Strategic Outsourcing: Exploiting the Skills of Third Parties (Management Consultancies Association) [Paperback]

The prospect of improving your management focus, sharpening your processes, updating your technology and saving money sounds too good to be true, but this guide aims to help steer managers through the pitfalls of outsourcing. It covers everything from the strategic drivers to the practicalities of implementation and ongoing management so that you can capitalize on the opportunities.

Researching the book led me to meet a lot of smart, knowledgeable and experienced people who had faced outsourcing challenges from all three aspects - those who have outsourced, those who have achieved outsourcing and those who have had outsourcing thrust upon them (with apologies to Shakespeare)

As an enthusiastic bookworm myself, I set out to write this book with three aims:

1: To deliver genuinely practical information that would help readers in their jobs;
2: To avoid as much business, technical and marketing jargon as possible;
3: To write in a style that the reader can genuinely enjoy.

Did it work? I think so, but I guess you will have to be the judge.

Ian Benn is Managing Director of the marketing consultancy, Brass Consulting. He has been in the IT industry for 20 years. Ian is a regular speaker and writer on both business and technology. Jill Pearcy has 15 years' experience of business communications as a PR consultant. She now heads up public relations for Unisys Ltd where she manages the external communications strategy for major outsourcing projects.

The birth of Outsourcing

When was the first instance of outsourcing? It’s impossible to say – we have been delegating work to third parties at least since God sent Moses down from the top of the Mount Sinai to pass on the Ten Commandments. (As things turned out, Moses threw down the tablets of stone in anger having discovered just what his people had been up to while he’d been mountain-climbing, but as the Bible does not report whether there was a service level agreement in place, the penalties aren’t clear.)
A more thoroughly documented example of business process outsourcing is the Coca Cola Corporation. For over 100 years, Coca Cola has been producing syrup and bottled marketing. The actual production of Coca Cola is the responsibility of its global network of business partners – the bottling firms. By concentrating on protecting its core formula and brand image, Coca Cola has managed to build a successful business where the vast majority of the supply chain sits outside its operation.
According to Charles Wang, CEO of software giant Computer Associates, outsourcing entered the vocabulary of CEOs in July 1989. "In that month, Eastman Kodak Co. announced it was stripping away its computer operations, lock, stock and mainframe, and farming them out," he says. When a global top 50 company undertakes a whole new way of doing business, the world has to listen.
The huge explosion of the outsourcing industry can be attributed to the rise of the concept of ‘core competence’, popularised by Gary Hamel and C.K. Pralahad in their 1990 article "The Core Competence of the Corporation"1. At around the same time, Tom Peters was expounding the need to view corporations "as Rolodex" – in other words as a selection of elements, the core parts being handled by the corporation itself, the others being bought in from third-party suppliers or partners2.
Hamel and Prahalad argue that by understanding all the elements that enable your company do business, you can start to analyse which provide you with a source of competitive advantage and which can be done by anybody – as long as they are done right. Peters puts it even more simply: "Core competence is the difference between what you do and what you know." Non-core activities are those that provide no differentiation, or have no direct effect on the customer’s experience – arguably 99% of an organisation’s activity.
Michael Porter made much of this analysis more straightforward by describing and explaining the concept of value chains3. Today, value chain analysis is a technique familiar to anyone with an MBA or basic marketing qualification: most major organisations have processes in place to analyse their value chains to the finest degree. This ‘Lego-isation’ of the value chain is a critical element in the success or failure of an outsourcing contract. If it is done right, the company understands each step in the path from customer input to customer service delivery, how they interrelate and which are core to competitive differentiation. If an organisation then elects to outsource elements of this value chain to a third party, it will succeed as long as the client organisation retains responsibility for managing the connections between the Lego blocks and the strategic direction for each element, whether outsourced or internally resourced.
Perhaps the best example of this is Dell Computer Corporation. A little later than Compaq and IBM into the PC business, Dell was among the first to recognise that information technology is an industry built on standards. Industry standard, figured Dell, equals good, and non-standard (even if it is better) equals bad. The company therefore invested a huge amount of effort in persuading the market that the only difference between itself and the market leaders, who were spending vast sums of money on R&D, was the badge on the front of the machine.
Dell had two other challenges to deal with. First, inventory in high-tech businesses goes stale faster than in almost any other non-consumer product business. A processor may halve in value within weeks of coming to market if Intel decides to introduce of a faster model in the interim. The same is true for disks and, to an extent, memory. Second, the industry has a habit of going from feast to famine and back again with very little notice. Demand can be phenomenally high, or can suddenly dwindle to nothing, depending on macro-economic factors that are just too hard to call. Dell recognised that in a commoditised, volatile market, the race would not be to the swift to market but to the company that could:
• deliver the best quality – and ensure everyone got to hear about it;
• build at the lowest cost (though not necessarily sell at the lowest cost);
• manage its inventory and cashflow better that anyone else.
Arguably, Dell is now a logistics company that happens to be in the IT business.
Liam Fahey, author of Outwitting, Outmaneuvering and Outperforming Competitors4, says: "Talk to any of the execs at Dell – the CFO, the COO, the Global VP of Sales – and you won’t be able to tell which is their role without sneaking a look at their business card. All of Dell’s management understand their customers, their supply chain and their business model."
Dell understands that to deliver effectively, it needs to understand its value chain in great detail. This has equipped the company to readily identify elements that can best be outsourced, kept in house or delivered through commercial partners. For instance, the company would never be likely to outsource its sales function – which is a core competence for the business and starts at the very top, with Michael Dell spending an unusually high proportion of his time engaged directly in the key business of selling.
Dell does not, however, handle its own logistics, preferring to outsource these operations to Walsh Western and Target. Maintenance, considered core by many vendors, is handled through business partners Unisys and Getronics, who make a margin on every service call