- A pharmaceutical
firm hires a contract manufacturing organization to manufacture a
product
- A computer chip
maker hires a staffing company to monitor and manage all of their
non-exempt hiring
- A university
hires an information technology company to manage all of it's desktop
PC's and staff the user help desk
Those who provide
outsourcing are often referred to as outsourcing partners, suppliers and
providers. Those who are purchasing the outsourcing services are called
buyers or users. Outsourcing takes place when an organization transfers
the ownership of a business process to a supplier. The key to this
definition is the aspect of transfer of control. This definition
differentiates outsourcing from business relationships in which the
buyer retains control of the process or, in other words, tells the
supplier how to do the work. It is the transfer of ownership that
defines outsourcing and often makes it such a challenging, painful
process. In outsourcing, the buyer does not instruct the supplier how to
perform its task but, instead, focuses on communicating what results it
wants to buy; it leaves the process of accomplishing those results to
the supplier
What define outsourcing are more the circumstances of the relationship
than the nature of the work performed—that is why the label
`outsourcing' is applied to a lot of situations.
Outsourcing vs. Suppliers
Replacing or substituting the services of an external provider for
internal capabilities characterizes outsourcing relationships.
Importantly, outsourcing applies to an activity an organization did do
or would have done itSelf Funded. A bank doesn't say that it's "outsourcing"
the production of mops, brooms and chemical cleaners when it buys
cleaning materials for its janitorial staff from a supply service. That
same bank may `outsource' cleaning services, or even outsource
purchasing, but the difference is that cleaning and purchasing are
things a bank would reasonable do, manufacturing and transporting mops,
brooms, and chemical cleaners are not. Outsourcing is not about
"supplying" commodities or totally unrelated products or services.
Outsourcing vs. Consulting
The difference here is both difficult and easy to see. The difficult
part is that many firms simultaneously position themselves as offering
consulting and outsourcing services, they don't clearly distinguish the
two, and in the process they confuse the situation. It's easier when you
think clearly about what the differences truly are. Consultants advise
us on how to do something. Outsourcing providers actually do it.
Sometimes a consultant will deliver a business service or product, and
that's when they are acting like a provider, and other times an
outsourcing provider will advise, but generally the distinction is easy
to see. Most professional services firms fall into one of three
categories. There are the consultants. There are the providers. There
are the hybrids. The reality is that many firms are both consultants and
providers, but play different roles with different clients and at
different times.
Outsourcing vs. Jobbing and Out-Tasking
Outsourcing relationships are high value-add, durable and on going—they
are not a one-time only deal. Hiring a provider to set up your
technology, or a manufacturer to handle production when demand exceeds
capacity, or using FEDEX to deliver overnight packages is not
outsourcing. Outsourcing relationships are high level, contractual
relationships for a fixed period of time, usually measured in years, but
they are assumed to be continuous. Provider and user often work to
define the service delivered. There is frequent interaction between user
and provider and a lot of communication. The outsourcing service is
customized to the needs of the user.
All of the elements of outsourcing combined are what make it a unique
management practice. Outsourcing providers are partners, given
significant managerial discretion for how to deliver the service, who
manage the day-to-day delivery of that service. The value they create is
based on being a long-term partner who understands the business, can
deliver on the requirements of the relationships, and look ahead to how
they can better service client firms.
In the last ten years there has been explosive growth in the use of
outsourcing. There are three distinct stages in outsourcing's evolution
tied to executives' mind-sets rather than to a calendar.
As managerial understanding of outsourcing's values proposition advances
then the number of applications for outsourcing multiply. As they
multiply, the applications mature from tactical and short-term to
strategic and long-term, and eventually transformational and
evolutionary.
Since 1990 there has been an explosive growth in the use of outsourcing.
From near zero when outsourcing first emerged in the late 1980's to $100
Billion in 1996 (according to Harvard Business Review) to an estimated
$318 Billion by 2001.
Along the way outsourcing has matured into an indispensable management
tool. As famed management writer Peter Drucker notes, of all the
powerful management tools to emerge in the last half of the 20th century
outsourcing uniquely compels managers to ask "what to do," increasingly
the central management challenge.
Drucker's thoughts appeared in a 1994 Harvard Business Review article.
In the preceding years outsourcing's value and role were seen as
tactical and immediate. The U.S. business environment of the late 1980's
and early 1990's was in transition, and many organizations needed
serious change. There was economic uncertainty and pressure. Corporate
America was emerging from a period of significant corporate
restructuring and large-scale downsizing. Japanese management theories
were influencing American business and a quality revolution was
underway.
Outsourcing the term and the concept emerged from its application in
three places. For manufacturing many firms used foreign labor to make
components and products. Outsourcing was also first used to describe
relationships between firms and their providers of support services like
payroll, security, grounds keeping, maintenance, janitorial, and food
services. Companies like ADP, Aramark, and ServiceMaster took on these
services. Often outsourcing was used to describe longstanding
relationships. At the same time large firms, especially Fortune 500
Firms like Kodak, were working with traditional hardware and software
providers such as EDS, IBM, AT&T, CSC, and others to provide a full
array of technology services. It was through these relationships that
outsourcing as a managerial practice grew and flourished.
