* Companies motivated by cost reductions, other factors
A recent study finds that companies that decide to outsource were primarily motivated by cost reductions and the opportunity to focus on core operations rather than revenue growth and competitive advantage.
Conducted by CAPS: Center for Strategic Supply Research and management consulting firm A.T. Kearney, the “Outsourcing Strategically for Sustainable Competitive Advantage” report is based on a survey of 165 companies in a range of industries.
According to the results, more than 80% of companies surveyed attributed the primary reasons for their outsourcing activities to reduced operating costs, reduced capital investment and the need to focus on their core business. Less than half of the companies cited reasons related to revenue growth, such as increased time to market, improved quality and faster customer response time.
Bill Markham, a principal with A.T. Kearney, describes the two approaches to outsourcing. “Companies seeking quick savings focus their efforts on finding less-expensive alternatives to operating their business today. Companies focused on tomorrow’s business needs are seeking more significant long-term benefits and looking to leverage marketplace skills, technologies and scale to cut costs and increase revenue,” he says.
The most common functions being outsourced were IT, as chosen by 36% of respondents, legal regulatory affairs (30%) and manufacturing operations (24%). But companies aren’t outsourcing at a deep level — the average level of outsourcing penetration was 15.8%. In IT, the area with the deepest penetration by outsourcing, only 14% of respondents said they outsource more than 25% of their activity.
While cost-cutting may be the biggest driver, outsourcing for revenue generation can have the biggest effect on an industry. “Tactical outsourcing is a follow-the-leader approach, not a road to competitive advantage. Strategic outsourcing can create new ways to compete and possibly rewrite the rules for whole industries,” says Robert Monczka, director of strategic sourcing and supply chain strategy research at CAPS and research professor at Arizona State university.
For a copy of the report, go to www.atkearney.com or www.capsresearch.org.
