There was a time when it was not unusual to see flames and smoke on the horizon while still miles away from oil field derricks. Often, in the business of exploring for oil, natural gas was found instead. But it was a hindrance to the core business of oilmen, so it was often wasted and costs were incurred in burning off the gas. Some companies, though, envisioned the importance of the natural gas, realizing it could create value and profits if placed in the hands of those with expertise in that industry.
It is much the same in outsourcing. This dynamic business tool allows companies to focus on their core competencies, thereby increasing efficiency and competitive advantage. Core functions are what a company competes on. A company’s telecommunications infrastructure and management are good examples of important, yet non-core functions that are ideal for outsourcing. The meal catering functions of an airline is another example of a non-core process. Logistics is a crucial business function but, in most companies, it is not core and offers excellent opportunities for value from a supplier’s economies of scale. Wise leadership recognizes that a company can get more value by outsourcing non-core processes to others who are dedicated and expert in specific fields.
Through outsourcing, buyers contract for outsourcing suppliers to perform non-core, yet essential, business functions for them. The buyer gains value through the economies of scale, process expertise, creative ideas, and investment leverage of the supplier. The key in the definition of outsourcing is that the buyer turns over the ownership and the control of a process to a supplier. The buyer determines what results it wants to achieve, but the process of accomplishing those results is left to the supplier.
In today’s world of ever-increasing competition, companies are forced to look for new ways to generate value. The world has embraced the phenomenon of outsourcing and companies have adopted its principles to help them expand into other markets. Outsourcing is an excellent solution for a company’s need to constantly adapt in order to compete in such an environment. In a two-part special feature in this issue of OutsourcingJournal, Robert L.Crandall, former CEO of American Airlines, and Scott Nason, CIO of American Airlines, talk about the competitive environment and how American adapted, creating the outsourcing company, Sabre. “As we figured out how to do something and had the ability to do it at a very high standard,” Crandall says, “we would create a business and spin it out.”
Creating new outsourcing companies is a huge growth area in the marketplace today. As more and more non-core processes are divested, there is more opportunity for suppliers to create niche areas for outsourcing and refine those processes to generate new wealth for both companies. Success for a new company, however, is not guaranteed. The supplier must be able to take a buyer’s existing process, provide that service back to the buyer at less cost or with superior expertise and do so at an excellent standard of performance determined by the buyer and yet still make money. Entrants in the field of outsourcers can benefit greatly by the advice offered in this issue from those who have taken various directions to create new businesses. Many births are taking place today and, for those who do it right, there is the opportunity to build on strengths and develop a reputation of success not unlike that of IBM.
Jumping on the Bandwagon
Most new companies today either find a niche or create one, and we highlight several such stories this month. Read about StrataSource, which has found a new hot button, and Exult, a company with a truly ambitious global vision. In many instances, new outsourcers are born of a need to provide services in an area where no providers currently exist. Such is the case in Hong Kong where an Ernst & Young joint venture structure has been used to create an outsourcing company with plans to spread throughout the Asia-Pacific Region.
As always, at OutsourcingJournal, we seek to provide you with useful knowledge about best practices in outsourcing that you can apply to your own organization. In the birth of an outsourcing company, there are many aspects to consider at the outset. How can you recognize where an opportunity exists? What resources will be required? Where and how do you find that all-important first client? How do you achieve economies of scale? What about structuring the pricing and the contract? Bill Deckelman, our legal analyst, highlights some of these issues. Linda Tuck Chapman, of the Bank of Montreal explains the importance of establishing a center of competence. Finally, Francisco D’Souza, of Cognizant Technology Solutions, discusses how to sustain growth.
One arena with enormous potential for outsourcing is America’s government; however, it is much more complicated than outsourcing in the private sector. Without understanding the various challenges involved in government outsourcing, private sector firms risk failure when they compete for work. At the OutsourcingCenter, we see a great deal of value in focusing attention on the elements and challenges involved in this revolution that is occurring between the private and public sectors. To that end, the OutsourcingJournal debuts an exclusive new column this month, looking through the prism of government outsourcing to help our readers sort through the issues and opportunities. We will present information each month on best practices; lessons learned at local, state, federal and international levels; and success stories. The focus of the column will be to keep you informed about new developments and thinking.
The government column’s new associate editor, Steven Else, is the founder of the Center for Public-Private Enterprise (CPPE) and the founder of “Outsourcing and Privatization Forum,” a monthly newsletter focusing on federal outsourcing, privatization and partnering. Starting out as an Air Force pilot, Else has served in US government for 22 years. He worked in the problem-solving arena as an attachÈ in France and worked at the Pentagon as foreign liaison on a number of issues for many countries. Else was also director of strategic planning and policy development for the Air Force’s outsourcing and privatization office, then served as director of public-private partnerships while working in the Air Force secretariat.