The Outsourcing Industry

The idea of outsourcing is certainly not new. Hiring outside organizations to do things an organization cannot or chooses not to do for itself goes back as far as one cares to look. Today, most organizations outsource at some level in almost every part of their operations. The typical manufacturing company gets 70 to 80 percent of its finished product through its ‘supply chain.’ Facilities operations – everything from cleaning to cafeterias, to routine maintenance and upgrades – are routinely done by outside contractors. Chief Information Officers (CIOs) at companies ranging from General Motors to Applied Materials to McGraw-Hill outsource as much as 50 percent or more of their IT budget dollars. At the same time, many of the world’s top companies are the beneficiaries of this outsourced work. IBM, HP, EDS, Aramark, CB Richard Ellis, and Flextronics are just a few examples of the hundreds of companies that derive more than a billion dollars a year of revenue by providing outsourced services to other companies.

Outsourcing spending in all business activities has continued to climb at 10 to 20% for the last decade – in good economic times and bad.

The reasons that companies outsource have changed as the economy has changed. A survey of 292 executives conducted last year by the global accountancy PricewaterhouseCoopers found that while reducing costs was still the top reason for outsourcing – identified as important by 92 percent of these executives – the need for a more flexible business model and to access talent are now almost as important. Eighty-six percent of these same executives said that increased business model flexibility was important to their outsourcing decisions and 85 percent said that access to talent was important. “The need for access to talent will lead companies to think about outsourcing as a means of accelerating innovation and gaining competitive advantage. This will lead to a transformation of the outsourcing profession where innovation will be valued much higher than pure cost savings” according to Jagdish Dalal, IAOP Managing Director, Thought Leadership.

The following issues can be reasons for an organization to outsource:

          • Cost savings and cost restructuring. Lowering the overall cost of the service to the business will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Outsourcing changes the balance of operating leverage creating a move from fixed to variable costs and by making variable costs more predictable.

          • Improved quality. Leveraging the cultural and societal emphasis of process management and quality culture for higher productivity and better results