Outsourcing in Today’s Business World
I don’t know if this is really an “industry report” but it’s on outsourcing which relates to any industry.
In a world of globalization, U.S. companies are constantly seeking strategies to become more competitive. Important objectives of the strategic response have been to reduce costs, stay ahead of the competition, and enhance profits. Outsourcing has become a main cost-cutting strategy in the twenty-first century. It occurs when a company moves work out of the enterprise. A special report in the Canadian Business Review magazine refers to outsourcing as a strategic tool. The author, Michael F. Corbett, states that in the 1920s and 1930s, the model that has shaped our thinking about organization has been that of a large, integrated corporation that owns, manages, and directly controls most or all of its assets and resources. However, today’s organizations are increasingly turning to outsource and changing the way they do business. As a result, outsourcing becomes a tool that challenges managers to think about creating more flexible organizations based on core competencies and mutually beneficial, long-term outside relationships.
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I agree with the author in this area. It is impossible for any organization to have expertise in all areas of the company. Therefore, it is wiser to outsource some of the work to other organizations that can do it more efficiently in order to save time and money. How well this process will work depends on the relationship between the parties. Therefore, it is a key element to develop a fair and honest relationship in which both parties can benefit by working together.
The author further went on to explain that as organizations adopt an outsourcing strategy, they often find themselves beginning to focus more on their expertise. In another word, organizations are assessing their strengths and advantages and doing the right thing. I totally agree with the author in this sense because it reminds me of the economist David Ricardo’s principle of comparative advantage.
The theory states that gain will be maximized when each nation, in this case, an organization, specializes in producing those products for which it has the greatest economic edge. The author says that organizations are asking themselves, “How do I bring the greatest value into my organization to deliver the end product to my customers?” This shifts the traditional focus on resources to become a focus on results.
As the article states, the main tactical reason for organizations to outsource is to reduce operating cost. Increasingly though, we find that companies are looking beyond tactical reasons and focusing on strategic reasons for outsourcing. These include improving the business focus, sharing risks, and freeing up resources for other purposes. In this sense, outsourcing is the view as a way of moving people from one area of their business to an area where they see a greater return on investment. I think this is a great strategy.
It uses resources more efficiently. For example, say a company can produce the wheels on a bicycle for $8 and sell it for $10. If it can find another company that can do produce it cheaper than what it can, then an intelligent decision would be to outsource the production and pass the saving onto customers.
This strategy allows the company to gain a competitive edge against its competitors while at the same time frees up the resources for other things. Despite the benefits of outsourcing, very few organizations took advantage of this strategy and the author does not explain why. I believe the main reasons are stubbornness, resistance, and fear. Organizations do not want to admit that there are others that can do things better than them. Moreover, they do not want to change the way things are being done.
Outsourcing will lead to a restructuring of the organization and the movement of human and material resources. People dynamic is probably the major outsourcing challenge. An organization that decides to outsource needs to communicate to its employees the reasons for the decision and emphasize that the new strategy is to focus on its core competencies. In addition, outsourcing means sharing internal information with suppliers. Many organizations fear that business secrets will leak out as a result. Therefore, these reasons provide organizations with a tendency to resist change even though it is beneficial to do so.
Toward the middle of the article, the author defines the four categories of relationships in outsourcing. These include integrating operations, mastering change, providing cutting-edge solutions, and sharing risks and rewards. For example, a Chicago law firm was able to triple its operation in 18 months by creating an integrated relationship with various firms in the area of payroll, billing service, and account collection. I think that the greatest advantage of outsourcing is having access to people with areas of expertise.
There is no need for hiring and training people. As a result, time and money are saved. In the area of mastering change, Circle K is a great example. These convenience stores utilize technology to link their point-of-sale terminals to their suppliers and distributors. As a result, they do not have to ship their own products to the stores. The distributors know when the supplies are low and will ship it to them immediately.
For cutting-edge business solutions, Chrysler offers an excellent discussion. Seventy percent of the components in a Chrysler are manufactured by outside organizations. In fact, all U.S. automobile manufacturers are moving in this direction, but they still lag behind the Japanese, who outsource on average about 75 percent of their parts and components. In the area of shared risks, we’re seeing a growing number of cases where vendors are being measured and rewarded by the benefit that they bring to the organization. In this case, a partnering relationship is established.
Next, the author goes on to describe the process of outsourcing. It consists of six steps. It begins with conducting an analysis and then moves on to identify the best candidates, defining the requirements, selecting the providers, and transitioning the operations. Then finally, the last step is managing the relationship. In terms of analysis, understanding why your organization is outsourcing and what goals is it trying to accomplish is very important. In my opinion, without a clear purpose and goal, the strategy will eventually lead to disaster.
The next step is choosing candidates for outsourcing. I think a considerable amount of time should be allocated to this step because choosing the right candidate is essential to the success of the strategy. Questions such as how many suppliers to use, which area of expertise they have, and how reliable are they must be addressed in this step before moving on.
The outsource provider must possess the experience, knowledge, and ability to manage its workforce and meet the expectation on time in a consistent manner. The next step is equally important. In addition to describing what result is expected, it is also crucial to explain to the suppliers the relationship that the organization tends to build. The partners must be honest to each other in order to maintain a beneficial relationship in the long term.
Lastly, I agree with the author that the key to outsourcing is communication. It must be clear and often. All stakeholders should be addressed. Time should be allowed for the relationship to mature. Commitment and trust are essential. All parties must understand that their roles are important and will affect others. They have to help each other because when one part of the chain is broken, it will impede or stop the other parts from moving on.
I believe that outsourcing is a great strategy to implement. However, it is essential for organizations to analyze themselves to see if they can fit well into it. It is not a guarantee of profitability. It is simply a tool to achieve organizational objectives. The pros and cons must be weighed together to see the net result. For those that have successfully implemented the strategy, they are a major player in the global economy. Such organizations include Hewlett Packard, Compaq, Chrysler, General Motor, Toyota, etc. These organizations realized this new trend in global management and are rewarded for their efforts.
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