed costs to variable costs, balances work force requirements, reduces costs via suppliers economies of scale, and improves access to suppliers innovations. Because outsourcing moves each activity to the producer who can do it the best, it creates the opportunity for lower production costs, greater flexibility, and improved quality, so that the organisation can concentrate on becoming a “world class producer” of its core tasks and functions (Quinn, et al., 1990).
To be successful, management must have a clear set of goals and objectives in mind from the start. Outsourcing of non-core functions may entail significant organisation upheaval, transfer of important assets, dislocation of people, and long-term contractual relationships with an outside partner. There are many potential benefits that can accrue an organisation, some which become apparent immediately, others more long-term in nature. What follows is a list found to be inclusive of most benefits reported in the literature. The first five reasons are tactical, near term issues and the second five are more strategic, long-term benefits.
l Function difficult to manage or out of control: Outsourcing does not mean handing off management responsibility. The reality is that when a function is viewed as “difficult to manage” or “out of control” the organisation needs to examine the underlying causes. If the real problem is that the organisation doesn’t understand its requirements then it certainly won’t be able to communicate them to a vendor either.
l Resources not available internally: Organisations outsource because they do not have access to the required resources within the organisation. Outsourcing is a viable and logical alternative to building up needed capabilities from the ground up. Rapidly expanding, or new organisations lacking the time or finances may find themselves looking to outsourcing to meet their needs.
l Reduce and control operating costs: The single most important tactical reason for outsourcing is to reduce and control costs. Access to the vendor’s lower cost structure, which may be the result of greater economies of scale or some other advantage based on specialization, is one of the most compelling reasons for outsourcing.
l Cash infusion: Outsourcing often involves the transfer of assets from the organisation to the vendor. Equipment, facilities, vehicles, and licenses used in the current operation all have a value and are, in fact, sold to the vendor. When these assets are sold to the vendor they are typically sold at book value. The book value can be higher than the market value. In these cases, the difference between the two is a loan from the vendor to the organisation which is repaid in the price of services over the life of the contract. That is, part of the cash is income from the sale of assets and part is a loan to be repaid.
l Make funds available: Outsourcing is a way to reduce the need to invest funds in non-core business functions. Instead of acquiring the resources through capital expenditures, they are contracted for on an “as used” expense basis.
l Free resources for other purposes: Every organisation has limits on the resources available to it. The constant challenge is to ensure that limited resources are put to use in the most valuable areas. Outsourcing permits an organisation to redirect its resources from non-core activities toward activities which have greater return in serving their customer. Most often, the resources redirected through outsourcing are people resources. By outsourcing non-core functions, the organisation can redirect these people, or at least the staff slots they represent, into greater value adding activities.
l Shared risks: When organisations outsource they become more flexible, more dynamic, and better able to meet the changing opportunities. Outsourcing is a vehicle for sharing these risks across many organisations. Outsourcing vendors make investments not on behalf of just one organisation, but on behalf of their many clients. By sharing these investments, the risks born by any single organisation are significantly reduced.
l Accelerate reengineering benefits: Outsourcing is often a by-product of another management tool, business process reengineering. Outsourcing allows an organisation to immediately realize the anticipated benefits of reengineering by having an outside organisation, one that is already reengineered to world-class standards, to take over the process.
l Access to world-class capabilities: Outsource vendors can bring extensive world-class capabilities to
meeting the needs of their clients.
Partnering with a world-class vendor can offer the following advantages:
1) Access to new technology, tools, and techniques that the organisation may not currently possess;
2) Avoidance of the cost of chasing technology and the training costs associated with each new generation;
3) Better career opportunities for personnel who transition to the outsource vendor;
4) Enable staff to concentrate on building new and improved capabilities that meet business requirements rather than managing current operations;
5) Outsourcing vendors typically have more structured methodologies, procedures and documentation, as well as larger, more experienced staff, this can result in fewer operational problems;
6) Competitive advantage through expanding skills;
7) A better price/value mix on investments;
8) The vendor’s primary business is delivering world-class support to clients. These organisations have a track record of proven experience and leadership in the application of their specialty;
9) Access to better tools for estimating the costs of new solutions;
10) Access to industry knowledge and expertise the vendors has gained from other clients;
11) On-site staff to support the client’s needs.
l Improve organisation focus: Outsourcing lets the organisation focus on larger business issues while having operational details assumed by an outside expert.
When making the decision to outsource, Quinn, et al. (1990) recommends that organisations identify core service areas in which they already have unique capabilities that can lead them to sustainable competitive advantage in their marketplace. They then seek to eliminate, limit, or outsource activities not related to their area of strategic focus. As Quinn, et al. (1990) put it, “Thanks to new technologies, executives can divide up their organisations value chains, handle key strategic elements internally, outsource others advantageously anywhere in the world with minimal transaction costs, and yet coordinate all essential activities more effectively to meet customers needs” (p. 58). Managers, they add, should evaluate every internal and overhead cost by asking: “Are we really competitive with the worlds best here? If not, can intelligent outsourcing or coalitions improve our productivity and long term competitive positions?” (Quinn, et al., p. 65). Taken to an extreme, some organisations may have only one unique source of competitive advantage; their ability to outsource every activity to a network of world-class vendors. A properly constructed network can display the technical specialisation of the functional structure, the market responsiveness of the divisional structure, and the balanced orientation characteristic of the matrix” (Miles and Snow, 1986, p. 65).
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Updated on January 17, 2003
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