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More and more organizations are exploring and/or implementing outsourcing programs, often based on vague observations about what others have done. In such an environment, it is easy to overestimate the savings generated by outsourcing or to underestimate the efforts required for successful implementation and ongoing success.
The course examines the potential benefits and pitfalls of outsourcing, both in general terms and for your organization specifically. Learn how to develop a framework for determining when outsourcing will be successful and profitable. Create a workable strategy for proceeding with an outsourcing decision. Prepare the organization for the potential future use of this strategic alternative.
Objectives:
Prerequisite: Experience in financial management of a medium or small company
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Chapter 1 - Outsourcing - Basic Concepts and Practices
Learning Objectives
- Review the prior uses of outsourcing. - Explore the construction industry as a model of outsourcing. - Examine some basic management concepts relating to outsourcing. - Begin to define activities that are potential candidates.
Introduction
This chapter provides the basic groundwork for developing an understanding concerning the use of outsourcing as a management alternative. It moves from a brief discussion about the past and current uses of outsourcing, to providing the start of a disciplined approach to identify potential candidates. The section "What Can You Do?," towards the end of the chapter, begins the information gathering process needed to prepare an evaluation of activities to assure they are consistent with an organization's resources, risk profile, and strategy(ies).
Outsourcing - Not a New Concept
Despite the continuous coverage in the media, outsourcing is not an new idea. Organizations have used this tool for years, and in fact, industries such as construction are designed around its use.
We routinely use outsourcing for functions such as
Outside assistance is also employed when facing a nonroutine situation, such as an acquisition or divestiture. Consultants have become almost commonplace in modern organizations. All of this is outsourcing.
Given the cumulative experiences, we should have developed a series of rules to determine when and how to employ outsourcing. Unfortunately, it appears that we tend to do this on a case-bycase basis, without the benefit of a systematic/disciplined approach.
In addition, the affects of an increasingly global economy require us to rethink the process. This transition has resulted in potential new economies, but also new risks. Even major global companies have experienced failures in outsourcing. For example, Dell moved its toll-free service and tech support to India in 2001. In 2004, it returned customer support for business clients to the U.S. Recently, Dell added 2,000 people to its U.S. call-centers, increased training for 5,000 other reps., and will spend $100 million in 2006 to improve customer support service.
Industry Models
The construction industry has evolved into a model of continuous outsourcing. As such, we will refer to it from time-to-time throughout this program.
The typical small/mid-size construction company consists of a central management team with expertise in project management, cost estimating, material and property acquisition, and engineering/design. It will have relatively few employees, except for supervisors, that actually perform the physical work. This is done by a series of subcontractors.
If you have ever had, or seen, a house built you will quickly notice the various names of companies performing tasks. These tasks range from excavation, plumbing, electrical services, carpentry, painting, etc. The successful use of subcontractors is a key skill in the industry. This demonstrates the importance of knowing your customers' expectations, and the steps required to produce and deliver your products (goods or services) to them.
The use of this model clearly demonstrates a key management fact. You cannot delegate responsibility. While well-known, it appears to be often forgotten regarding outsourcing. Outsourcing does not relieve us from our responsibility to our customer. If you have a problem in the construction of your new home, do you hold the general contractor responsible, or seek the subcontractor who did the physical work? You cannot transfer ultimate responsibility. Therefore, just as a general contractor continues to monitor/manage his subcontractors, businesses must monitor/measure and manage their outsourced activities.
Other examples of industry-wide outsourcing include major portions of the computer industry, as well as movie production. In the first instance, workers perform their tasks remotely and send, via electronics, their product to people they may never have met. The key to success is to bring together people, located virtually anywhere, with the needed skill-sets, and to coordinate the various tasks assigned.
Movie production is another case of outsourcing. Here, people are brought together for their skills for a period of time. Just think about the various films your favorite producer, director, or actor have been part of. Now reflect on the numerous other people required to make a film. Again, success relies on gathering skilled personnel and managing their tasks. Obviously, as before, this requires a keen focus on scheduling, monitoring the interfaces, and overall management.
Visualize two teams drilling a tunnel through a mountain. While each team requires considerable autonomy to deal with problems it will encounter, there must be close coordination (management) if the two teams are to join and create a straight tunnel.
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