For the last century, academics and business leaders have been shaping the practice of modern management. The main theories, tenets, and behaviors have enabled managers to build corporations, which have largely been hierarchical, insular, and vertically integrated. However, we believe that the technology underlying out-sourcing is coming with the greater force and market changer.
When a company contemplates improving their competitive position in the marketplace, they typically think about doing something internal to transform their posture — like mastering a new technology, developing an innovative process, or even adopting a fresh business model.
These traditional approaches to improving competitiveness are reasonable but not the only option. Organizations increasingly use outsourcing to change the competitive landscape, reposition their firms, and/or renovate how they do business.
Outsourcing works to reduce costs, grow revenue, and be first-movers to market.
Why the Market is moving toward Outsourcing
We can cite a number of ways outsourcing improves competitive advantage and, consequently, why more companies are taking advantage of the proposition.
First, there has been an increase in the number and types of capabilities that external product development contractors possess. Suppliers concentrate on mastering and building upon a core set of competencies, so they built to handle the toughest challenges within their domain and continue to offer a broader scope of services.
Second, advances in technology and other innovations make it more advantageous for firms to outsource because of the difficulty in simply keeping up with the latest advances.
Third, even if companies could keep up with changes, it is not cost-effective to make the investments necessary to be on the cutting edge of countless technologies. With ever-shorter times to market and product life cycles measured in months, not years, speed has become a defining competitive advantage for many businesses.
Competitive Advantages Realized Through Outsourcing
Specific advantages, or reasons for product development outsourcing, vary from business to business. Whatever the reasons, the advantages are compelling.
First, a major advantage referred to earlier is that it offers firms a way beat the competition to the market by engaging a partner with the expertise and capacity to rapidly bring new innovations to market.
Second, experienced development partners can also provide the catalyst for firms to swiftly enter and execute within new markets.
Third, reducing investments in non-critical functions gives firms the flexibility to act with reduced financial burdens and, as a result, the ability to respond opportunistically in new markets.
Fourth, outsourcing enables businesses to focus on core competencies and build those skills that directly add value to customers.
Direct and indirect advantages from outsourcing are endless. If an organization did not have the option to outsource, it would be saddled with doing everything itself, leaving little time to create the skills that are the foundation of competitive advantage.
As the benefits of outsourcing amass, firms frequently extend those relationships and look for more powerful ways to leverage the contracted company. They realize that these relationships can help them innovate and fundamentally change the business status quo; because the contractor and recipient are both focused on exactly what they do best.
Given the overwhelming advantages, product development outsourcing is becoming increasingly strategic and even transformational. Outsourcing is changing how business is done. It is a powerful way to improve business focus, realize better asset utilization and generate ever-greater corporate value.
Michael F. Corbett shared the following facts and said that the first myth about outsourcing is that it’s new. Actually, the term dates to the 1970s, when manufacturing companies seeking efficiency began hiring outside firms to manage less-than-essential processes. Outsourcing worked. Today many manufacturers outsource 70% to 80% of the content of their finished products. Large companies commonly outsource half of their IT operations. Organizations outsource their entire back office operations, including human resources, payroll and accounting. Companies may soon be more outsourced than “in-sourced,” signifying a fundamental reorganization that will affect employees, managers, customers and executives. Consumer choices will increase, product costs will drop and workers’ roles will change.
Today, outsourcing is at a crossroads. Companies no longer outsource only vertical business units. The new cross-functional approach follows a process horizontally throughout an organization — so-called business process outsourcing, or BPO. Now more companies are seeking strategic advantages based on outsource alliances. While the relentless push to operate more efficiently remains the driving force behind outsourcing, it has also become a competitive, strategic marketplace tool, allowing companies to improve response times and develop new products faster than ever. Once focused just on reducing expenses, today’s outsourcing initiatives are likely to help companies do things they previously could not do.
Once technology made it feasible to outsource operations abroad, media attention made outsourcing part of the public lexicon. Intense debate ensued as jobs left domestic boundaries and headed overseas. Opponents often overlook outsourcing’s benefits, such as allowing consumers to buy better products for less money. And, tens of millions of stockholders of major companies benefited as the value of outsourcing companies markedly increased.
More than 90% of companies say that outsourcing is an important part of their growth strategy. Management expert Peter Drucker calls outsourcing America’s fastest-growing industry, involving such companies as ARAMARK Corporation, Electronic Data Systems Corporation (EDS), General Electric (GE), International Business Machines Corporation (IBM), United Parcel Service of America, Inc. (UPS), Xerox and others. Many U.S. firms provide outsourcing services. Outsourcing is one of the very few business techniques that can transform a firm fundamentally and increase its competitiveness exponentially.
Outsourcing begins with an understanding of your business’s core identity. If you understand your unique competitive advantage, you’re positioned to consider what work you’re doing that others could perform better. Essential areas of an organization are called core competencies. Microsoft Corporation’s core competencies, for example, are product design, product development and marketing. To the extent that Microsoft avoids spending resources on non-core competencies, it probably operates more efficiently.
Impediments to Outsourcing
Of course, outsourcing faces several obstacles. Commonly heard objections include:
• Reluctance to lose control and flexibility — When you outsource, you rely on a contractual relationship with a service provider. Some executives would rather manage contracts than internal processes. Fretting over flexibility fails to consider that out-sourcing can actually increase management’s control over certain operations.
• A given function is too critical to outsource — Crucial functions, such as payroll, are outsourced all the time. In fact, an argument can be made for outsourcing pivotal functions to specialists who can perform them more effectively.
• Anticipated negative reaction by customers — Customers may get nervous until they see the enhanced service levels that outsourcing makes possible. The involvement of a third party is a secondary consideration.
• Employee resistance — Outsourcing often involves breaking down organizational structures to enhance efficiency, which changes job roles. When employees resist, companies should respond with proper communication and training.
We will look at the second part of this business process later, considering managing the relationship and the future of outsourcing. The question we are asking, is your organization ready for this shift in business?