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Outsourcing
Point Summary
More than nine out of ten large
U.S. manufacturing companies source at least one activity, and the typical
company sources nine. More than half outsource in the areas of marketing and
manufacturing, and more than three-fifths in information systems, human
resources, transportation, and general administrative services, including
property and inventory management.
While
some firms have outsourced component manufacturing for years, recent years
have witnessed the spread of sourcing to a broader spectrum of activities
by a wider array of companies. Eastman
Kodak’s decision in 1989 to contract out its information systems to IBM
and two partners is viewed by many observers as marking the beginning of
the current wave of outsourcing in which company managements are moving a
broad array of inside activities to outside providers.
From manufacturing and information to finance and accounting,
little is considered sacrosanct. Some
companies have even resorted to outsourcing their sales staff, and many
are beginning to use the internet to facilitate and manage the
process.
With the spread of outsourcing, fresh forms of
organization are emerging to manage it.
Chase Bank, for instance, is outsourcing inside, creating “shared
services” units that compete with outside vendors to furnish services to
the bank’s own operating units. Delta Airlines has created a “Business Partners” unit to
oversee its relations with some 250 vendors and 2,600 contracts for ground
crew and customer services at 186 airports around the world. Microsoft outsources almost everything – from the
manufacturing of its computer software to the distribution of its software
products – and thereby focuses the organization on its primary area of
competitive advantage, the writing of its software code.
Still other firms are creating “strategic service” divisions in
which activities that had been decentralized into autonomous business
units are now being re-centralized for contracting to the outside.
The best ways to structure the outsourcing remain the subject of
on-going management debate and media coverage.
As new forms of
organization are invented to manage the sourcing, a new blend of talents
is required among those responsible for making it happen. The
management style that comes with issuing orders is giving way to one of
negotiating results. The skill for sending work downward is being
replaced by a talent for arranging work outward. Sourcing services
necessitates distinct ways of assuring results, and lateral leadership --
of extending out rather than directing down -- is a new management
capacity required for cost-effective operations when you can no longer
exercise direct control over them.
Links
Business
Process Outsourcing: PriceWaterhouse Cooper's outsourcing
website, with survey results, conference events, and the main advantages
of outsourcing ("increase
profitability, sharpen management focus, empower employees, improve
business processes, adopt best practices, enhance service, strengthen
control, gain scalability, exploit advanced technologies, and reduce
operating costs").
Firmbuilder:
Firmbuilder is a web-based, executive resource for information,
experts and tools for building a business through outsourcing. It is
managed by Michael F. Corbett
& Associates, Ltd.
ICG
Commerce: An online outsourcing service company.
Outsourcing Center: The Center presents information
about the outsourcing industry and tools managing outsourcing.
Outsourcing Institute: The Outsourcing Institute is provides
advice and networking opportunities to professionals engaged in
outsourcing services.
Books and Articles
John
Cross, “IT Outsourcing: British Petroleum’s Competitive Approach,” Harvard
Business Review (May-June, 1995): 94-102.
Jeffrey
H. Dyer, “How Chrysler Created an American Keiretsu.” Harvard
Business Review, July-August, 1996, pp. 42-56.
Maurice
F. Greaver, Strategic
Outsourcing : A Structured Approach to Outsourcing Decisions and
Initiatives. New York: AMACOM, 1999.
Charles
R. Greer, Stuart A. Youngblood, and David A. Gray, “Human Resource
Management Outsourcing: The Make or Buy Decision,” Academy of
Management Executive (August, 1999): 85-96.
Richard
L. Huber, “How Continental Bank Outsourced Its ‘Crown Jewels,’” Harvard
Business Review (January-February, 1993): 121-129.
Robert
Klepper and Wendell. Jones, Outsourcing
Information Technology, Systems, and Services. Englewood Cliffs, N.J.:
Prentice-Hall, 1997.
Mary
C. Lacity and Rudy Hirschheim, Information
Systems Outsourcing: Myths,
Metaphors and Realities. New York: Wiley, 1993.
