If you ask yourself the following questions: "How can I improve profitability?", "How can I have more flexibility?" "How can I improve ROI?" Outsourcing can help you.
Obviously, the answers to these questions integrate different dimensions in the company: quality management, processes and costs, New Technologies and the Internet, human resources, strategy, etc., but it must also be taken into account that specialization in a certain activity will lead to better results with lower costs.
Due to this need for specialization, the concept of outsourcing appears, that is, external companies developing activities that are not the main ones for an organization. In this way, companies can focus on what they do best, thereby focusing their attention and resources. Obviously, the activities that go on to develop external companies are those that are not strategic for your business and do not have special capabilities in them.
In fact, beyond outsourcing as the outsourcing of certain activities, the concept of transformation of business processes appears based on outsourcing. Starting from the management / reengineering of processes, the concept of outsourcing is integrated for the radical improvement of processes in which internally there are no special capacities.
Advantages of outsourcing
Among the "theoretical" advantages of outsourcing are:
- Cost reduction. It depends on each particular case, and may be more or less important depending on the particular conditions. For the analysis, it is essential to have the cost structure perfectly defined as well as the impact of the different possible decisions on said structure. Improving flexibility and having more capacity to adapt to the client already avoids investments in non-strategic areas. These investments are supported by the company that provides the outsourcing service. Have more control. In this sense, depending on the agreement reached, it can become greater control over costs, deadlines, qualities, etc. Reduce the «time to market». Improve return on assets
But it is clear that depending on each specific case, one or other advantages will be more or less certain and important.
Some cases
There are many use cases for outsourcing, both large multinationals and Small and Medium Enterprises (SMEs).
A typical and very important example is that of the automotive sector: two-thirds of the American automotive industry resides in suppliers. For example, Ford prefers to outsource many of the products and services it needs because it is not highly competitive in those activities. This way, you have more control and flexibility.
Another example is Kodak, which has outsourced its entire IT function for over a decade to a 10-year, $ 10 million contract. Why is Kodak doing this? Simply because the business in which Kodak is really competitive is imaging, photography,… but not information technology. So why allocate resources in this regard? Wouldn't it be much better to hire true specialists in that area whose experience and knowledge make them have a better quality-price-service ratio? Kodak has clearly understood the possibilities of outsourcing.
The outsourcing process
After having discussed the advantages of outsourcing, let's move on to practical aspects for its application. The first thing to keep in mind is that before making a decision as important as this, it must be analyzed both in the short, in the medium and in the long term, so having a clearly defined strategy will help in the process.
Therefore, it is essential to reflect on some concepts:
What are you really good at? This question that seems immediate is much more complex than it seems. If this reflection is wrong, it can lead to losing competitive advantages.
In this sense, it is interesting to comment on a case of a medium-sized industry dedicated to distribution that was considering outsourcing all its warehouse management to a logistics operator since it believed that its greatest competitive advantage lay in the quality of its sales force. In this case, you really didn't want to outsource because of costs, flexibility, etc. but because "warehouse management was a problem." After a thorough analysis, this solution was discarded because one of the company's strengths was placed in the hands of a third party (the logistics operator) without high guarantees of success.
What is our strategy? What will we do and how will we do it in three - five - ten years?
Decisions related to outsourcing, on many occasions, have a high strategic component, so the strategy needs to be perfectly defined to make decisions aligned with it. What are our processes? What costs and performance are there in these processes? What is the cost structure by processes, by products and by business areas?
As has been commented previously, it is necessary to know exactly the process map as well as its basic parameters in terms of costs, times, etc.
In addition, you must have tools to know the impact on business processes of the different possible solutions.
What threats / opportunities do you have if certain areas are outsourced?
Obviously, before outsourcing activities, it is necessary to analyze for each specific case, what are the advantages, disadvantages, opportunities and threats that the company encounters with outsourcing.
Outsourcing in Small and Medium Enterprises SMEs
But it should not be thought that outsourcing is only related to large companies. Small and medium-sized companies use it. It is common in SMEs to develop externally the fiscal-labor-legal, logistics, training, etc.
But SMEs need to make that leap to larger and more important areas of the organization, analyzing the profitability and interest of developing internally or externally each of their company activities: manufacturing, distribution, human resource management, management of warehouses, New Technologies and Internet, etc.
Furthermore, in the case of SMEs, it is often difficult to find a "supplier / partner" to outsource as they do not have the volume that large corporations have.
A specific case: New Information Technologies and the Internet
In the case of New Information Technologies and the Internet, organizations have increasingly important initiatives. The problem is that it is not usual to have internal personnel who know enough about these areas to achieve the desired results in the organization.
Due to this lack of qualified personnel, on many occasions solutions are developed internally that end up being more expensive and less professional than if all their development and maintenance had been outsourced.
Obviously, finding the right partner to outsource activities is not easy and in most cases it is a strategic decision. Some parameters to take into account to choose the right partner are: partner's value proposition, cost, guarantees, commitments made by the partner, finding an interesting agreement for both parties, etc.
As a summary, it could be said that outsourcing is an interesting option in most cases, although the practical application is quite problematic, so it is necessary to be very clear about what is going to be outsourced, why and what threats and opportunities it offers..
