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As outsourcing in the business, there are many variables to consider when making the

decision to involve a third party. Here we will explore why companies should consider
outsourcing, the keys to successful implementation, the potential problems associated with
outsourcing, and when it may not be the best model for your company. It is important to not
only understand when you should or should not outsource, but also to understand the
different effects outsourcing will have on a startup versus a large industry manufacturer.

Outsourcing: Working Definition


Outsourcing is the contracting out of a business process, product, or service to a third party. It
may involve transferring employees and/or assets from one firm to another, but not always.
Outsourcing includes both foreign and domestic contracting, and sometimes includes
offshoring or relocating a business function or service to another country.

Trends, Past and Present


The growth of the global outsourcing market in the past few years has been phenomenal, and
all indications are that the pace will continue unabated for years to come. The Sourcing
Interest Group (a leading forum for the exchange of information between those involved in
the sourcing of information technology, business processes and corporate support services)
pegged the global outsourcing market at $72 billion (U.S.) in 2002 and it has predicted that
the figure will rise to $100 billion (U.S.) in 2005.
Outsourcing has been around for a long time, but much of the action until the late 1990s was
focused on informational technology (IT) outsourcing. The goal then was often largely
restricted to achieving operational efficiencies. The past four to five years, however, have
witnessed the rapid growth in Business process Outsourcing, to areas such as manufacturing
and product design. With Business Process Outsourcing, the goal is typically longer-term and
focuses on the realization of overall business benefits, whether enhancing an organizations
competitive position in the marketplace or improving shareholder returns. A recent Accenture
sponsored IDC Canada survey noted that over 90 per cent of the Canadian executives
surveyed who currently outsource said they expect some degree of change in business

processes through outsourcing (Outsourcing-Shared Risks and Shared Rewards, Accenture,


2003). From its earlier days when it was viewed as little more than a ho-hum tactic aimed at
reducing costs, outsourcing has now matured into a strategic management tool.

The essence of strategic outsourcing


What distinguishes an outsourcing arrangement from any other business arrangement is the
transfer of ownership of an organizations business activities (processes or functions)-or the
responsibility for the business outcomes flowing from these activities-to a service provider.
In a typical outsourcing arrangement, the people, the facilities, the equipment and the
technology (the Factors of Production) are also transferred to the service provider, which then
uses the Factors of Production to provide the services back to the organization. The people
are often transferred to the service provider, but this is not always the case.
An outsourcing arrangement can be either tactical or strategic. An outsourcing is tactical
when it is driven by a desire to solve a practical problem. For example, a company may find
that its payroll clerk is not able to process payroll changes, cheques, tax returns and make the
required accounting entries on time. The company concludes that although the payroll clerk is
competent, there is too much work for a single person. The company outsources the payroll
process (including the clerk), and ends up with all of the payroll work done on time and at a
lower cost. As a result, it achieves a net gain in operational efficiency. Similarly, if an
organization outsources its IT infrastructure so it can save five to 10 per cent on the cost of
operating that function, the outsourcing is purely tactical.
Strategic outsourcing, on the other hand, is not driven by a problem-solving mentality.
Instead, it is structured so that it is aligned with the companys long-term strategies. The
changes that organizations expect from strategic outsourcing vary and can include anything
from

achieving a gain in competitive advantage,

spending more time on those activities that are truly central to the success of the
organization,