Tactical Outsourcing
In the first stage, tactical relationships, the reasons for outsourcing
were usually tied to specific problems the firm was having. Often the
firm was "in trouble" to begin with and outsourcing was a direct way to
address the lack of financial resources to make capital investments,
inadequate internal managerial competence, an absence of talent, and a
desire to reduce headcount. Outsourcing often accompanied large-scale
corporate restructuring. Many tactical relationships were forged to
create immediate cost savings, eliminate the need for future
investments, to realize a cash infusion from the sale of assets and to
relieve the burden of staffing.
The focus of tactical outsourcing is the contract, constructing the
right contract, and holding the vendor to the contract. The expertise
for constructing these arrangements emerged from purchasing. Frequently
the contract was simply a fee for services. Much of the value stemmed
from the discipline of spending dollars externally. When managers
created successful tactical relationships the value of using outside
providers was clear: better service for less investment of capital and
management time.
Strategic Outsourcing
As some pushed for more value from outsourcing relationships the goals
of these relationships changed. Executives realized that instead of
losing control over the outsourced function they gained wider control
over all of the functions in their area of responsibility, and they were
better able to direct their attention to the more strategic aspects of
their jobs. Instead of facilities managers worrying about staffing
janitorial positions, they were more focused on infrastructure issues.
Technology executives handed the running of the data center to a service
provider and turned their attention to serving the needs of internal
customers. The logic remains compelling.
How outsourcing was used and where it was applied changed. The size of
outsourcing relationships jumped and the scope of the service provider's
involvement grew. Outsourcing changed from being a tactical tool to
becoming a strategic tool by virtue of the dollar value of the
relationships, the integrated scope of services, and the length of the
new relationships. Most importantly, the managerial mindset about the
nature of the relationships matured from one between buyer and supplier
to one between business partners. Strategic outsourcing relationships
are about building long-term value.
Professors Quinn and Hilmer coined the phrase strategic outsourcing in
1994. But forward thinking executives, like Katherine Hudson of Eastman
Kodak as early as 1989, was practicing it earlier. In that year Eastman
Kodak and Katherine Hudson signed a landmark ten-year outsourcing deal
with IBM for $250 Million. This outsourcing was not about fixing a
troubled function, avoiding a problem, or restructuring. The Kodak-IBM
deal was about identifying the core competencies of the firm, partnering
with a provider to deliver the non-core activities, while focusing the
firm's resources on the core competencies of the firm. For the IT
operations at Kodak it was a matter of focus, IT's role, and the
direction IT would take for the next decade. The decision to outsource
was very much strategic, and the role the provider (IBM) took on was
critical. The rationale for outsourcing was focusing on core
competencies, or as Katherine Hudson said, "our mission doesn't say `be
the world leader in computing'"*.
Instead of working with a host of vendors to get the job done, in a more
strategic model corporations work with a smaller number of best-in-class
integrated service providers. The working relationships with providers
evolve from adversarial vendor-supplier relationships to long-term
partnerships between equals where the emphasis is on mutual benefit.
Michael Corbett defined strategic outsourcing as, "the redefinition of
the corporation around it's core competencies and strategic, long-term,
results-oriented relationships with service providers." It is
fundamentally redefining the business and separating the core from
non-core activities and making decisions about how to get the work done.
Transformational Outsourcing
Transformational outsourcing is the term used to describe third
generation outsourcing. If the first stage of outsourcing was about
doing the work with the existing rules, then the second stage is about
using outsourcing as the corporation is redefined. The third stage is
using outsourcing to redefine the business.
To survive today, organizations must transform themselves and their
markets in an ever more daunting challenge to redefine the world before
it redefines them. And outsourcing has, once again, emerged as the
single most powerful tool available to executives seeking this level of
business change. This new transformational outsourcing recognizes that
the real power of outsourcing is in the innovations that outside
specialists bring to their customers' businesses. No longer are
outsourcing service providers simply viewed as tools for getting more
efficient or better focused, they are seen as powerful forces for change
— allies in the battle for market- and mind-share.
Outsourcing can be used to radically change the definition of the
business—open new markets, deliver new customers, and create new
products. Outsourcing is leverage. Here outsourcing is a vehicle for
changing the firm's relationships with customers, employees, and
business partners by working with best in world partners. It's enabling
growth. It's the way to grow by alliance. When managers realize that
outsourcing relationships are a way to invest in the future of the firm
they are thinking differently. Transformation outsourcing is not about
creating dependence, it's about actively creating interdependencies that
serve the interests of all parties. Mission Foods uses Ryder Logistics
to deliver it's products to new markets in ways the company could never
have done alone. Where once firms kept outsourcing in the background,
never letting their customers know part of the work was delivered by a
third party, now firms co-brand products/services and firms march out
their outsourcing providers to instill confidence in customers and
business partners. "No longer are outsourcing service providers simply
viewed as tools for becoming more efficient or better focused, they are
seen as powerful forces for change, allies in the battle for market and
mind share," says Michael Corbett. Outsourcing relationships have the
power to thoroughly redefine how business is done.
|
