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Investment Opportunities* Nike, Inc. is the largest supplier of athletic shoes in the world. It outsources 100 % of its shoe production, and manufactures only key technical components. Nike creates maximum value by concentrating on preproduction and post-production activities. NIKE has also outsourced the advertising component of its marketing program to Wieden & Kennedy, whose creative efforts drove Nike to the top of the product recognition scale
* Knowing it could not be the best at building chips, monitors, cables, keyboards, and the like for its explosively successful Apple II, Apple Computer outsourced 70 percent of its manufacturing
* Rolls-Royce's, the aircraft engine and car manufacturer struck its first outsourcing agreement for infrastructure operations and program delivery with EDS in 1996. A new exclusive $2.1bn (1.2bn) deal was agreed in 2000, covering 90 per cent of IT services for Rolls-Royce, extending until 2012. Rolls-Royce has retained a small team of senior IT and contract management staff and specialized in-house developed code expertise.
ENTER the world of OUTSOURCING which has spread across the globe like a wild (YIELD) fire! But, is this boom, a boon or bane Read on .
What is Outsourcing Outsourcing is defined as the procurement of products or services from sources that are external to the organization. In other words, outsourcing is an act of transferring some business functions or components of business processes to an outside contractor.
Why outsourcing: Outsourcing was once started as an option to keep out non strategic functions such as payroll, IT, maintenance, etc, to reduce costs. But today almost every organization is seeking external suppliers help for outsourcing everything. The goal is better quality at lower costs and to improve overall operational performance. Outsourcing enable organizations to remain competitive, as a way to reduce costs, increase efficiencies, and refocus critical resources. The critical role of Outsource in managing the bottom line is driving companies to adopt it.
• Reduce and control operating costs.
• Improve company focus.
• Gain access to world-class capabilities.
• Free internal resources for other purposes.
• Gain access to resources that are not available internally.
• Accelerate reengineering benefits.
• Handle functions that are difficult to manage or are out of control.
• Make capital funds available.
• Share risks.
• Bring in a cash infusion.
• Improved performance,
• Increased profitability and shareholder value.
The Trend
Outsourcing emerged as a popular operational strategy in the 1990s. Almost 100 mega deals (> $1 billion) have taken place in the past ten years, with 15 in 2003 alone. It is estimated that the total global outsourcing services spending was something around US$151 billion in 2003. Outsourcing is one of the 69 industry categories recognized by Fortune Magazine. Even just a handful of the industrys leaders IBM, EDS, CSC, Solectron, Aramark and Ryder, for example generated more than $75 billion in revenue in 2001.
What to outsource some selection tips firms should think about outsourcing when it is believed that certain support functions can be completed faster, cheaper, or better by an outside organization. Best results can be achieved when the selection process follows on from internal consultation with management and employees. Clear decisions are possible when detailed selection criteria are used.
Advantages: The outsourcing of selected organizational activities is a crucial part of corporate strategy. Outsourcing allows companies to refocus their resources on their core business. A research covering 110 companies showed that cost reduction was the driving force behind outsourcing, cited as 'important' or 'very important' by 82 per cent of companies. Some of the main benefits:
• Less capital invested in back-office infrastructure.
• Increased profitability through reduced costs and sharper management focus
• Improved business processes
• Best-in-class compliance management
• Enhanced service levels
• Better control over back-office performance
• Economies of scale
• Streamlines a business' operations
• Gives you access to professional capabilities
• No worry about continually introducing new technologies
• Frees up human resources / cash flow
• Increases the control of your business
• Makes the business more flexible to change
Disadvantages: Customers and vendors approach outsourcing with two radically different philosophies, but they rarely discuss those philosophies and the impact that they will have on the relationship. The customer expects the outsourcer to act exactly like the customer's own people acted. It is reported that there is a high rate of failure, mainly due to poorly designed and documented arrangements between buyers and suppliers. It is believed that even though outsourcing is a global phenomenon, there are still wide differences in attitude and approach to outsourcing between different countries.
The research findings suggest organizations currently aim to cap outsourcing activity to 18 per cent of their systems and processes due to Outsourcing Risks. According to an analysis optimum balance is actually struck if 70 to 80 per cent of systems are outsourced. The perception of Outsourcing Risks is at its peak in the UK and its lowest in Germany. When asked to grade Outsourcing Risks on a scale of one (no risk) to 100 (high risk) companies in the UK gave a mean score of 35. In France this lowered to 29, in Australia it scored 22 while in Germany it reduced to 14.
• The fear of the service provider ceasing to trade (bankruptcy, etc)
• You may lose control of the process
• Creates potential redundancies
• Other companies may also be using the service provider.
• No focus of the customer and concentrate on the product
• The loss of talent generated internally
• Demoralises Employees and consequently their quality of work may suffer
• Outsourcing results are disappointing-to-dismal -- simply because many buyers lack a clear outsourcing methodology.
The two most important factors in a successful outsourcing relationship are trust and security - without these the relationship is destined for failure. It is therefore important that one takes the time and effort required to find the perfect partner.
Further, whether outsourcing boom is a great boon or bane, some questions pertaining to ethics need to be answered by all of us: Does outsourcing improve responsiveness, quality, flexibility, and even provide a better focus on core business functions Outsourcing lacks a humanistic element, especially for those employees who are being outsourced. The plight of the people being laid off is cause to wonder whether other considerations of Outsourcing Ethics, traditionally omitted from the balance sheet, should be examined.
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