repositioning the organization in the marketplace, or

achieving a dramatic increase in share price

It may include any combination of the foregoing, and others. The common denominator of
strategic outsourcing is that the organization is externally focused. It embarks on the
outsourcing with a view to achieving concrete results in the marketplace. While the focus is
external, the strategic focal point of the organization may evolve during the course of the
outsourcing relationship. For that reason, it is important to build-in the required degree of
flexibility in the contractual documents so the parties can realign the strategic intent for the
benefit of the organization that is outsourcing. A properly structured governance model will
help make the appropriate adjustments.
In strategic outsourcing, the optimal relationship usually approaches a joint-venture/strategic
alliance-type arrangement. The traditional customer-supplier relationship is typically
inadequate for strategic outsourcing, as it often fails to allow the parties to address key
business considerations and requirements. A structure that approaches a partnership-like
arrangement-where the organization that is outsourcing and the service provider see each
other as equals engaged in a common enterprise-tends to allow the service provider to deliver
greater value during the course of the arrangement. This, however, is not an easy course to
chart for many large organizations. As Peter Drucker notes about large companies in his most
recent book: Theyre used to giving orders, not to working with a partner, and its totally
different. In an alliance or a joint venture, you have to begin by asking, What do our partners
want? What are our shared values and goals?'
The accepted wisdom is that organizations should not outsource activities that are core to
their business that is, those activities that are tied up in the organizations identity-and that
only non-core activities should be outsourced. Distinguishing core from non-core is not
always easy, however. The notion of shared-core business activities illustrates the point.
The concept captures the grey zone between core and non-core activities and was conceived
as a tool to help decision-makers relinquish ownership of business activities that otherwise
might have been classified as core, but which have had a history of underperforming
internally.
What attributes make core activities so important that they should not be outsourced? In their
article Linking Outsourcing to Business Strategy (Academy of Management Executive,
Vol. 14, Nov.4, November 2000), authors Richard C. Insinga and Michael J. Werle make a
distinction between core and strategic activities. A strategic activity, they argue, is one
that confers a competitive advantage on an organization and should not be outsourced. We

now briefly examine a methodology that can assist organizations in reviewing their functions
and processes in order to determine what activities are not true competitive differentiators,
and therefore obvious candidates for outsourcing.

Linking outsourcing to business strategy


Outsourcing has been around for a long time, but it is only in the most recent past that it has
become known by that name. A classic example is Coca-Cola. By the late 1890s, Coca-Cola
had already established itself as a highly successful soft drink company, but the firm was
looking to extend its business across new markets. Although bottling was then considered an
emerging source of competitive advantage, Coca-Cola decided that it did not have the capital,
the time or the expertise to produce its own bottles. Production methods for bottles at the time
were primitive, the result inconsistent, and quality control was a significant concern. CocaCola chose to license a group of independent bottlers to whom it sold its syrup while
imposing strict quality controls. In the next several decades, Cola-Cola was able to achieve its
key strategic business objectives, including vastly expanding its market and protecting its
good name. By outsourcing the non-core business function of bottling its products, CocaCola was able to focus on its core business objectives (such as maintaining high product
quality, protecting its brand and growing market share).
By the late 1970s, however, bottled products had developed into a significant competitive
feature. While Coca-Colas competitors were making significant headway in the bottling of
soft drinks, the companys independent bottlers were not improving their business. CocaCola was losing market-share to its main competitors. In 1979, the company responded by
taking steps to buy out several of its bottle-making alliance partners so it could develop its
own internal capability in what had become a strategic area.
In Linking Outsourcing to Business Strategy, Insinga and Werle sketch out a methodology
to assist organizations in aligning outsourcing to business strategy. The methodology helps
organizations conduct a systematic review of their internal business activities by establishing
a consistent strategic basis for the decision-making process.

Contribution to competitive advantage


Whether an activity adds to an organizations competitive advent age must be measured in
the marketplace, in accordance with a valuation metric that the authors rank from none to
absolutely. This metric assesses activities that are separated into four major categories of
strategic importance, ranging from key activities, which are more apt to add the greatest
strategic value to the organization, to commodity activities, which are readily available in
the marketplace and contribute no strategic value to the organization. Key activities should
generally be performed in-house while others become prime candidates for outsourcing.

Capability to perform internally


Whether an activity can be performed well internally depends on an organizations internal
resources. Those resources are measured against a valuation metric that the authors rank from
a weak to a strong capability (as represented in the figure below). While this metric
cannot be measured in the marketplace, it should be measured as objectively as possible.

