As the nation celebrates Independence Day this week, organizational consultant Hal Resnick reports that the original 13 colonies that became the United States of America were the original low-cost outsourced agricultural production centers established by the European nations.
As such, “outsourcing as a cost-reduction strategy has a long global tradition,” wrote Resnick in his latest newsletter.
“At the height of its empire, Great Britain outsourced manufacturing all over the globe. Wherever pockets of lower-cost labor are available, companies and countries seek to use them to lower their own costs of good and services,” Resnick wrote.
Resnick, based in Ponte Vedra Beach, is president of Work Systems Associates Inc. His 30 years in organizational development and training include work with EverBank, The Haskell Co., Lockheed Martin, Shell Oil and others. His newsletters are posted at his www.worksystems.com website.
Resnick contends that while outsourcing has become synonymous with moving services offshore to lower-cost providers, “that is not necessarily its purpose or best use.”
He writes there are several legitimate reasons for outsourcing, which might or might not be related to reducing costs. Outsourcing includes U.S. and offshore providers and suppliers.
By definition, outsourcing is the act of contracting with another organization to provide the management and delivery of services for some aspect of business that organizations prefer not to resource or manage, he said.
“Outsourcing is broader than subcontracting a service. When services are subcontracted, the company still retains fairly tight control of the implementation of the work. Outsourcing takes this process to the next level whereby an organization asks another organization to take over the full management and implementation of defined services,” Resnick wrote.
According to Resnick, the client organization first defines its strategic intent and direction as well as the required services levels and other criteria it needs for delivery of the service.
Then the company delivering the service becomes an extension of the client organization and provides the services to specifications.
Criteria for considering outsourcing
Some organizations resist outsourcing because they want to maintain direct control over all their work, according to Resnick.
“Henry Ford was fanatical about such control, and initially developed a vertically integrated company that even manufactured its own automotive glass,” he wrote.
“At the other extreme, management guru Tom Peters has been credited with stating that organizations should ‘outsource everything but their soul,’” he wrote.
Resnick said the consideration for outsourcing should be based on three criteria:
First, does the organization have the resources, talent, systems and tools needed to deliver the service itself?
An organization might not have the capacity to provide the needed service and finds it more effective to allow others to provide it. Examples include employee relations, payroll systems, information technology, facilities management and marketing programs.
Second, is it more cost-effective for an organization to use outsourcing rather than to develop the competence and resource internally?
The question should consider both the labor costs and the costs to develop the infrastructure, including systems, tools and facilities, to provide the function.
Examples are disaster recovery services, data management centers, vehicle management and customer-service call centers.
Third, how much management attention will the service divert from the organization’s core purpose?
For example, some software development companies outsource their own IT infrastructure.
“They certainly have the competence to manage this for themselves. But they want their management attention focused on their core value proposition – developing new software products – rather than maintaining their own technology infrastructure,” Resnick wrote.
Outsourcing for the wrong reason
Companies often end up making the wrong decision when they decide to outsource based solely on cost factors, according to Resnick.
Resnick wrote that when cost is the primary driver, the organization might outsource some aspects of its business that are core to their value proposition.
“Some airlines have made this mistake. They have outsourced call centers overseas to companies that hire individuals who do not understand the geography of the areas they serve or customer flying preferences,” Resnick wrote.
“These individuals are given no authority to deviate from their scripts even when customer situations require balanced judgment. As a consequence customers become frustrated, dissatisfaction increases, and the airlines lose market share,” he wrote.
“These airlines outsourced a key customer touch function for cost-reduction purposes without due consideration of the longer-term impact,” he said.
Outsourcing for the right reason
Organizations should first look at their “core value proposition,” which is what they do best and with the most benefit for their customers, to determine what to outsource.
That value typically is “best delivered by the committed, loyal employees of that organization,” Resnick wrote.
Standard services that a company needs but do not directly create customer value are good candidates for outsourcing.
Another candidate for outsourcing is an area in which an organization does not have critical mass or talent. Resnick said marketing is an example for some organizations that do have their own pool of multiskilled individuals. “Outsourcing is a viable solution for their needs,” he wrote.
“When the right reasons are applied, outsourcing makes a lot of sense. When the wrong reasons are used, outsourcing can be a nightmare,” according to Resnick.
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Right reasons to outsource
• The outsourcing provider has systems, technologies, tools and work processes that provide higher quality service than the organization could justify developing solely for its own internal use.
• The outsourcing provider has a pool of talented people who can provide a level of service that the organization either could not afford to hire or could not justify on a permanent, full-time basis.
• The outsourcing provider can remove that area of concern from the management of the organization, enabling it to focus more effectively on its own core value proposition.
• The outsourcing provider can deliver the service at a lower cost – through economies of scale, enhanced technology or lower-cost labor – without significant degradation of services.
Source: Work Systems Associates Inc.