"Outsourcing" is still a four-letter word to many, especially when preceded by "China." When used appropriately, however, outsourcing can make your operations far more effective and profitable.
Why Is This So?
Running a business has become progressively more complex over time. While in some cases it may still be possible for a manufacturer to "do it all," there are significant advantages to just doing what you are good at, and letting someone else take care of the rest. The things you are good at are commonly called your core competencies.
The notion of core competencies is based on a few basic realizations:
- You can only be good at a few things
- Specialization yields results
- By definition you don't make much money from low-value-added operations
- You have only so much time and money to invest
- There are some things you may not want to become good at
Personally I'm waiting to see "Executives-R-Us," which would provide economically attractive outsourcing services to replace the multitude of non-value adding, but obscenely overpaid, senior management and board members taking up office space in corporate America. Somehow though, I don't think this would be a very successful venture. The first rule of outsourcing seems to be that you never outsource your own job, whatever the merits of doing so may be.
Specialization yields results. This is obvious from everyday experience. If you look at fields of endeavor in which performance, such as professional sports and music, and not credentials, is used as the benchmark, you tend to see that world-class athletes and musicians tend not to be world-class anything else. They have achieved their levels of performance by focusing at what they are good at and working hard at getting better. The renaissance man may be a nice personal ideal to aspire to, but renaissance men tend to lose to Tiger Woods on the putting green. Similarly, renaissance businesses will tend to get eaten for lunch by their more focused competitors. Figure out what you are good at, work hard to get better at that, and take a good hard look at what other activities you need to perform that can better be done by someone else.
If you consider something a low-value-added operation, then why not give it to someone who views it as a high-value operation? For example, consider PCB fabrication. Most electronic manufacturers view it as a low-value commodity operation that is painful to perform in house and something that is natural to outsource. But to the companies that specialize in PCB fab, making PCBs is their bread and butter&mash;a high-value operation. The 'value' of an operation is strictly in the eyes of the beholder. Why not give your low-value operations to someone else who sees them in a more favorable light? Giving up operations to vendors who value them more highly can also have the side benefits of reduced costs and dramatically improved quality.
You only have so much time and money to invest. Every operation you do in house requires detailed supervision and may have capital costs associated with it. Intelligently outsourcing an operation to a competent supplier can dramatically reduce the attention (man hours) you must devote to it. In many cases it will also radically reduce your capital requirements, as the vendor has already invested in equipment and other capital resources. Ultimately, these investments will have to be recovered, but they can be spread out over a number of customers, and a much greater amount of total business. Unlike the case in which you keep the operation in house, and have to cover all of the capital investment yourself.
Finally, there are things you may just not want to become good at. This may be for "business" reasons or by the unbusiness-like personal wishes of those running the organization. In either case, there are certain kinds of operations that are a real hard sell in particular types of businesses. One example is a manufacturer I worked for who absolutely did not want to have anything to do with adhesives in the manufacturing process-even in situations where they would have resulted in a less expensive and higher quality poduct. Adhesives just weren't in the design or manufacturing cultures of this company. Operations involving adhesives, therefore, would have been natural candidates for outsourcing.
The real question is not "should I outsource," but rather "what should I outsource." The answer is complex, and in addition to identifying your core competencies also depends on a wide variety of factors including some very qualitative ones. An interesting thought experiment would be to consider the scenario where the employees performing a particular function just one day announced they were all leaving the company to start a business that offered the services they were providing to you, but on the open market. You could buy their services and so could your competitors. For example, if your accounting department took off and started Accountants, Inc., what would your reaction be? If it is Oh my God we are all doomed!, then perhaps you should keep your accountants in house (and maybe give them bonuses and raises occasionally). If your reaction is Best of Luck, and you sign up to become their first client, then this function might be a good candidate for outsourcing.