Note that the matrix also includes gradations within certain cells, reflecting the fact that being
at the top of a cell leads to a recommended course of action that is different than if the
activity is pegged at the bottom of the same cell.
This two-dimensional matrix helps assess whether a particular activity should be outsourced.
The criteria on the matrix help decide whether an activity is both key to the organization and
an important source of competitive advantage to it, and therefore worthy of being performed
in-house. If it is found that an activity only provides an eligible (if any) competitive
advantage to the organization, depending on the organizations ability to perform it in-house,
it is more likely to be outsourced outright, or handled through some type of third-party
relationship.
As was shown in the Coca-Cola illustration above, in the late 1890s, bottling was considered
an emerging strategic factor, but the company deemed that it was unable to perform
satisfactorily the bottling function in-house. According to the methodology, the optimal
course of action then was for Coca-Cola to enter a partnering or collaborative relationship
with a third party. This is what the company did. By the late 1970s, however, because
bottling had become a matter of greater strategic competitive advantage-qualifying as a key
activity on the matrix-the company reacted by looking to build an internal capability, putting
the move somewhere in cell 2 of the matrix.
Note that despite its usefulness in identifying candidates for outsourcing, the matrix runs the
risk of encouraging a siloed view of the organization, as it tends to overlook the potential for
synergies between the various functions and processes. The strategic value of outsourcing is
of course best captured through a fully integrated analysis that avoids discrete, unbundled
solutions.

A case study
An illustration of a strategic outsourcing arrangement involves J. Sainsburys plc, a U.K.
food retailer with approximately 150,000 employees. By the spring of 2000, the companys
profits had fallen by 40 percent from the previous three years, its competitive position in the
U.K. was rapidly declining, and its share price was falling dramatically. The company was
facing major competitive threats from new entrants, and its once-loyal customer base was

dwindling rapidly. Sainsburys was looking to increase shareholder value and rebuild its
customer relationships. The company wanted to free its managers so they could focus on
more strategic, higher-value activities. For example, it wanted to allow its managers the time
to develop deeper relationships with customers. Cost-cutting alone was not going to be
enough. Sainsburys decided to take steps to turn around its business and refocus itself
strategically.
The company entered into a $2.7-billion (U.S.) seven-year outsourcing arrangement with
Accenture. Accenture took over all aspects of Sainsburys IT infrastructure, including 800
employees, which resulted in immediate savings of $50 million (U.S.) per year. The service
provider is now building new IT systems and working to streamline many of Sainsburys
business processes. Without transforming its business, the company determined that it could
not support the demands associated with modern retailing and growing customer
expectations. To succeed, the company must transform itself in almost every way, from the
way it operates internally to the way its deals with its customers, and it must work in a close
cooperative relationship with its service provider. As Blake Hanna, managing partner
Financial Services Canada, Accenture, observes, A critical success factor in shaping
Business Process Outsourcing arrangements is the degree to which the customer and the
outsourcing provider have achieved alignment around business objectives. The more strategic
the nature of the outsourcing arrangement, the greater the need to achieve this alignment.
One early focus in transforming Sainsburys has been IT governance. It was recognized early
on that IT spending was not producing optimal results and that IT was not regarded as a
business enabler but as a cost centre. The company had insufficient control over much of the
IT envelope, including IT spending; the impact of projects on future costs; the value
generated from its third-party IT relationships; and the delivery of IT projects. There was also
insufficient prioritization of projects, inadequate measurement of results, and few penalties
for non-performance.
The company accepted that it had to bring order to its IT environment. Spending within the
company is now controlled by a cross-business-unit management body so that spending
decisions are not made in isolation. This integrated approach allows for a sustained focus on
the overall business objectives. All IT spending is also evaluated against the strategic
objectives of the company to ensure strategic consistency and a shift away from more tactical
spending initiatives where cost overruns were the norm at the company.

