The Path to Strategic Outsourcing | Article

path to outsourcing successStrategic outsourcing is gaining strength in the marketplace. That migration, according to Scott Andersen, operating executive, commercial sector, MCI Systemhouse, has followed a path from the completely vertically integrated companies, such as automobile manufacturers, of 40 years ago through the just-in-time (JIT) manufacturing environments of the ’70s and ’80s to what MCI Systemhouse calls the “network enterprise.”

The JIT environment drove the integration of very tight customer/vendor relationships and changed the way industry was viewed, said Andersen. The network† enterprise, he said, is an extension of the JIT approach, in which the key focus was linking across the supply chain to tie all the companies together.

“It’s not only an extension back through the supply chain but up to the customer, across to your various business partners and also back to your suppliers,” said Andersen. “So now there’s an even tighter integration of all the parties that have to come together to play a role in creating that product or solution for the customer, whether it be business or end user.”

The key question is how a company can use its internal resources most advantageously in going to market and reaching their customer set. Then, said Andersen, comes the question, “How can we team with others so we can really provide a total solution to that customer?”

That ability to use outsourcing as a strategic tool and team with vendors is going to be what separates the winners from the also-rans in the emerging marketplace, according to Andersen. “The company and its partner that can rapidly respond to changing customer requirements, whether that be product or services, is probably going to be the winner in tomorrow’s world,” he said.

Strategic or Tactical?

The people in a company who make the decision to outsource can determine whether the decision is strategic versus tactical, according to Andersen.

“If it’s just done from a cost-cutting perspective, these decisions can be made on a limited basis by a departmental or CIO type executive,” he said. “Where it becomes strategic is where more of the executive team is involved in the decision process, and it plays a piece in the puzzle of what that company is trying to achieve.”

The upper echelon involvement not only helps determine the status of a relationship, it also is essential to making the business partnership work when difficulties are encountered, according to Andersen — and the ability to weather rough spots is crucial. “I tell my customers that a partnership is all fine and good when things are going well, but what tests the mettle of partnership is how you react when there’s an issue.”

The second important element to success is having a clear statement of expectations and objectives.

“The more you can reach agreement and understanding …of what makes the relationship a win-win, the more the joint relationship will work,” said Andersen.

Familiarity Breeds Opportunity

The comfort level with outsourcing has increased over the years. Andersen points to the automakers that, 40 years ago, were totally integrated from resources through the production of cars. Then services such as security and janitorial began to be outsourced, followed by the boom in information technology and the resulting acceptance of outsourcing data centers. “What we’re looking at now is really an extension of that because of a rapid change in technologies,” said Andersen.

Now the door is swinging wide open on the opportunities for relationships and the technical offerings that drive those relationships. MCI Systemhouse is involved in a joint venture with Mellon Bank where the long-term goal is to provide all of the services of a chief financial officer. On the products front, the company recently announced an online process called electronic bill presentment payment. It allows a company to target market a customer paying bills electronically and get an immediate response.

“I think more and more companies are going to look at the activities that add value to what they provide to their external customer and where they need to focus their limited resources to make sure they make a difference,” said Andersen. He pointed out two companies where that focus on core components coupled with technology to create innovative corporate structures.

The Name of the Game

One of those companies,, has turned the bookselling business on its ear. It is, essentially, a retail book selling business whose only way of touching the customer is through the electronic media. Moreover, the company maintains no inventory. Instead, has relationships with publishers that enables the booksellers to take orders and turn them around quickly enough to meet their customers’ needs.

Now has added an element that allows customers to tell the publishers what authors and subjects they want to see in new books. “That’s publishing based on pre-demand,” said Andersen. “It drastically changes that whole book manufacturing supply chain.”

Another example that illustrates the power of strategic outsourcing is a major food manufacturer that, in the past, made and sold most of the food. “What they decided to do is take outsourcing to almost its fullest extent by outsourcing all of the manufacture of their product,” said Andersen. “What they became is a marketing, research and development and customer contact company. Customer contact drove the marketing, marketing feedback drove research and development, and all of that was pumped into the types of products they brought to market.”

These examples, according to Andersen, are indicative of what lies ahead for strategic outsourcing. “The virtual corporation that people talked about in the past can become one in reality,” he said. “If you have an idea and can bring it to market, you can radically change the way you deal with customers and the way the whole supply chain works. You do not have to manufacture the product. In many cases, you might not even be the distributor, manufacturer or the person that sells it.”

Lessons from the Outsourcing Primer

  • Strategic outsourcing grew out of supply chain relationships created in just-in-time manufacturing.
  • Teaming with others effectively can be crucial to success.
  • Senior level involvement is required to move a relationship from tactical to strategic.
  • Having clear expectations and objectives are essential to a successful relationship.
  • Strategic outsourcing has opened the door to the creation of virtual companies.

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