Move beyond traditonal supply chains

when to outsource and when not to outsource

Click below to share this post

Facebook

Linkedin

Twitter

Email

Whatsapp

Print

$26 Billion question – “When to outsource and when not to outsource?”

Quick, take a guess what is the most outsourced service on the earth today? Think of all the potential services in your company that can be outsourced; cast your mind far and wide. Try not to miss anything. Once you have thought of potentially every service that can be outsourced, make the guess again. Out of everything that possibly be outsourced, what is the most outsourced service on the earth?

Guess which is the most outsourced service on earth today

If you guessed call centers, you are wrong. In fact, if you guessed any of the following services – Logistics, IT, sales training, fleet management or payrolls – all popular services to be outsourced, you are wrong too. I will tell you the most outsourced service on earth today somewhere within this chapter.

What else will you find interesting in this chapter?

You will learn to recognize how ubiquitous outsourcing is the modern day organization and life, and how to keep your eyes open to recognize situations that are amenable to outsourcing. When you see the full list of all the activities within a company that can be outsourced, it may surprise you a bit.

You will also learn why you must NOT outsource in some circumstances because of strategic or tactical reasons. In our work we frequently meet people who are dogmatic about outsourcing – on both sides of the fence. We have met directors serving on boards of large organizations who are deal against outsourcing. On the other hand frequently we meet people at all levels in organizations who would rather outsource than do the tasks internally.

When asked as to which way do we lean, our answer is almost always – it depends. Indeed,  there are situations where you must NOT outsource. However, there are situations where you must outsource. We have come across situations where companies are reluctant to outsource in situations where that would have been the best course of actions.

What keeps the companies from following the best course of action?

What are the key criteria that help you decide when to outsource and when not to outsource?

We will examine some of those criteria in detail in this chapter. However, there is another set of criteria or measures that are equally important. Outsourcing being now so ubiquitous, is there a way to distinguish between a good outsourcing arrangement and a bad one. We will see a few key measures focused on the outcomes that your company (or the outsourcing company) is seeking from the arrangement.

[BOX] Outsourcing Continuum: From Simplicity To Sophistication

Ask 100 people what image comes to mind when they think of outsourcing, and 99 people will describe a sweatshop in China or Bangladesh, or a call center in India or Philippines. No doubt these are somewhat stereotypical images of outsourcing conveyed by the media, but let me describe the other end of the continuum.

To understand its full potential, as well as the barrage of debate surrounding outsourcing in the modern business networks, let us look at Boeing as a brief case study. Its 787 Dreamliner has been one of the most innovative and costliest projects on Earth today. From the beginning it was apparent that to keep up with Airbus and to create the next generation of airplanes, Boeing would need extensive cooperation of the best in the world.

0
People
0
Dreamliner

The most noteworthy feature of the 787 Dreamliner production is perhaps the fact that out of the entire airplane, only one part – the tailfin – is manufactured by Boeing itself. The rest of the plane – the fuselage, the engines, the avionics, the landing gear, even the wings are all manufactured by the outsourced service providers all over the world.

Secondly, since sections of the fuselage are baked hard in autoclave ovens, purpose built large autoclave ovens are installed in various locations of Boeing’s outsourced service providers. Some of the biggest autoclaves in the world were built for the 787 project. The one in Wichita, Kansas is 30 feet in diameter and 70 feet long.

For the first time ever, the wings of the Boeing Airplane are made overseas by Fuji in Japan. A purpose built plant with cutting edge technology and capability to use carbon fibre helps Fuji meet Boeing’s rigorous standards. Fuji not only builds the wings and parts of the fuselage that hold the wings but also works with Boeing to fine-tune the design specifications to meet the stringent strength and stability requirements.

Sub-assemblies are brought to the final assembly plant in Everett, Washington in a special plane called the Dreamlifter. It has a swing tail that opens out and a large cargo loader unloads the pieces coming from Italy, Japan, South Carolina and Kansas.

Moreover, the wings come from Japan, the horizontal stabilizers come from Italy, the engines from Rolls Royce in England, landing gear from Messie-Dowty in France, and the largest section that comes in a single piece is the 85 feet long mid-section of the fuselage, built by Global Aeronautica in Charleston, South Carolina.

The story of production of Boeing’s 787 Dreamliner is a poetry in motion and a true global supply chain in action.

At the time it was envisaged, this business network attracted a lot of positive and negative publicity. However, it is clear by now that the new product development time was shrunk, the capital cost of development as well as risk was reduced significantly as a result of extensive outsourcing.

