Outsourcing

What is Outsourcing?
Outsourcing the strategic use of outside resources to perform activities traditionally handled by internal staff and resources Dave Griffiths

Why Outsource?
Provide services that are scalable, secure, and efficient, while improving overall service and reducing costs

 According to a survey of 53 major corporations, the most important reasons for outsourcing are: Cost savings - 77% Gaining outside expertise - 70% Improving services - 61% Focusing on core competencies - 59% Gaining access to technology - 56%

Types of Outsourcing
Common processes outsourced are
Purchasing Logistics R&D Operations Service management Human resourcesFinance/accounting Customer relations Sales/marketing Training Legal processes

Outsourcing components have increased progressively over the years Some industries have been outsourcing for an extended time Fashion Industry (Nike) (all manufacturing outsourced) Electronics Industry Cisco (major suppliers across the world) Apple (over 70% of components outsourced)

Why do many tech companies outsource manufacturing, and even innovation, to Asian manufacturers? What are the risks involved? Should outsourcing strategies depend on product characteristics?

OUTSOURCING BENEFITS
Economies of scale Aggregation of multiple orders reduces costs, both in purchasing and in manufacturing Risk pooling Demand uncertainty transferred to the suppliers Suppliers reduce uncertainty through the risk-pooling effect Reduce capital investment Capital investment transferred to suppliers. Suppliers higher investment shared between customers.

Focus on core competency Buyer can focus on its core strength Allows buyer to differentiate from its competitors

Increased flexibility The ability to better react to changes in customer demand The ability to gain access to new technologies and innovation. Critical in certain industries: High tech where technologies change very frequently Fashion where products have a short life cycle

Problems With Outsourcing

Loss of Control Increased cash outflow Confidentiality and security Selection of supplier Too dependent on service provider Loss of staff or moral problems Time consuming Provider may not understand business environment Provider slow to react to changes in strategy

 The risk concept Risk is an ambiguous concept . Risk denotes the precise probability of specific eventualities . Technically, risk has no value, so these eventualities can be beneficial or adverse (i.e. financial risk). RISK = f (Probability, Consequences)

What is risk? Risk :

exposure to the chance of injury or loss hazard or dangerous chance chance of loss degree of probability of such a loss

Risks in Outsourcing
Outsourcing can be risky As many as half of all outsourcing agreements fail because of inappropriate planning and analysis Erratic power grids, government difficulties, inexperienced managers, and unmotivated labor can create problems Failure to achieve unrealistic goals sometimes create the impression of failure

Outsourcing Risks Loss of Competitive Knowledge

Outsourcing critical components to suppliers may open up opportunities for competitors Outsourcing implies that companies lose their ability to introduce new designs based on their own agenda rather than the suppliers agenda Outsourcing the manufacturing of various components to different suppliers may prevent the development of new insights, innovations, and solutions that typically require crossfunctional teamwork

Risks in Outsourcing
Outsourcing Process
Identify non-core competencies Identify non-core activities that should be outsourced Identify impact on existing facilities, capacity, and logistics

Examples of Possible Risks

Can be incorrectly identified as a non-core competency Just because the activity is not a core competence for your firm does not mean an outsource provider is more competent and efficient May fail to understand the change in resources and talents needed internally

Risks in Outsourcing
Outsourcing Process
Establish goals and draft outsourcing agreement specifications Identify and select outsource provider Negotiate goals and measures of outsourcing performance

Examples of Possible Risks

Goals can be set so high that failure is certain Can select the wrong outsource provider

Can misinterpret measures and goals, how they are measured, and what they mean

Risks in Outsourcing
Outsourcing Process
Monitor and control current outsourcing program Evaluate and give feedback to outsource provider Evaluate international political and currency risks

Examples of Possible Risks

May be unable to control product development, schedules, and quality May have non-responsive provider (i.e., one that ignores feedback) Countys currency may be unstable, a country may be politically unstable, or cultural and language differences may inhibit successful operations