Why do companies outsource today?
Until the arrival of the Internet, the answer was clearly cost. But the new economy is making new demands. How has a world moving at Web speed altered the way companies decide to outsource?
“If we can figure out how buyers buy, we can help sellers sell,” says Kyle Andrews, who along with Bill Hall, founded Pretium Partners Inc., a consulting firm in Columbus, Ohio. The company specializes in sales training and is known for training professionals who sell outsourcing.
Pretium Partners joined hands with Professor Venkat Bendapudi of the Fisher College of Business at Ohio State University, to conduct a study. The resulting publication is formally called “Value Assessment in Outsourcing: A† Study of Outsourcing Justification Practices.”
Professor Bendapudi, an assistant professor of management and human resources, has conducted outsourcing studies previously. This time he surveyed a random sampling of U.S. and Canadian companies who had annual revenues of $1 billion or more. Sixty five companies responded to the four page survey. Most respondents occupied the executive suite.
The goal was to find out how companies make decisions about outsourcing and then justify those choices. The professor examined both tangible and intangible factors to determine how companies make the often wrenching and fearful decision to hand over a crucial but not core function to SOMEONE ELSE!
Outsourcing When In Financial Distress
Historically, companies outsourced because they were in financial distress, points out Hall. In these instances, cost reduction and cash infusion were the overwhelming motivations.
But as the outsourcing relationship continued, these struggling companies noticed they were enjoying a host of unanticipated benefits. Over time, outsourcing became a proactive decision that allowed companies to enjoy all the goodies, including the welcome cost savings.
The study found the five most important benefits to outsource in the buyers’ eyes were:
- Improve productivity.
- Reduce operating cost.
- Upgrade, introduce or transform skills.
- Better manage the department or function.
- Make resources available for core area.
Andrews points out that 27 percent of the respondents reported outsourcing allowed them to redefine their corporate strategies, a percentage he finds “remarkable.” Companies felt they could enter a new marketplace or develop a new product faster if they included outsourcing in their business mix.
Andrews says if the questions had focused on the transition to ecommerce, that percentage would have been significantly higher. In these days of mach speed change, large companies believe outsourcing is one of the best ways to update their business models to be more in tune with today’s radically altered business world.
The partners were also curious about how companies utilized† investment performance measures in their outsourcing decision. Companies relied more on cost, quality and productivity in their decisions than on traditional financial measures like return on investment. However, an overwhelming majority — 80 percent — reported they are much more likely to use all of these justification measures in the future.
Corporate Cultures Matter
The study provided concrete proof that when buyers and suppliers share common goals and values, the outsourcing relationship is most successful. “Sellers who can demonstrate a similarity of corporate cultures not only helps sell the engagement but also ensures its success,” notes Hall. This is a key finding since only 32 percent of the respondents reported being extremely satisfied with their vendors.
Risk analysis will grow in importance. During the study, only 39.6 percent of the companies reported using formal risk analysis. But nearly 70 percent said they will depend on risk analysis in the future.
Finally, the professor found intangibles like intuition played an important role in deciding to outsource. “The justification to outsource is multi-dimensional. There’s no one way to justify outsourcing,” Hall continues.
The study also focused on business paradigms — the overarching principles that drive investment decisions. The partners hit upon the idea after discussing outsourcing justification with Coors Brewing Company’s director of strategic resources. He explained that Coors was fixed on cost reductions for a period of time. Accordingly, outsourcing decisions had to be justified that way.
But once the company repositioned itself, the decision-making paradigm would shift to operational and strategic investments. When that happens, the outsourcing model justification model would change, too.
The Ohio State study discovered that improving operations was the No. 1 reason why companies outsource (41 percent) today. Cost reduction and enabling new strategy tied for second place.
Training Courses with Real Life Research
The Pretium Partners have incorporated the study’s findings into their training course called “Selling the Business Impact of Outsourcing.” “Training courses are more effective when they have real life research,” says Hall.
Lessons from the Outsourcing Primer:
The study concludes with seven critical lessons for outsourcing providers. They are:
- Explore risk perceptions.
- Understand the customer’s approach to investment.
- Identify decision making paradigms.
- Identify, validate and emphasize the intangible benefits of outsourcing.
- Work with the decision makers to sell from the top down.
- Demonstrate an alignment of goals and values.
- Set appropriate expectations.