The Changing Shape of Outsourcing | Article

Over the past three years, strategic outsourcing has become an increasingly familiar practice — and by all accounts, it will be even more prevalent in the near future. The worldwide market for outsourcing services is expected to double in the next five years — and, according to a recent survey conducted by the Economist Intelligence Unit (EIU) and Andersen Consulting, a majority of executives will consider outsourcing nearly every non-core business process by the year 2010.

This growing interest is driven largely by a fundamental change in the way the corporate world views outsourcing. Today, more and more executives see outsourcing as a strategic tool — a means not only to cut costs, but also to draw on the expertise and resources of a partner to shorten time to market, increase customer satisfaction, and exploit fast-changing technology.

More importantly, a growing number of executives see outsourcing as a way to reshape the corporation — to move away from the vertically integrated organization and toward a more focused and flexible company that relies on sourcing relationships to enhance its core abilities. The EIU survey, entitled “Vision 2010,” revealed that 80 percent of the companies studied cite a “flexible organization structure” as a key success factor in the coming years.

More than 40 percent of executives believe that their organization will be a substantially or fully virtual organization by the year 2010 — and respondents regard outsourcing as having the same kind of importance as acquisitions and mergers in creating those competitive organizations of tomorrow. In short, companies are expecting a lot from outsourcing — and those expectations are giving rise to new kinds of outsourcing relationships.

As executives look for broader, more strategic benefits, they are forging relationships that are increasingly close and cooperative. A recently released study conducted by The Warren Company, a Rhode Island-based consulting firm, describes an emerging spectrum of outsourcing relationships. At one end are the more traditional arm’s-length outsourcing arrangements — having a vendor manage a data center, for example, while the company makes the transition to client-server technology. Moving along the spectrum, one begins to see strategic sourcing relationships that are more collaborative.

Near the far end are sourcing relationships that are, in essence, alliances and joint ventures — as when a bank, for example, works with a technology outsourcer to create and market a new information-based financial product jointly. At the end of this spectrum is the networked enterprise, a company that is able to combine and recombine its core strengths with those of multiple partners and, thereby, move swiftly into new markets.

These trends are already evident in the marketplace. Andersen Consulting has worked with the London Stock Exchange to cut internal costs and funnel the savings into a powerful new trading network. At DuPont, we have joined a long-term alliance of outsourcers in an arrangement that is designed to do nothing less than dramatically enhance shareholder value over the next five years, according to DuPont executives.

No two strategic sourcing relationships are alike; each depends on the nature of the partners who are in the relationship. But Andersen’s experience has shown that strategic sourcing arrangements share several key traits that distinguish them from traditional outsourcing relationships. They tend to downplay legalistic, command-and-control approaches, and instead emphasize joint problem-solving. They involve shared goals and shared risks and rewards.

Finally, they are set up for the long term, so that the two organizations will have the time they need to produce strategic results.

As we turn the corner into the next century, the ability to create and sustain such relationships will be vital to competitive success. Unfortunately, this is unfamiliar territory for most executives. Indeed, only 21 percent of the respondents in the EIU survey felt that they and their colleagues were ready to manage in such an environment. Strategic sourcing requires new management skills — from a disciplined selection process to an understanding of the critical “soft stuff” of culture and chemistry that can make or break a sourcing relationship.

Acquiring such skills represents a big leap for most of us in business today. More than anything, it requires a change in mindset, which is one of the most difficult kinds of changes for managers to make. Those who do, however, will be able to add the power of strategic sourcing to their toolkits and keep pushing the boundaries of the organization further and further to create competitive advantage.

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