Outsourcing’s New Risks | Article


Outsourcing's New Risks

Today, the greatest risk in outsourcing is to not outsource. So says James Brian Quinn, William and Josephine Buchanan Professor of Management emeritus at Tuck School of Business at Dartmouth in Hanover, New Hampshire. “Without outsourcing, companies can’t keep up,” observes Quinn.

The second biggest risk today is to keep innovation in-house, continues the professor. He calls the idea of assigning all corporate innovation in-house “a macho shibboleth.” Today, the most successful companies use outsourcing for innovation. He cites Dell Computer and Cisco Systems as leaders in their fields who rely on their suppliers to do the development work.

Dell, for example, concentrates “on the few things it does best in the world” and outsources the rest. Dell’s core competency is a responsive customer support system; the company relies on its upstream suppliers to do everything else. “Dell is dominant in its field because it has outsourced innovation,” says Quinn.

The frontiers of innovation are moving so fast no one company can stay ahead of the entire world, observes the professor. In the old days Bell Labs were able to keep the Bell system one step ahead. That is not possible today because events “interact in ways that are unpredictable.”

Today, companies have to dip into the knowledge bases of their suppliers to innovate. Quinn says entire industries like electronics, automobiles, and aerospace are “rearranging this way.”

Quinn sees this restructuring happening worldwide. U.S. companies have to keep up with what’s going on in America but also abroad. “Good things are being done in faraway places,” says Quinn.

The Dartmouth professor believes both buyers and suppliers have to adopt an increasingly global focus. Today some of the risk associated with outsourcing is global. Companies have to figure out where they want to be and where they want to find suppliers. He suggests setting up a† “scan system” to track current and potential suppliers in all corners of the planet.

The new economy has also changed how companies approach risk management. The traditional approach has been to look at the past instead of trying to predict the future. Today, it’s the future that holds the biggest threat to companies. Gazing into a crystal ball is just what’s required in these times of change. “The new elements of risk control are anticipatory,” says the professor. “This will be another big outsourcing trend.”

Quinn says strategic control is control over your future positioning. In the outsourcing arena, buyers have to assess whether their suppliers will threaten or enrich their financial future, depending on the buyer’s particular strategy. This entails envisioning both where the company and its suppliers will be at a particular time in the future. Will the corporate strategies still mesh then? This ability to look ahead is another skill buyers will have to add to their outsourcing skill sets.

Buyers must have input at the formative stages of a supplier’s new strategy. Buyers only have power to change things while the ideas are still nascent. If buyers react to a change already implemented by a vendor, it’s too late, in Quinn’s view, “because the position is already firm.”

If buyers outsource innovation, adopt a global vision, and anticipate which suppliers can help them in the future, they will “knock the pins out of the risks of outsourcing,” says Quinn.

Lessons from the Outsourcing Primer:

  • Companies need to let their suppliers supply innovation.
  • Today, the world is too complex for any one company to commandeer the lead.
  • A global viewpoint is crucial for buyers.
  • Buyers must anticipate which vendors will be able to help or hurt them in the future.

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