Are you outsourcing illiterate?

May 10, 2005
ompanies continue to make outsourcing decisions that are driven by cost reduction and the desire to focus on their core operations

Companies continue to make outsourcing decisions that are driven by cost reduction and the desire to focus on their core operations, rather than pursue outsourcing in an effort to drive more revenue and seize competitive advantage.

That is the conclusion of a new research study conducted jointly by CAPS: Center for Strategic Supply Research and global management consulting firm A.T. Kearney. The study, "Outsourcing Strategically for Sustainable Competitive Advantage," surveyed 165 companies representing 24 industries.

More than 80% of companies in the study say reduced operating costs, reduced capital investment and the need to focus on their core business are the primary reasons for their outsourcing activities. Fewer than half of the companies cite reasons related to revenue growth such as increased speed to market (46%), improved quality (42%) and faster customer response time (40%).

The majority of companies with cost-related goals for outsourcing say they met or exceeded those goals. The average cost savings for these companies was 13%, but more than one-third reported savings greater than 15%. In contrast, the majority of companies with revenue-related goals for outsourcing report falling short of those goals.

"It's clear there are two different approaches to outsourcing at work," says Bill Markham, a principal with A.T. Kearney and co-leader of the study. "Companies seeking quick savings focus their efforts on finding less expensive alternatives to operating their business today. Companies focused on tomorrow's business needs are seeking more significant long-term benefits and looking to leverage marketplace skills, technologies and scale to cut costs and increase revenue."

The study examines the breadth and depth of outsourcing across 14 different activities in research and development, marketing and sales, supply, manufacturing and distribution, and corporate support. Every company studied reported outsourcing at least one of the activities, with 50% saying they outsource parts of more than eight activities.

The most common activities being outsourced are information technology (reported as outsourced by 36% of companies), distribution/fulfillment (32%), legal/regulatory affairs (30%) and manufacturing/operations (24%).

However, companies are not outsourcing at a very deep level, according to the study. Eighty-six percent of study participants say they outsource less than 25% of activities overall. The average level of outsourcing penetration across the 14 activities is 15.8%. Even in IT, the area with the deepest penetration by outsourcing, only 14% of respondents say they outsource more than 25% of their IT activity.

"Tactical outsourcing is a follow-the-leader approach, not a road to competitive advantage. Strategic outsourcing can create new ways to compete and possibly rewrite the rules for whole industries," says study co-leader Robert Monczka, director of strategic sourcing and supply chain strategy research at CAPS and research professor of supply chain management in the W. P. Carey School of Business at Arizona State University.

The report suggests companies define from the outset whether the strategic intent of their outsourcing efforts is cost reduction or revenue generation. It also recommends the following steps to give companies an edge in achieving their outsourcing goals:

* Anticipate shifts in the future business environment such as political and social backlash, changing demographics in emerging economies and dwindling natural resource supplies, and consider the effect these shifts would have on future outsourcing activities

* Build tomorrow's corporation by seeking skills, technologies and scale from the marketplace rather than assuming that these capabilities must be developed internally

* Address the execution issues inherent in any outsourcing activity by clearly defining roles and responsibilities across the corporate functions involved.

Latest from Transportation & Distribution

176927300 © Welcomia |
96378710 © Nattapong Boonchuenchom |