New rigour has also been introduced to the IT decision-making process. Before being
allowed to proceed, every project must be formally approved and supported by a business
case showing current and future IT costs. Finally, decisions must be made by director-level
personnel, as part of a team, and delegating IT decision-making down is no longer acceptable
within the company. In short, steps have been taken to avoid losing the strategic intent of
outsourcing. As Sainsburys transformation continues, store layouts will be modernized and
new ways of working will be established, in accordance with the companys re-set strategic
business focus.
Assessing accurately where on the matrix the Sainsburys outsourcing falls would require
examining each of the specific activities that make up the arrangement. However, the
magnitude and the strategic orientation of the relationship suggest that many of the activities
would fall within cells 5 and 6. As was noted above, a structure that approaches a
partnership-like arrangement typically offers the greatest value to organizations engaged in
strategic outsourcing, as it best allows the parties to address key business considerations
during the term of the relationship.
That outsourcing can be strategic is not in doubt, but there must first be a recognition of the
strategic value that outsourcing can generate. As Insinga and Werle note, a real risk is in
losing the strategic intent of outsourcing in the day-to-day hustle and bustle of the
organizations operations. At this level, they point out, the dominant success metric of
outsourcing becomes lower cost, period. As such, the stage is set for classic sub-optimization
at its worst. To avoid losing sight of the strategic intent, therefore, it is important to
institutionalize a robust decision-making process during the course of the outsourcing
relationship that hard-wires the operations to the strategic.

Benefits of Outsourcing
The benefits of the outsourcing partnerships as reported by Sponsors generally speak to:

Reduced costs and improved operational margins

Improved quality or judgment proofing by using a third partyless biased lens

Access to expertise beyond current staff, equipment, or therapeutic/facility


capabilities

Access to geographical, cultural, global capabilities

Geographical penetration and/or cost advantages

Ability to focus on core competencies

Improved revenue per employee

Flexibility to address capacity constraints

Access to leading edge technology, expertise, or insights

Reducing riskseg, extending/paralleling regulatory pathways to market

Outsourcing Fears?
Outsourcing can come with risks, and deciding when to outsource is likely a decision unique
to the individual Sponsor because tasks, capabilities, and resources will vary from company
to company. Good strategic partnering begins and is centered on trust, which is likely built
over time and has mutual benefit. This trust grows as the solutions to innovation, cost,
performance, and speed prove to be worthy. There are times and situations where the risks
are perceived too great and in our experience Sponsors typically point to certain risks as
unacceptable:

Loss of control

Increased cost

Sponsor reputation on the line

Lack of urgency, CRO cant share our vision

Continuity of projects

Complexity in managing CROs

Confidentiality/IP exposed

Business strategy exposed

Too much uncertainty

Forecasting in question

Process changes and business re-engineering

Cultural fit, values, and alignment in question

Outsourcing Dos and Donts


Do outsource

To create variable and fixed cost flexibility

To gain expertise you do not have

To increase core competencies on work you cannot outsource

Do set expectations appropriately

Plan start-up time realistically

Expect significant cultural and communication issuesknow what they are and train
accordingly

Address the internal resistance

Execute transfers between Sponsor and service provider staffflip badges and other
assets in an upfront and structured manner

Do partner with experience, longevity, and reputation

Do set up key performance indexes that speak to the shared vision and shared risk

Trust Surveys, project reviews

Time On time performance, on time delivery

Quality Error free metrics, aligned quality indexes

Cost Volume discounting, shared performance incentives

Do adjust early and often

Do use a common-sense approach that works for your situation

DONT Outsource for short-term cost savings

DONT Select your partner on price alone

DONT Outsource if it would compromise your core competencies

DONT Expect immediate gains

DONT Expect outsourcing to solve your workflow or business process problems

DONT Expect ROI calculations to tell the entire truth

Conclusion
As trust and alignment develop, todays concerns may translate into new opportunities that
benefit the device maker, service provider, and employees on both sides while addressing the
core needs of innovating faster, better, and cheaper. The key is long-term trust that mutually
benefits and speaks to the must haves of good strategic outsourcing. The path to true
transformational outsourcing starts at the transactional levels where performance and
quality are witnessed and simple cost/benefit analyses can be identified. The real efficiencies
develop when there is cultural and operational alignment in processes that take advantage of
best practices. Industry pains are complex and growing, which presents industry with new
challenges or new opportunities, depending on whether your glass is half empty or half full.
Todays economic and regulatory burdens on industry have pushed us to the point where
industry consolidation and better strategic partnering are moving from essential needs to
mandatory. The pains are real, they are here, and it is likely that outsourcing partnerships
and strategic partnerships are the logical evolutions that will help industry bring bigger and
brighter innovations to the marketplace in a more efficient model.