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.

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

Selected references

Brown, Douglas, and Scott Wilson. The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities. John Wiley & Sons, 2005.

Gottfredson, Mark, Rudy Puryear, and Stephen Phillips. "Strategic Sourcing: From Periphery to the Core." Harvard Business Review, February 2005, pp. 132-139.

Greaver, Maurice. Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives. AMACOM, 1999.

Kennedy, Robert E., and Ajay Sharma. The Services Shift: Seizing the Ultimate Offshore Opportunity. FT Press, 2009.

Koulopoulos, Thomas M., and Tom Roloff. Smartsourcing: Driving Innovation and Growth Through Outsourcing. Platinum Press, Inc., 2006.

The Outsourcing Institute. www.outsourcing.com.

Power, Mark J., Kevin Desouza, and Carlo Bonifazi. The Outsourcing Handbook: How to Implement a Successful Outsourcing Process. Kogan Page, 2006.

Quinn, James Brian. "Outsourcing Innovation: The New Engine of Growth." Sloan Management Review, Summer 2000, pp. 13-28.

Robinson, Marcia, Ravi Kalakota, and Suresh Sharma. Global Outsourcing: Executing an Onshore, Nearshore or Offshore Strategy. Mivar Press, 2005.

Vashistha, Atul, and Avinash Vashistha. The Offshore Nation: Strategies for Success in Global Outsourcing and Offshoring. McGraw-Hill, 2006.

Vitasek, Kate, Mike Ledyard, and Karl B. Manrodt. Vested Outsourcing: Five Rules That Will Transform Outsourcing. Palgrave Macmillan, 2010.

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