Introduction and Overview
Potential Benefits of Outsourcing
As organisations jump on the outsourcing bandwagon, a variety of resources (human, physical, and financial) may be widely affected for organisation gain. Frequently though, reason(s) to, or not to outsource, are not as obvious as one might think and outsourcing decisions made under the guise of financial benefits are occasionally a disguise for personal motives. That being the case, once an organisation has decided to outsource, managing the vendor and establishing a solid agreement goes a long way to assuring a successful relationship.
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To improve their competitive position, some organisations find that they can streamline operations by outsourcing certain functions to service vendors who can do the needed tasks better than the organisation could (Quinn, Doorley & Paquette, 1990). Having outside sources, such as suppliers, vendors, consultants and service centres, contribute directly to a value chain is the whole basis for outsourcing. While outsourcing can create major benefits for an organisation, it is not without risks.
Leading-edge organisations do not change for the sake of change. Rather they change by discovering and adopting options that add value to the business and by dropping practices that do not (Egan, 1993). The business growth organisations experience as a result of outsourcing is growth based not on investing in everything but on investing in the right things. Outsourcing is redefining the organisation as we think of it today. Since the 1920s and 30s when organisations such as General Motors and DuPont created the model for the post industrial revolution organisation, they have been viewed as large integrated operations, owning and directly managing most required resources. Over the years, as organisations became more complex, their resources have further specialised and were directed toward various pieces of the company’s operations. Outsourcing, in contrast, suggests an organisation focus on a few, well-chosen core competencies supported by long term outside relationships for many of its other activities and resources (Quinn, Doorley & Paquette, 1990).
The term outsourcing is generally reserved for situations where, in addition to providing resources and expertise, the vendor (outsourcer) takes direct responsibility for the daily operations of specific portions of an organisation’s operation. This is the primary contrast between outsourcing and purchasing. The outsourcing vendor not only supplies the resources for its portion of the operation, but it also assumes accountability for providing a predefined level of service to the organisation. This mixture of resources, expertise and accountability is the foundation for the major benefits that can be gained from outsourcing.
Few, if any organisations have the resources, management expertise, and focus needed to be world class in every area of their organisation. Each organisation has a few core competencies that are at the heart of why its customers do business with it. Core competencies are the areas of greatest return from organisational investment (Phrahalad and Hamel, 1990). All other areas of the organisation are “non-core” and may be more effectively acquired through long-term relationships with vendors who are specialists in their field. “Non-core” simply means that the function or activity is not one in which the organisation is likely to identify itself, in a meaningful way, in the eyes of its customers, by performing the activity internally (Welch and Nayak, 1992). They are not the areas where the organisation receives the greatest return from an investment of focus and resources. An organisation is not likely to establish and build a lasting competitive advantage in their “non-core” areas.
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Introduction and Overview | Potential Benefits of Outsourcing | Unintended Consequences | Lessons Learned | Summary
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Updated on January 17, 2003
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