Outsourcing can be defined as the process by which organizations focus on their core business by obtaining specialized services in areas outside their expertise. As business becomes more complex and requires deeper expertise, companies find it increasingly difficult to specialize in multiple areas. As a result, companies focus on a few key competencies that give them a sustainable competitive advantage and outsource all other tasks to other companies to conserve resources, downsize, and become more agile.
Advantages of Outsourcing?
It allows companies to allocate human and time resources to core activities that drive competitive advantage. It improves the quality of products and services by leveraging expertise. It enables companies to benefit from industry best practices and accumulated expertise. It significantly reduces costs while providing ongoing access to new technologies.
Outsourcing and Innovation
A study of Australian manufacturing firms examined both innovative and non-innovative aspects of outsourcing. It found that while outsourcing may be costly initially, the choice of innovative outsourcing proves more profitable in the long run by fostering internal and external innovation.
The study also emphasizes that innovative outsourcing leads to the development of long-term R&D capabilities in companies, so outsourcing is much more than a cost-saving strategy for companies; it’s a strategy for innovation and development.
In this context, companies using innovation-based outsourcing can be more innovative, efficient, effective, and successful in their innovation efforts by focusing on their core competencies.
While Using Outsourcing
Don’t: Avoid making decisions based solely on cost. The need should be clearly defined, and if there is a real need for outsourcing to solve a problem, verify that it is the right need before making a decision.
Do: Align outsourcing decisions with your business goals and carefully evaluate your options.
Outsourcing requires expertise. Develop the expertise to get the right service at the right level from suppliers. This is where the sourcing manager’s role comes in. Resource utilization will reduce your fixed costs and increase your dynamic costs. This will allow your company to spend as long as it earns, which is the primary goal of all organizations. You should create a culture that makes this continuous.
Stages of Outsourcing?
- Begin by clearly defining your outsourcing needs and objectives.
- Develop a resource allocation strategy. Determine which resources to outsource and when to use them. Regularly review and adjust your strategy based on external changes.
- Drafting a clear request for proposal (RFP) is crucial. Specify desired outcomes rather than focusing solely on execution details.
- In evaluating proposals, do not focus only on cost, try to see the entire value the supplier will create, as the cheapest resource may not always be the right resource. Also, the outsourcing resources should not be weak.
- Therefore, supplier selection is important. Speak with references, and if possible, you decide which reference you want to talk to.
- In the contract, determine the service levels you want, how these will be measured, the criteria, penalties, and the conditions for termination.
- Include in the contract the reporting of service levels and the evaluation of services received in meetings at certain periods (monthly, quarterly).
- Maintain open and continuous communication with suppliers, treating them as an extension of your organization. Establish a system for regular feedback and performance evaluation.