0
Dreamliner

About the Authors

Vivek Sood

Co-Founder

Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek  and more information on Global Supply Chain Group is available on  www.globalscgroup.com 

Click below to share this post

Dr. Partsch Wolfgang

Partner

Partsch was born in Vienna but spent most of his time in Munich. He came from a natural sciences background with a PhD in Physics and also studied Industrial Dynamics from Jay Forrester. Most of the original thinking, methodologies and  terminology of Supply Chain Management (SCM) were developed by Dr. Partsch and his team in the 1980s. There is a saying in the European supply chain circles – “if Wolfgang does not know it – then it is not worth knowing.’
A maven in the world of Malcolm Gladwell’s The Tipping Point, Wolfgang is constantly thinking about the technologies, the economics and the emerging trends in Global Supply Chains. He is now the only active member in the original team of SCM pioneers.

Related Posts

Click the below Text to see related posts.

Is there something that cannot be outsourced?

Meanwhile, as you cast your mind wide and far within your company – how many services did you think of that can be outsourced. Think about all the various departments in your company – the Information Technology department, Human Resources, Marketing, Sales, Production and Manufacturing, Logistics, Purchasing, Finance, Administration, Legal – and try and imagine all the various possibilities for outsourcing that exist in each of these departments.

Fundamentally, each of the department carries out its tasks at four different levels – the highest level being strategic, the next lower level being tactical, the next lower level being operational and the finally the lowest level is the executional level. At the lowest level the execution of the task is carried out, while at the highest level the plans are long term all-encompassing plans.

Let’s take the example of a typical finance department. If you make a list of all the activities carried out in the finance department they will roughly fall in the pattern of a pyramid shown in Figure 1.1.

Figure 1.1: Activities carried out in a typical Finance Department

The exact details and the nature of the tasks at each level will differ based on the type of company we are talking about and the industry it is part of. However, the pyramid of tasks will look somewhat similar in most companies. In fact we have drawn similar pyramid of activities for most other departments as well – Information Technology, Operations, Sales and Marketing, Human Resources and Administration.

In case you are interested, you can do the same thing for your company too. In our workshops where cross functional teams from the same company can come together for strategy formulation – we frequently like to encourage executives to jointly draw up a similar activity pyramid for each department.

The results are quite enlightening for most participants – even for those executives who have been directing these departments for many years. The full complexity of a modern day corporation are clearly on display in an easy to understand format. In additional, it lays bare all the various activities that can either be insourced, or outsourced or insourced-outsourced.

From the perspective of this book that is the key consideration, after all. How to configure a right combination of internal and external teams in order to support your 5-STAR Business Network for maximum profitability and business sustainability?

In fact, you can combine a number of these activity pyramids for the various departments of a company to form an activity map of the entire organization. One such activity map is shown in Figure 1.2.

As you can see in the figure 1.2, the central core of the organization, called business strategy and shown in dark red shading, is the key policy setting arena where executives make key decisions. As you walk away from the core, the possibilities of outsourcing multiply. We will not comment on the gaps between the different pyramids, or the key supply chain and consulting mechanisms to fill the gaps because that is not the main topic of discussion in this book.

Figure 1.1: Activities carried out in a typical Finance Department

Figure 1.3: Organizational Activities and Outsourcing

The key take-away from the figure 1.2 is that except for the central core (and in some cases, at least temporarily even for the central core) more other activities carried on within an organization are being outsourced in some part of the world or other. Let us take a look at the different activities we are talking about. Figure 1.3 shows such a list. 

Of course, the list in figure 1.3 is not an exhaustive list of all the activities within an organization that can possibly be outsourced. Also, not all activities are outsourced to the same extent. To answer the question asked at the beginning of this chapter – Janitorial services are the most outsourced services today.

If you like, you can make a list of all the activities that you outsource in your company, and either email me any omissions from the list above, or consider additional activities to outsource within your company. It will certainly be useful exercise to prepare you for the rest of this chapter.

Let us briefly look at the history of outsourcing before coming to the key questions of when you must NOT outsource and when you MUST outsource. History is instructive for learning the trends and potential future outcomes.

Outsourcing has a long history

The advent of outsourcing is best described in his doctoral thesis at Southern Cross University by Paul Anthony Mcmahon [5]:

Outsourcing, or as it was then labeled „contracting out, has been in use on an industrial or commercial scale since the advent of the industrial revolution in England during the 1700s (Brown & Wilson 2005; Kakabadse & Kakabadse 2003), with firms facing the “make or buy conundrum that resulted from the greater production efficiencies that characterized eighteenth century England (Domberger & Hall 1995). In support of this contention, Greaver (1999, p.10) wrote that “outsourcing is similar to subcontracting, joint venturing, and strategic partnering concepts, which date back hundreds of years, citing the following examples: farmers hiring migrant workers; construction companies subcontracting electrical and plumbing activities; and governments subcontracting defence materiél production to private companies.

