Outsourcing: Is it really strategic?
Background
Few would argue that having a clear business strategy is fundamental to sustaining competitive advantage and success for an enterprise. A practical test of the importance business in general places on having a strategy is borne out by the large number of ‘hits’ resulting from entering the word ‘strategy’ into a search engine. Add the word ‘enterprise’ and the number diminishes with, somewhat predictably, several pages of information containing advertisements for IT related products and services. These hits range across a wide mix of offerings which purport to bring a variety of strategic benefits to the enterprise employing them.
Add the word ‘outsourcing’ to the search and the number of pages diminishes further, again well populated with IT related offerings. Although the remit of outsourcing extends far beyond IT, it is in the world of computers where it features most and where many of its purveyors claim to be able to make a positive difference to business strategy at the level of the enterprise. There is varying opinion at to whether these claims are justified or indeed if outsourcing bears any relevance at all to enterprise strategy, resulting in a vigorous debate about the question posed above.
Outsourcing, which started life decades ago as Facilities Management (FM), has in the interim spawned various offspring with novel names like ‘co-sourcing’, ‘business process outsourcing’, ‘transformational outsourcing’ and latterly ‘ adaptive’ outsourcing’.
There may be subtle differences in intent if not effect, between these forms of outsourcing but perhaps an expert definition would cut through the subtleties and finer points involved.
Linder, J (2004) defines outsourcing as meaning the purchase of ‘ ongoing services from an outside company that a company currently provides, or most organizations normally, provide for themselves’. This definition is intended to embrace most aspects of outsourcing including the contracting out of business process related support activities.
A definition of strategy is more difficult to pin down but of the many versions available, that of Johnson and Scholes (1999) is often referred to. They define strategy as ‘ the direction and scope of an organization (enterprise, business) over the long term, which achieves advantage for it through its configuration of its resources, within a changing environment , to meet the needs of markets and to fulfill stakeholder expectations’.
They also differentiate between ‘corporate’ strategy, which is concerned with the overall scope of a business/enterprise to meet stakeholder expectations and ‘operational’ strategy which deals with how component parts of an organization, in terms of resources and processes, effectively deliver a business level strategic direction.
Delivering an enterprise level strategic direction, as part of an operational strategy, is a central mission for much of outsourcing activity.
Outsourcing: It really is
strategic.
Recent reported big ticket
failures, such as those in the UK at J P Morgan and the Inland Revenue, are
additional and more recent reminders that the outsourcing experience for
enterprise, in both the Public and Private sectors, can sometimes be less than
inspiring. An increasing level of bad press generally about outsourcing
arrangements cite problems such as the lack of responsiveness to changing
business needs of long term contracts, captive customer exploitation, low
quality services and technology obsolescence due to infrequent or little
refreshment. The providers involved and a host of similar organizations,
continue in business however because ongoing demand for their services, as well
as an expanding market, attest to successes as well as failures. These successes
are based on a number of stakeholder benefits which can sometimes accrue to the
enterprise acquiring outsourcing services. Such benefits, which may involve a
significant element of provider risk, include:
Any one and certainly all of the above benefits combined should directly and positively impact operational strategy through underpinning the delivery of an enterprise’s strategic direction. They may also indirectly impact overall business strategy through facilitating, for example, a relatively more productive application of enterprise funds and human resources. In addition, certain manifestations of outsourcing, such as the ‘transformational’ version, which endeavors to support or undertake ‘core’ enterprise activities, have sometimes been compared to joint ventures and business acquisitions in terms of overall strategic intent and impact.
When it delivers on its promises, there appears to be little doubt that outsourcing can figure as a key success factor of an operational strategy, but the question remains; is participation in the delivery of a strategic direction tantamount to also being part of a strategic direction at the level of the enterprise?
Outsourcing:
It really is not strategic.
Porter, M (1996), in a seminal article written for the Harvard Research Journal separates enterprise strategy from what he terms ‘operational effectiveness’ (OE).
He maintains, that in their quest to remain flexible in changing markets, managers benchmark continuously in order to achieve ‘best practice’, rejecting in the process market positioning as being long-term and too inflexible They outsource aggressively to gain efficiencies and nurture a few ‘core’ competencies in order to stay ahead of rivals who they believe can quickly copy any market position. This push for productivity, quality and speed, has spawned a host of tools and techniques including total quality management, reengineering, outsourcing and change management, leading imperceptibly to the replacement of strategy by management tools
Inevitably the push for OE through the pursuit of ‘best practice’ for selected activities; available to all at a cost, fosters similarity among companies and ultimately leads to the self inflicted wound of ‘hyper’ competition. Creating or achieving ‘best of breed’ for an activity can signify membership of an ever increasing population and the resulting, often intense competition, can erode profits as evidenced by the financial performance of many Japanese companies
According to Porter, sustainable competition by the enterprise depends not on OE or a selected number of ‘core’ activities but rather on the interaction of all activities where these create a strategic positioning and generate differences with rivals. The essence of strategy at the level of the enterprise is performing activities differently from rivals.
Southwest Airways in the US and Ikea in Europe, are examples of a differentiated approach to the travel and home furnishings markets which, despite imitators, continue to sustain and build on their strategic positioning. This situation is based on a disciplined leadership choosing a unique set of interlocking activities, making sure they fit well together and performing tradeoffs in terms of conflicting ones. The prime objective of this process is to continuously deliver a unique mix of value to a target market.
OE, through
replacing or improving selected operational activities, plays an underpinning
role to the strategy process, but this does not in itself render it strategic at
the level of the enterprise. Indeed, based on Porter’s arguments, it is
difficult to conceive how using what are often the same tools and service
organizations as the competition to achieve
‘best of breed’, can ever foster a sustainable differentiation in a
market place; so necessary to an effective enterprise strategy.
Conclusion
Irrespective of whether outsourcing is ‘adaptive’ or ‘transformational’ or one of the many other forms it can take, it generally replaces an existing activity or set of activities in an enterprise. It typically comes under the OE banner and within that context can be an effective component of the operational strategy of an enterprise. It can also contribute to or underpin enterprise strategy in conjunction with other business activities, but viewed from this level it manifests currently as being more tactical than strategic.
Moving from a tactical status to being really strategic for the enterprise presents a challenge and a great market opportunity for the outsourcing supplier community.
Whether the big
established providers, many of whom have to contend with relatively high
overheads and the burdens of legacy and size, can effectively exploit this gap
in their market, anytime soon, is doubtful. Some of them are trapped into a
‘me too’ downward spiral based on repeated restructuring and reorganization
which seeks to emulate a perceived ‘ best of breed’ competitor, inevitably
resulting in ever thinner profit margins, diluted focus and a dissipating brand
equity.
A way forward to explore and meet this challenge may be represented by a small number of expert and importantly, independent, specialist outsourcing consultancies, which stand between the enterprise and the outsourcing providers. These boutique organizations have the insight, experience and objectivity to spearhead the process of relating strategic enterprise imperatives to the ability and willingness of providers to meet them
The preferred providers resulting from this process may very well be the smaller, more flexible ‘crouching tiger’ outsourcing organizations which can seize the opportunity and liberate this market, enabling outsourcing to figure increasingly at the core of enterprise strategy.
Becoming really
strategic for the enterprise may not be that far off for outsourcing after all.
(First
published in the CIMTech Newsletter November 2004)
REFERENCES
Johnson, G Scholes,
K ((1999) Exploring Corporate Strategy. Prentice Hall, pp 11,12
Linder, J (2004) Outsourcing for Radical Change, Amacom,
p 27
Porter, M (1996) What is Strategy, The Harvard Business Review