The rise of inefficiencies that prevail in many business send many business owners on a quest to outsource product manufacturing or specific service requirements. When confronted with the opportunity to outsource, many opt not to pursue this direction because there is a feeling of loss of control. Used correctly, the ability to use outsourcing can improve operational performance and individual job quality no matter whether the outsourced activity provided is product or services. What has made this approach popular with some companies and avoided by others? Why is outsourcing a good idea for companies? Is outsourcing a viable strategy given the business environment of today? If so, to what extent is it appropriate for your business?
The idea of outsourcing has grown beyond the idea of product or component part production. The initial concept of supply-chain management coupled with lean manufacturing techniques support outsourcing components and can be illustrated well when reading Henry Ford’s comments on the subject:
“The task of putting business on better foundations depends on every department of the business and not alone on the manufacturer.”1
The resulting effects on industry have been substantial for large manufacturers and especially for businesses with smaller work forces where the ramifications have been substantial. In many cases, their ability to use this approach has fostered their competitive advantage and provided a sustained period of business growth.
Businesses are increasingly hiring specialized service firms that perform services that they used to provide for themselves. A company’s ability to specialize or provide a more sophisticated service creates opportunities not previously available for many businesses. Growth in the underlying need for services is driven by several factors including the need for increased sophistication, globalization, and the ever-increasing aspect of management complexity.2 Specialized forms of services have proliferated, as has the complexity of needs in such established service industries as advertising, accounting, consulting, information systems, market research, and investment banking. The companies that are able to create advantages by working smarter and staying cost competitive will be the companies that will have the ability to survive the increased competition, aggressive pricing, and sustain the threats from international competition.
Are products and services affected in the same way? Specialization and sophistication are occurring in both areas. However, services are actually being de-integrated or removed from the businesses. This de-integration result actually is a net increase in service provision being provided to the organization. The trend in graphic arts industries is toward integration, or in-house provision, though this industry is considered non-traditional and does not reflect the trend by the majority of other service industries.3
By far the greatest reason for lack of outsourcing within any industry, no matter whether product of service related, is the fear of loss of control. The pervasive thought that the product can be produced better or the service performed better can be an inherent part of a business culture that can cause stagnation and large inefficiencies. Individual managers or owners will many times decide that the opportunities to vertically integrate demand in-house functions to remain “in-house”. Thus maintaining quality standards that cannot be supposedly matched by outside sources or incur increased costs that will impact the sale of the product or service.
The services that are being provided have grown and are continuing to grow due to three underlying factors: the specific need for increased sophistication by service providers, the de-integration of services previously performed as an in-house function, and the privatization of public services.4 Many of these service firms have reinvented themselves during the last decade due to the increased use of information technology. It has allowed increased productivity from the individuals that are part of the firm as well as increased the amount of information and number of services each service firm can offer to their clients. Many of the services are now automated which provide immediate access without a need for direct customer interface. The airlines have taken automated ticketing to new heights via the telephone and the Internet. The new technologies are both the cause and effect of changes the industry structure and the source of major competitive advantage in many service industries.5
Multi-service firms allow their clients to tap into a broader selection of available services. At the root of the growth of these firms is a type of systemization that allows efficient and consistent replication of the services at multiple clients due to standardized employee procedures, internal methodology, automation of the actual service tasks performed by the individual. This has spawned another critical aspect that allows firms to narrow their focus of specialization for their clients. Take for instance, a consulting firm that offers multiple service functions but has true expertise in only a couple of areas. This broad approach has given way to increasingly specialized services such as human resource management, compensation modeling, and strategy definition to name just a few. Specialization leads the service firms to a much more narrow focus which provides better service in the specific areas of client need.
There are several advantages of having a narrower focus within the service firm. Among them are the economies of scale that the service firm can gain with the specificity of a narrow focus area. For example, diagnostic service programs that can be run via a phone modem at a remote location of the client can check software programs and often even correct the problem. Other types of enhanced communication can provide data processing, telemarketing functions, or answering services possible. These are closely related to the centralization needs of the client and are specifically scale-sensitive meaning that activities provided by the service firm are adapted to the client’s need to service their clientele on a regional, national, or on a world-wide basis. Managed IT Services Markham
Additionally, the aspect of competition and focus are potent advantages for the outside service provider. In-house service departments are at the very least cost centers for the business. This is not to say that an in-house service facilitator cannot be profitable. It does, however, mean that the policies, procedural methodologies, and accomplishments should be regularly measured to not only justify the existence of the department, but also provide adequate pressures and performance incentives when faced with outside service alternatives.
At the same time, in-house service departments do face inherent constraints.6 Understanding barriers that are constraining for a business helps ownership and management better evaluate the performance requirements necessary for an in-house service department to function well. Given the limitations, such as compensation structures and employee benefit packages, those responsible for making the decision should probably opt to outsource the services instead of having them handled internally.