Outsourcing the Future
The outsourcing movement has been with us now for some ten years and show no
sign of abating. As this is one of the most powerful trends in modern industry
worldwide it may be worthwhile revisiting the issue to consider how it might develop
in the future.
The fundamental principle behind business success is competitive advantage, and
where this advantage is sustainable a business can fend off the competition and
remain ahead of the field. The nature of competitive advantage lies in the
achievement by the organisation of a distinctive competence by excelling in one or
more areas of business activity. According to Slack et. al. (2000) distinctive
competence derives from excellence in five main operational areas; speed (the ability
to produce quickly), flexibility (the ability to bring new products to the market
quickly), reliability (reliable delivery), quality (consistency of quality in products) and
cost (the ability to tightly control costs). If these five sources of distinctive
competence are considered in any depth it would seem that they are based upon areas
of activity that are central to the functioning of the organisation, hence related
business functions tend to be referred to as core activities. In brief a distinctive
competence is something that an organisation is better at than its competitors. In
terms of outsourcing therefore it is commonly the areas in which an organisation has
no distinctive competence that should be outsourced i.e. none core activities. If these
are outsourced to organisations that do have a distinctive competence in the
production of these functions we should in principle be able to “hijack” their
distinctive competence, build it into our own and improve our competitive advantage.
The “cardinal sin”, however, according to Cox, A (1997) is to outsource something in
which we do have a distinctive competence.
This approach to the outsourcing exercise based upon core and non activities has
resulted in the usual lists of candidates for outsourcing, such as catering, security,
facilities management, logistics and so on. Outsourcing these activities allows
managers to focus on strategically more important issues and thereby improve
performance and profitability. To this extent outsourcing conforms to the best
principles of lean enterprise.
It is interesting to conjecture at this point as to where outsourcing may develop in the
future. We loosely defined distinctive competence it as something we do that we do
better than anyone else, or something that sets us apart from the others. This is
closely allied of course to the concept of mission, which should clarify what the
organisation is about. There are indications that the emerging trend is towards the
outsourcing of manufacturing itself. If we take any well-known brand or marque and
ask what the nature of it is, we can often conclude that manufacturing activity is not
an essential component of that brand. Consider a leading brand of car manufacturer
such as Fords, what really gives them competitive advantage? It is probably the
ability to bring out new designs quickly, to be highly innovative in those designs, and
to market them effectively. Is it necessary therefore to be involved in their
manufacture? The answer to this question is probably no, in fact a view could be
taken that being involved in manufacturing merely slows the organisation down and
makes it less adaptable and innovative. If we look at some of the current trends this
can already be observed. Several years ago Fords ceased the production of engine
blocks at Dagenham, and in Ford’s new Brazilian plant there are plans to give
suppliers and contractors a greater role in the assembly of its cars. Volkswagen has
already introduced limited assembly outsourcing at its Brazilian plants, and Daimler-
Chrysler has increased the use of contractors in production of its two-seater Smart
cars in Europe. The move towards the outsourcing of final assembly is naturally one
which highly contentious with the labour force.
The same trend is evident in the electronics industry. A developing characteristic in
the electronics industry is the emergence of large scale “manufacturers”, known as
electronic manufacturing services (EMS), which will manufacture for anyone to a
performance specification and badge the product accordingly. A prime example here
is that Microsoft wanted nothing to do with the manufacture of the new X-Box, they
came up with the concept and performance requirements and left the production to
their supplier in Hungary while they moved on to the next project.
The Swedish company Ericsson have ceased the manufacture of handsets which has
been transferred Flextronics, a Swedish company with divisions in Brazil, Malaysia,
The USA and the UK. Ericsson will instead focus on technology and development.
Ericsson have also entered a deal with Arima in Taiwan for the development of their
internet phones. Motorala have similar deals with EMS companies Celestica and
Flextronics.
A similar trend towards the outsourcing of manufacturing is emerging in the
Pharmaceuticals industry.
The distinction between core and non core activity may however not always be that
simple and as pointed out by Jane Linder (2002) what is non core today may be core
tomorrow and vice versa., for example, in the USA on September 9 airport security
workers were non core; on September 12 they were core to the federal governments
ability to provide security to the nation.
The advice given by Insinga, R.C and Werle, M J (November 2000) is that companies
should monitor the situation constantly and adjust accordingly. They quote the
example of Coca Cola, which decided to stay out of bottling activity in the early
1900’s, partnering instead with independent bottlers and quickly building market
share. The company reversed itself in the 1980’s when bottling became a key
competitive element in the market.
From a practical contract negotiation standpoint it is probably advisable therefore to
ensure that an escape clause is incorporated into any long-term contract for
outsourced activity.
Cox, A Supply Management May 1997
How to think strategically about outsourcing, Cramer, M. Harvard Management
Update May 2002
Linking Outsourcing to Business Strategy, Insinga, R C and Werle, M J Academy of
Management Executive Vol 14, No 4 November 2000
Operations Management, Slack, Chambers, Harland, Harrison and Johnson, 1989