The first systematic use of outsourcing can be traced back to the 1940’s, during World War II, when organizations provided systems facilities management services to the U.S. government (Greaver 1999). However, it was the growing dissatisfaction with the underperforming post World War II ideal of economy-of-scale driven conglomeration (Hunter & Cooksey 2004) and the introduction of timesharing mainframe computer services in the 1950’s and 1960’s (Factor 2002) that set the scene for the wider adoption of outsourcing methodologies.

Today you don’t have to go very far before you find an example of a successful (or unsuccessful, yet enduring) outsourcing arrangement around you.

The debate on outsourcing is centered around Core Competence

Ask any executive, when to outsource, and when not to outsource – you will get a quick answer. If it is a core competence, do not outsource. If it is not a core competence then consider outsourcing.

But are there situations when you must NOT outsource? We were faced with a situation like this in one of our projects. One of the directors was dogmatically against outsourcing of any kind. In his executive career, prior to becoming a non-executive director, he had faced several outsourcing situations where the outsourcing service providers did not deliver the promise. In addition, he had seen an erosion of capability within his own company to an extent where it lead to dependence on the outsourced service provider, even for minor tasks related to the service. At times, he felt that the service providers charged inordinately high prices for these minor services, especially if they were not covered by the initial contract. All these memories had created a bias which is not uncommon.

Looking at the problem in a fact based logical manner, we asked three key questions:

  1. What exactly does the organization lose by outsourcing this particular service in this manner?
    1. What specific capabilities will be lost, and in what time-frame?
    2. What specific relationships will be lost, and to what extent?
    3. What infrastructure – property, plant and equipment – will be lost or disposed off?
    4. What specific knowledge base, technology or know-how will be lost – to what extent, and in what time-frame?
  2. How long will it take to recoup these losses if the company had to do so, and at what additional costs?
  3. How long can the company survive after the losses analyzed in Question 1?

It does not take very long to answer these key questions; all it takes is a systematic, objective approach. Obviously, the answers will be highly specific to the situation. However a systematic approach similar to the one described above will help a lot in breaking the impasse in the board room as it did in our case. In fact a lot of companies miss out on opportunities to outsource because of the fear of unknown, lack of knowledge, lack of trust or overconfidence in your own ability to do things themselves.

Are there other situations where a company MUST outsource? Admittedly, most situations fall in the grey area somewhere in between. However, we have also faced projects where the company must outsource. Let us look at a situation like that.

Our client – a pioneer in the sustainable energy field – was looking to rapidly build production capability in a region where demand was projected to be especially strong. To capture the first mover advantage the company was marketing aggressively with the expectation that the production capacity could be rapidly ramped up, when needed. When we looked at the end-to-end supply chain plan, matching projected supply to demand, it was very clear that the only way to meet projected demand was by outsourcing some of the activity.

The key questions to ask in similar cases are only slightly different (yet this difference is critical):

  1. What exactly does the organization gain by outsourcing this particular service in this manner?
    1. What specific capabilities will be gained, and in what time-frame?
    2. What specific relationships will be built, and to what extent?
    3. What infrastructure – property, plant and equipment – will be put at our disposal as a result?
    4. What specific knowledge base, technology or know-how will be gained – to what extent, and in what time-frame?
  2. How long will it take to make these gains on our own if the company had to do so, and at what additional costs?
  3. Are there potential gains from outsourcing analyzed in Question 1, that the company cannot do without?

The two extreme cases described above are relatively easier to deal with. A great majority of the cases are however, in the grey area where the answers are not as clear-cut. The dilemma the companies face in those cases is how to figure out whether to outsource or not. Just saying “it depends on your core competence” does not help because no competence comes with a label CORE, or NON-CORE attached to it. Additionally, what is core today, may well become non-core in future and vice-versa.

I have frequently been asked “are there any practical set of guidelines that can help me decide when to outsource and when not to?”

