Oxford Innovation business adviser Andrew Farmer examines the merits of outsourcing
A key outcome resulting from the recession has been the reduced ability of a business to pass on cost increases to the customer.
Correspondingly, managers of SMEs are increasingly under pressure to improve the performance of product/service packages and reduce costs in order to compete.
In the context of the internet-created market transparency of pricing, there has also been an increased requirement for organisational flexibility and agility.
Naturally, outsourcing of activities is integral to this approach and in turn this has lead to an increased activity and dependency on external supplier relationships.
The traditional approach to outsourcing is often with a focus on transactional economics such as considering a “make or buy study”. This can often lead to a lowest-cost based approach, ignoring other critical factors such as the strategic fit and longer term management of the relationship.
Consideration must also be given to the process being outsourced in terms of the value added from the end customer’s perspective.
How will the competitiveness of the organisation be affected by outsourcing? Will key competencies be lost? Or will the new relationship offer opportunities for growing innovation? Whilst cost is a critical factor, the new relationship must be seen in the context of creating potential wealth and increasing value to the customer.
There will always be a need to consider the economic rationale for outsourcing. However, a simple numerical exercise of internal costs versus supplier price may not be representative. A balanced viewpoint should also consider recovery of overhead, future product investment coasts, transport costs and potentially a loss of flexibility and control.
If a contributory process or service is difficult to manage or produces unreliable results, it may just be attractive to outsource the problem. This is sometimes at best naive and often negligent. A new
supplier may have more expertise but as the power base shifts their competency, or otherwise, will need to be paid for. New skills are required in managing these complex relationships. How will the increased dependency on the supplier be managed?
Another consideration is whether the outsourcing weakens or strengthens the long term competitiveness of a business? To compete in a market, what competencies are required? Can a competitor offer better quality and value because of their expertise? Do certain skills require development and investment in order to meet long term sustainability?
..and in Summary
Outsourcing cannot be simply seen as a means of reducing cost or passing on a problem. The detailed cost of an activity needs to be considered when evaluating the benefits of outsourcing. The effect on the long term competiveness of a business also needs to be evaluated when outsourcing. Perhaps in essence we should start with the customer and work backwards?
This article first appeared in the July 2011 issue of Business Cornwall magazine