“If there is something we cannot do more efficiently, cheaper, and better than our competitors, there is no point in us doing it. We should hire someone to do this work who will do it better than us.”
Henry Ford, 1923
Research results from PricewaterhouseCoopers indicate that 90% of companies on the American “Fortune 500” list of the wealthiest firms have used outsourcing to improve their operations. Analyses published in The Harvard Business Review show that outsourcing is one of the most important management concepts introduced into business practice over the last 75 years. The 400 managers surveyed from 34 countries around the world identified outsourcing as one of the most frequently used organizational methods and predict that its importance will grow, surpassing such restructuring methods as mergers, acquisitions, or strategic alliances.
Outsourcing (Outside resource using) is a method of strategically shaping the structure of business activity and an organizational concept for executing business processes. The use of tools and services offered by specialized partners (e.g., logistics operators, subcontractors) by an enterprise stems from the need to achieve better results, enabling a focus on core business activities.
The implementation of many management concepts in an enterprise, such as:
– Lean Management (slimming down structures and lean manufacturing),
– Shrinking (downsizing the organization),
– Delayering (reducing management levels),
– Outplacement (transferring the execution of a function or process outside the enterprise), uses outsourcing as a tool for achieving set strategic goals.
Due to the strategic position of outsourcing and its long-term nature, a distinction must be made here between subcontracting (a relationship between contractors where the executor receives instructions from the principal on how to perform a task) and outsourcing (where the outsourcer has the freedom to choose how to perform a given function or process). The principal, utilizing the potential, knowledge, experience, and qualifications of the outsourcer, expects specific results, while the method of execution remains at the discretion of the executor. This is therefore not a supplier-customer relationship, but a strategic partnership in which each partner wants to achieve success by adapting their processes to support the partner’s processes. The practice of using outsourcing indicates many benefits: striving to eliminate fixed costs, increasing efficiency and shortening lead times, slimming down the organization, utilizing a partner’s potential to strengthen one’s own competitive position, freeing up capital required for investments, risk diversification, the possibility of market expansion, and many others.
However, why can one encounter companies on the market that decided to use a logistics operator and after a few years take back the execution of entrusted processes or functions (e.g., distribution, transport and forwarding, warehousing, picking and packing, transshipment, etc.)? Why do some companies not consider the possibility of outsourcing at all, or at most, spin off and specialize a company, keeping it within the capital group? There are many reasons – from becoming dependent on the outsourcer and losing some competencies, through weakening control over product image, uncertainty regarding the confidentiality of transmitted information and the threat of losing a competitive position, to losing control over a portion of costs and weakening contact with the customer. Forecasted sales growth and market conditions encourage investment and the expansion of one’s own resources, whereas during a recession and forecasts of weak sales growth, a surplus of production capacity arises, leading to a search for those responsible for misguided investments.
Strategic controlling data relevant for outsourcing decisions:
– competition (current status and forecast),
– demand and sales forecast,
– sales price development,
– current potential – production capacity, personnel, land, capital,
– forecasted technology development,
– required level of investment,
– current and forecasted fixed and variable costs.
The article comes from the magazine “Logistyka”, No. 3/2006.