Redefining Procurement Series: Outsourcing
We are quickly approaching the end of our Redefining Procurement Series, with the final chapter focussing on Procurement Outsourcing. Today's post aims to set the scene for the subsequent posts in the final chapter.
The very word ‘Outsourcing’ incites a mixed reaction amongst various business and social communities across the globe – both negative and positive.
The cynics will tell you that outsourcing means:
- Loss of jobs
- The operation / process will now be handled offshore
- GDP will be impacted as a result of both of the above
- Loss of control
- Loss of quality
- Conflicting cultures (business, social)
- Security issues (sharing sensitive data)
The advocates will tell you that outsourcing means:
- Ability to focus resources on core activities
- Access to a greater pool of resources, knowledge, skills and technology
- Reduced operating and asset costs (as these now lie reside on the outsourcers P&L)
- Reduced training and development costs
- Leverage – taking advantage of a partners economies of scale
- Staffing flexibility
- Shared risk
- Increased innovation (driven by the partners desire to remain competitive)
- Acceleration of projects and quicker time to market
- High caliber professionals that hit the ground running
- Ability to tap into best practices
- Knowledge transfer to permanent staff
- Cost-effective and predictable expenditures
- Access to the flexibility and creativity of experienced problem solvers.
Whichever side of the fence you sit, outsourcing is not a new concept. Corporations have been ‘outsourcing’ since the early 1960’s – limited of course by technology advancements, management structures and geographical trade barriers. It wasn’t until the late 1980’s, alongside improvements in all of the above, that we start to see true global partnerships taking place – with management viewing outsourcing as a multi-faceted business strategy, enabling greater focus on core activities.
Since 2000, an increased focus on core-capabilities has resulted in many businesses looking at all operational aspects of their business, weighing up the benefits of building/ managing them in-house or partnering with a third party provider.
Outsourcing as a business decision is not derived by one factor, which was the common mis-conception with the initial waves of BPO (focusing on labour arbitrage). The decision to outsource is one which must be completely aligned with the overall business objectives. It has to have senior executive support. Both growth and exit plans need to be built in and understood from day one. And the outsource must sustainably fulfill the business need above and beyond what could be achieved internally.
The reason why outsourcing has been the success it has is that it enables an organisation to tap into a third party’s specialisms. A third party that can not only deliver the service more cost effectively, but that can also provide a better overall service. It may have had its issues (and there are countless examples of outsourcing that has gone wrong) but this has been part of the learning curve for both organizations and the outsourcers themselves. Today the industry is well established, agreements are far more sophisticated, vendors are experienced, and organizations are much more knowledgeable about how to make it a success. As a result successes over shadow the failures.
Whether you like it or not, outsourcing is here to stay. And it has become a permanent fixture for organisations because of its ability to deliver results that organisations could not economically achieve on their own. Rather than the cycle switching and organisations starting to take activities back in-house (as some have predicted), instead we are seeing relationships become deeper. The vendors become more capable. Organisations more demanding. In some areas, on-shoring is replacing off-shoring. And the driver of outsourcing is moving more towards effectiveness (i.e. how do I do this better) instead of efficiency (i.e. how do I do this cheaper?).