Jordan
D. Lewis, The Connected
Corporation: How Leading Companies Win Through Customer-Supplier Alliances.
New York: Free Press, 1995.
F.
Warren McFarlan and Richard L. Nolan, “How to Manage an IT Outsourcing
Alliance,” Sloan Management
Review (Winter, 1995): 9-23.
James
Brian Quinn, “Strategic Outsourcing: Leveraging Knowledge
Capabilities,” Sloan Management Review (Summer, 1999): 9-21.
Today's knowledge and
service-based economy offers innumerable opportunities for well-run
companies to increase profits through strategic outsourcing.
Emphasis is rapidly shifting from outsourcing parts, componentry, and
hardware subsystems toward the even greater unexploited potential that
intellectually-based systems offer, such as obtaining higher value, more
flexible, and more integrated services than internal sources can offer.
Outsourcing has to become a top management, not operating, issue.
Recommendations for the outsourcing of intellectual, innovation, and
cross-divisional benefits are unlikely to come from below.
Increased outsourcing will be a natural outgrowth of the competitive
system as it continues to globalize and move to knowledge-based
services. For those who anticipate and manage these changes
strategically, the gains can be enormous.
James Brian Quinn and Frederick G. Hilmer, “Strategic
Outsourcing,” Sloan Management
Review (Summer, 1994): 43-55.
Most companies can substantially leverage their
resources through strategic outsourcing by: 1. developing a few
well-selected core competencies of significance to customers and in
which the company can be the best-in-the-world, 2. focusing
investment and management attention on these core competencies, and 3.
strategically outsourcing many other activities where it cannot be or
need not be best. There are always some inherent risks in
outsourcing, but there are also risks and costs of insourcing.
When approached within a genuinely strategic framework, using the
variety of outsourcing options available and analyzing the strategic
issues, companies can overcome many of the costs and risks.
Kathy M.
Ripin and Leonard R. Sayles, Insider Strategies for Outsourcing
Information Systems: Building Productive Partnerships, Avoiding Seductive
Traps. New
York: Oxford University Press, 1999.
Carol Saunders, Maray Gebelt, and Qing Hu, “Achieving
Success in Information Systems Outsourcing.” California Management Review 39 (Winter, 1997): 63-79.
A study of 34 large companies, which outsourced for at
least 2 years, demonstrates that outsourcing can be successful even when
information systems are viewed as core functions. However,
outsourcing negotiations must reflect the role of the company performing
the outsourced functions and the nature of the outsourced work. A
critical key to success in outsourcing arrangements lies in having tight
contracts, even when the outsourcing vendor is viewed as a strategic
partner or the IS function is considered to be core.
Michael Useem, "Lateral
Leadership for Organizations That Are Outsourcing,"
Infoserver: The Journal for Strategic Outsourcing Information, July,
1998.
Michael Useem and David Byrce, "The
Impact of Corporate Outsourcing on Company Value," European
Management Journal (Vol. 16, No. 6, December, 1998): 635-643. [PDF
file]
Michael Useem and Joseph Harder, “Leading Laterally in Company
Outsourcing,” Sloan Management
Review (Vol. 41, No. 2, Winter, 2000): 25-36.
As companies rapidly expand the use of outsourcing,
executives are discovering that the management of outsourcing projects
requires a new blend of leadership qualities. Firms involved in
outsourcing are seeking managers with capacities for lateral leadership
- the ability to negotiate results outward across boundaries rather than
issue orders downward through a hierarchy. The findings from interviews
with 54 managers and a survey of 423 managers working at diverse firms
and organizations from 1997 to 1998 are presented. Companies are looking
for 4 specific capabilities in managers responsible for outsourcing
initiatives: 1. strategic thinking, 2. deal making, 3. partnership
governing, and 4. managing change. It is pointed out that lateral
leadership works best when top management is solidly supportive and when
companies have built a finely honed system to quantify results and
pinpoint accountability.
Journals
Outsourcing Journal
Case Studies
Richard Peisch,
"When Outsourcing Goes Awry," Harvard Business Review,
May-June, 1995.
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