The answer is always the same – it depends on the circumstances of the case. The key questions to ask are:

  1. Can we configure, create and manage an outsourcing relationship that gets us the desired results better than if we manage the operation ourselves?
  2. What gives the real advantage of outsourcing:
    1. Speed of ramp-up and execution?
    2. Capability of the outsourced service provider that are difficult to replicate internally?
    3. Economies of scale available to the outsourced service provider that is difficult to outsource internally? Why?
    4. Economies of scope? What is the source of such economies?
    5. Cost arbitrage opportunity because of lower cost base of the service provider?
    6. Patent, copyright or other proprietary knowledge base?
  3. How can we replicate this advantage without outsourcing?
  4. What is our bias – in favour or against?

Obviously there are no clear cut right or wrong answer in these cases. Outsourcing can be made to work in a great majority of such cases. However, equally it can fail because of a pre-disposition against outsourcing. There is no point blaming the service providers, or the practice of outsourcing itself, if the pre-disposition is against outsourcing, and it is not managed properly in the process.

Is there a way to distinguish between good outsourcing and bad outsourcing? What are the tell-tale signs? In a later chapter we will deal with the objective measure, but at this point I want to note a few tell-tale signs that generally apply.

Obviously, this list can become too long if we try and list every potential reason for which outsourcing arrangements have been known to fail. At the same time, it is not a categorical list in the sense that these criteria will hold good in every case. You will see exceptions to many of these tell-tale signs and need to exercise your own judgment.

Navigating The Grey Area

The two cases described above are relatively easier to deal with since they fall into two opposite extremes of to do and not to do. A great majority of cases are however, in the grey area where the answers are not as clear-cut. Just saying “it depends on your core competence” does not help because no competence comes with a label CORE, or NON-CORE attached to it. Additionally, what is core today, may well become non-core in future and vice-versa.

I have frequently been asked “Are there any practical set of guidelines that can help me decide when to outsource and when not to?”

The answer is always the same – it depends on the circumstances of the case. However, the key questions to ask are:

  1. Can we configure, create and manage an outsourcing relationship that gets us the desired results better than if we manage the operation ourselves?
  2. What gives the real advantage of outsourcing:
    1. Speed of ramp-up and execution?
    2. Capability of the outsourced service provider that are difficult to replicate internally?
    3. Economies of scale available to the outsourced service provider that is difficult to outsource internally? Why?
    4. Economies of scope? What is the source of such economies?
    5. Cost arbitrage opportunity because of lower cost base of the service provider?
    6. Patent, copyright or other proprietary knowledge base?
  3. How can we replicate this advantage without outsourcing?

What is our bias – in favour or against?

Based on the above discussion, a relatively simple framework can be developed as shown below:

Figure 1.1: Activities carried out in a typical Finance Department

The two critical criteria on which the decision hinges are whether the purported loss of capabilities, relationships or infrastructure are business critical, and whether these are irrecoverable.

Business critical capabilities are those capabilities absence of which can easily kill a business in medium term. Likewise we can define the business critical relationships and infrastructure.

In region A, where any of these – capabilities, relationships or infrastructure – are business critical, you will have to manage the outsourcing relationship very carefully to make sure that that a slight misstep from your service provider does not cause massive repercussions in your business. Logistics outsourcing, IT outsourcing and many other outsourcing arrangements fall under this category. A good example of a business critical capability leading to massive business losses is the case of oil rig Deepwater Horizon where business critical functions were outsourced to third parties, yet British Petroleum faced heavy penalties.

On the other hand, irrecoverability refers to the cost of developing these capabilities, relationships or infrastructure from scratch, once they are lost. In region C, where these costs are prohibitive, in general you would not like to lose these capabilities, relationships or infrastructure, and hence create an arrangement where you retain some stake in these.

Of course if the situation is such that the loss is both business critical and irrecoverable, you will find it easier to retain ownership of such capabilities, relationships and infrastructure. Hence it will not be advisable to outsource in such circumstances – as shown in region B.

Finally, there will be situations where the loss of capabilities, relationships or infrastructure is neither business critical, nor irrecoverable as shown in region D. Then, it is easy to make a decision to outsource and reap benefits from what outsourcing provides.

While there are often no clear cut answers, the above matrix serves to provide useful decision making guidelines. Outsourcing can be made to work in a great majority of cases. However, equally it can fail because of a predisposition against outsourcing. There is no point blaming the service providers, or the practice of outsourcing itself. If the predisposition is against outsourcing, it may well be due to poor management of the process in the past.

In conclusion, outsourcing has been around for a long time, and is wide spread. While biases abound, there are relatively very few situations in which a company must not outsource, or must outsource. Simple guidelines are assist in making these decisions. Most other situations are rather vague and the decision making  guidelines themselves become relatively more complex.