When Outsourcing, a company uses third parties to perform noncore business activities. Contracting third parties enables a company to focus its efforts on its core competencies. Many companies find that Outsourcing reduces cost and improves performance of the activity. Third parties that specialize in an activity are likely to be lower cost and more effective, given their focus and scale. Through Outsourcing, a company can access the state of the art in all of its business activities without having to master each one internally.
How Outsourcing works:
When Outsourcing, take the following steps:
- Determine whether the activity to outsource is a core competency. In most cases, it is unwise to outsource something that creates unique competitive advantage.
- Evaluate the financial impact of Outsourcing. Outsourcing likely offers cost advantages if a vendor can realize economies of scale. A complete financial analysis should include the impact of increased flexibility and productivity or decreased time to market.
- Assess the non-financial costs and advantages of Outsourcing. Managers will also want to qualitatively assess the benefits and risks of Outsourcing. Benefits include the ability to leverage the outside expertise of a specialized outsourcer and the freeing up of resources devoted to non-core business activities. A key risk is the growing dependence a company might place on an outsourcer, thus limiting future flexibility.
- Choose an Outsourcing partner and contract the relationship. Candidates should be qualified and selected according to both their demonstrated effectiveness and their ability to work collaboratively. The contract should include clearly established performance guidelines and measures.
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Companies use Outsourcing to:
- Reduce operating costs
- Instill operational discipline
- Increase manufacturing productivity and flexibility
- Leverage the expertise and innovation of specialized firms
- Encourage use of best demonstrated practices for internal activities
- Avoid capital investment, particularly under uncertainty
- Release resources—people, capital and time—to focus on core competencies
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