Outsourcing as a Strategic Advantage

Outsourcing as a Strategic Advantage

Bruce E. Jacobs

To be successful in today’s competitive market and fluctuating economic environment, an enterprise needs to exceptionally manage the business processes and capabilities that are its core competencies.

The business processes and capabilities that are not its core competencies but are necessary for providing products and services to customers should either be performed at the least total cost internally or for the least total cost by a supplier with the appropriate capabilities. Deciding to outsource the business processes and tasks that are not core competencies can create a strategic advantage for a company. Once outsourcing of business processes are in place, the company can focus on the critical business processes and tasks that make a difference in the market, provide growth and better meet customers’ present and future needs. By outsourcing, the enterprise doesn’t waste its valuable resources, cash and other assets on the many trivial tasks and related issues the outsourced service provider now manages and resolves.

Outsourcing Factors

Determining what to outsource or evaluating outsourcing as a tactical business improvement, not to mention a strategic business advantage, requires an objective fact-based and data-driven assessment. When the economic pendulum begins to swing back to the growth side, many enterprises will consider whether outsourcing is right for them.

Outsourcing—not to be confused with offshoring, which is an entirely different animal—is not new, and contracting with a third party to perform business processes a company performs internally may strike an emotional nerve. More companies are outsourcing internal business processes than ever before in order to remove themselves from the distraction and resource consumption the outsourced processes consume, as well as to have the processes performed for least total cost.

The fundamental questions to be answered include:

• What are the core business processes and competencies provided by the company that constitute the value proposition to customers?

• What are the supporting business processes and tasks performed by the company but are not core processes or competencies?

• Can the non-core business processes and competencies being performed be done internally for less total cost and resource consumption?

• Are there outsource providers of the company’s non-core business processes and competencies, and can they provide the services for least total cost than is being provided internally?

In addition, consideration should be given for how resources and capital can be better used if they were not being diverted to support activities that could be performed better by a capable outsource provider.
Numerous industries and enterprises have recognized the advantages from outsourcing. The major automotive companies moved away from vertical integration producing the majority of components and parts for their vehicles. They recognized the vast resource drain, infrastructure costs and competition for capital required to support non-core capabilities. Several decided that their core competencies would be: the design and engineering of the vehicle; the design, engineering and manufacturing of the engine and drive train; and final assembly of a high-quality vehicle. Being good at manufacturing the seats or the dash, the sound system, wheels, frames and numerous other parts and components requires resources that could be used better if invested in core competencies. Large aerospace and defense contractors have adopted a similar model.

The ability to manufacture products was once a crafted skill and capability that provided competitive advantage for a company that produced and distributed products. With the advancement in technology-driven automation of equipment and production processes, the role of the highly skilled artisan machine operator and craftsman has been relegated to the skills of a capable technician who can load the machine with materials, change the tooling, load the computer tape and start the production process, and monitor the process for quality and accuracy to the production specification. The skill of the craftsman is not in the ability to produce a high-quality product with the equipment but in the ability to set up, load and monitor the equipment. Manufacturing processes that once took years to achieve a skilled operator level have been replaced with skills that can be taught and learned in several months in a classroom and on the job.

More companies today are evaluating the competitive advantage producing their own products may provide and determining the production process is not a core competency for success in the market. The food and pharmaceutical industries have been outsourcing the production of branded products to outsourcing firms, called tollers, for years. Their focus is product development, growing the brand and brand equity, distribution and customer service. Next to brand equity, the highest value to customers is the quality and efficiency of the supply chain to provide customer service. The toy industry uses a similar model.

Getting Outsourcing Right

Deciding what to outsource to a competent outsourcing provider can be a challenging decision.
One view could be to outsource everything the company does and maintain a product development and engineering group along with the capability to manage the supply chain processes to serve customers. Another view could be to outsource every clerical-based process in the company, janitorial services, the information systems support, specialty engineering support, distribution and logistics operations, manufacturing, call center and customer service. Additional opportunities could be in specialty requirements needed for design, production and product support in product lifecycle management, product warranty management, marketing and sales.

Outsourcing is like fielding a professional football team, where specialty skills and capabilities are required to be provided by the offensive team, defensive team, punt-return team, and various other specialty team configurations and specialty players. No set of 11 players has the total skills and capabilities to meet all the requirements for the team.

The quickest way to determine the outsourcing candidates for your company is to identify the company’s core competencies and decide what the company will do internally to provide products and services that are core competencies or support core competencies, then identify the processes and requirements the company will not provide in house. Those are the outsourcing candidates for evaluation and selection of an outsource provider.

Determining the economic justification and business-case economics for outsourcing is not based on the purchase price for the product or service. It’s based on the least total cost for the product or service, taking into consideration: the embedded investment and investment maintenance requirements; the resource requirements in terms of qualified people, training, space, tools and resources for the job; economy of scale for raw materials acquisition costs and transportation, inventory requirements, and all maintenance, operating and repair costs that may be associated as well as the related overhead costs for the business, not to mention the lost opportunity costs from the consumption of the resources.

Outsourcing is a viable business tactic with strategic advantage that can free up encumbered resources for better use and investment in the company’s core competencies. An organization that knows its strengths and outsources the non-core processes is able to stay focused and devote more resources to building on its strengths. Let the outsourcing providers make the investments in their core competencies in outsourced products and services to provide them for the best total cost.

If you decide to perform non-core processes internally, then make every effort to provide them at the lowest total cost with the highest level of operating efficiency. If this can’t be achieved, then evaluate outsourcing the process to a competent outsource provider.

Bruce E. Jacobs is a consulting partner with BrokenGate Consulting and works with client executives to improve operating performance, design and implement improved business processes, value chain and supply chain performance improvement, performance measurements and optimize technology applications to enable improvements. He can be reached at (314) 704-0693 and at www.brokengateconsulting.com.