The Hindu Business Line : Outsourcing strategy

Outsourcing is a familiar concept to the business world. Since it has gained immense popularity in recent times, it is tempting to think of it as new. It is another form of what economists have always addressed as specialisation, which has been defined as “concentrating activity in those lines of production in which the individual or firm has some natural or acquired advantage.”

Strategic decision

Outsourcing is based on three main principles — focus on core capabilities; “make or buy” cost analysis; and Total Quality Management, including the supply chain. There are always two organisations in every outsourcing decision — the buying company and the supplier/service provider. While it may be a strategic decision involving some advantages, risks, and organisational changes for the buying company; it is a strategic opportunity for the supplier/service provider involving a different set of advantages, risks, and organisational changes.

Initially, much of outsourcing was at the easily definable end of the spectrum — hiring a supplier to make a component previously made in-house; or handing over management of the canteen; or contracting transportation of employees to the worksite and back. What drives the buying company to outsource its activities? Usually, it is to reduce costs — current or anticipatory. It may be related to a resource issue such as inadequate floor space for embracing a new activity or a problem in securing specialist skills. A change in the materials management doctrine of the buying company can also trigger a major outsourcing activity. For instance, adopting the just-in-time system can create the need for outsourcing majority of the inventory along with the corresponding warehouse requirements to the supplier.

Rapid changes

The volume, extent and character of outsourcing have been experiencing rapid and rabid changes since the last decade of the last century. The challenges are not simply make or buy decisions. They are responses to the upheavals caused by the globalisation of business. Companies are sending not only typical manufacturing jobs to their overseas outsourcing platforms, but also upscaling tasks such as research projects, engineering design/development, financial analysis and, even, human resources portfolio are being sent offshore.

Consequent to the advances in modern technology, equipment such as computers, cameras, videos, copiers, and telephones have all trespassed into each other’s territories, creating new competitors besides generating product obsolescence at an incredible speed. More and more companies are compelled to think of their businesses in global terms, because intense competition warrants larger volumes and bigger marketing territories to be cost-effective.

Peripheral activities

Outsourcing peripheral activities have emerged as a standard practice in industry and commerce. Peripheral activities are those that are essential and inevitable, but need no industry-specific capability. A canteen or a cafeteria is not any different for an IT major and a tyre manufacturing facility. Security services, housekeeping, warehousing, and customer delivery are some other activities under this umbrella. Whereas developing a training programme tailored to a particular industry is not a peripheral activity. It will require specific knowhow relating to the client company.

(The author is a Chennai-based freelance writer.)