Outsourcing: Effective strategies necessary for long-term success

Major corporations in virtually every U.S. industry sector are engaging in outsourcing. Examples turn up in the business news on a daily basis. Companies like Boeing, the world's second-biggest commercial aircraft maker, and NCR Corp., the biggest maker of automated teller machines, are sending pieces of their business process to India.

On the receiving end, HCL Technologies and rivals Tata Consultancy Services Ltd., and Infosys Technologies Ltd., have increased profits ahead of expectations. HCL Technologies, India's fifth-largest software developer, alone reported a 25 percent increase in quarterly profits as a result of new customer deals.

Infosys Technologies, India's second-largest software and outsourcing company, responded by ramping up payroll in the last quarter. Infosys added 37 clients in new countries and new industries, and received repeat orders from most of its more than 400 established clients. Quarterly profits grew by 67 percent. But ask which companies use outsourcing best and experts come up short. The outsourcing river is wide, but not deep.

Joseph R. Carter, chairman of the supply chain management department at the W. P. Carey School of Business, says that while outsourcing numbers may be up, not much has really changed. "Outsourcing is much more pervasive across all the activities of any given organization," he said. "What's the same from 20 years ago is penetration, which is very low."

Carter was part of a major research study jointly sponsored by CAPS: Center for Strategic Supply Research and A.T. Kearney Inc. More than 80 percent of study respondents indicated that cost reduction (operating cost and capital investment) and the need to focus on the core business led them to outsource. Further, the study found that companies are generally meeting or exceeding their cost goals for outsourcing activity.

Lacking, however, was evidence that companies are thinking strategically about outsourcing. "What surprised me the most about our research," says Carter, "was the almost unique focus on outsourcing for cost reasons. And though the professionals we interviewed will tell you that their outsourcing efforts are considered a strategic decision, in our survey data we cannot say that companies' outsourcing processes are being used for competitive advantage beyond cost reduction."

Another recent study by Deloitte Consulting, "Calling a Change in the Outsourcing Market," seems to confirm what the CAPS /A.T. Kearney study found. The Deloitte study goes so far as to suggest that a downturn in the outsourcing market will occur because of problems in establishing successful outsourcing engagements. Deloitte points out that focusing on cost savings is a formula for failure and especially since managing outsourcing relationships are difficult.

While both studies highlight the challenges and pitfalls of outsourcing, the CAPS/A.T. Kearney study gives guidance on strategies for success. After all, GE among others has a long history of successful outsourcing, Procter & Gamble continues to expand its relationships, and most large software companies will continue to outsource parts of their product development to offshore firms.

Guidance for organizations about to outsource

Carter contends that a company can fundamentally rewrite the rules for competing and incorporate outsourcing as part of the strategy. To tackle outsourcing on a strategic level, business leaders in competitive organizations must first identify the major drivers of change that create a more competitive environment. According to the CAPS/A.T. Kearney study, these drivers are:

  • Globalization
  • Demographics
  • The new consumer
  • Natural resources and the environment, and
  • Regulation and activism

Each organization will experience different levels of impact from these five areas. The key is knowing which ones are most significant to the business, then design the strategy appropriately. Next, the study supports the idea of "stretching the imagination beyond today's reality," suggesting that outsourcing can potentially restructure the entire value chain of an organization. The study cites the book "Rebuilding the Corporate Genome" by authors Johan Aurik, Gillis Jonk, and Bob Willen for guidance.

"Just as the genes in a strand of DNA determine the characteristics of an organism, the relative quality of the individual business units in a company largely determines the characteristics of an organization." Outsourcing has become a driver of this quality. The CAPS/A.T. Kearney study also identifies the primary leaders for each of three phases of effective outsourcing: planning and analysis, contracting and relationship development and implementation.

In the strategy planning and analysis phase, the board of directors, chief executive officer (CEO) and chief financial officer must drive development of a strategic outsourcing plan. According to Carter and the research team, this ensures that the outsourcing plan is tied into the overall strategic plan of the organization, and that the intent of the strategy won't be lost to tactical, quick-hit wins. Senior leadership, specifically the board of directors and the CEO, must shape and approve the strategy.

In the second phase and contracting and relationship development and the leaders are the chief operating officer and chief procurement officer. Here the study reports that purchasing and supply management leaders have a much more pervasive and strategic role today than they had 20 years ago. The researchers also found that certain companies place purchasing and supply management leaders in all three phases of the outsourcing strategy.

During implementation, leaders are the executive/business and functional officers of the affected units and the chief procurement officer. It is at this stage that an outsourcing strategy can fall apart due to lack of planning, lack of a far horizon view, and lack of support by senior leaders and even if senior management led the original design.

"You can avoid failure by creating a corrective action plan," says Carter. "Additionally, focus on implementation and constantly check in with senior leadership to make sure the overall objectives of your outsourcing strategy align with overall company goals. Finally, in planning, companies should build in a contingency, or exit, strategy just in case."

Despite the challenges of building effective outsourcing strategies, companies appear willing to pursue opportunities for using outsourcing as a competitive weapon. One day, this outsourcing river may be both wide and deep.