The decision to outsource or not is a fundamental one for most businesses. Firms need to be fully aware of the pros and cons and enter the agreement with their eyes wide open. The appetite for outsourcing traverses the world and most major industries.
In 2013, global outsourcing market revenue was $82.9
billion, up from $45.6 billion in 2000. Yet many firms
envision greater efficiencies and reduced costs without
truly understanding the benefits and pitfalls. For those
contemplating outsourcing, here is a brief overview of
some of the key points to consider.
MORE FOCUS AND AGILITY
The biggest single advantage of outsourcing is that it
provides the firm an increased ability to focus on where
it competes by concentrating its management, intellectual capacity, IT spend
and corporate energy on
its core competencies
and the primary goal of
making the firm more
competitive. The firm can
effectively offload all of
the business functions
where there is no competitive advantage (as its
peers all undertake that
task in the same manner).
With increased focus,
firms generally become
more agile. Management
is much more attentive to its core competencies and the
firm can react to changes in market conditions more
readily. A firm can often expand into other sectors and
geographies where its outsourcing provider already has
a presence. In effect, firms can benefit from leveraging
off their outsourcer’s scale and experience.
FASTER TO MARKET
Firms can also derive benefit from outsourcing if the
outsourcer has capability or experience that the firm
does not possess. If a firm wants to expand its product
offering, for example, the third party might provide
that capability much faster than if the firm was to
establish its own operation.
For example, within the asset management industry, perhaps a firm wishes to move into derivatives.
If the asset manager doesn’t have that operational
capability but an outsourcer does, then the firm can
be faster to market through outsourcing. Indeed,
where niche or emerging capabilities or skills are
required, it can often make sense to outsource all, or
an element of that requirement.
HIGHER LEVELS OF INVESTMENT
If the industry can concentrate certain functions to
3rd party suppliers, this will create a market that can
generate significant investment into key areas of the
value chain. The out-
advantage is based upon
delivering a good service
on what is effectively
your ‘commodity’, there-
fore its investment in the
and technology will be
continuous and substan-
tial. In effect, the out-
sourced function becomes
a profit center, attracting
and justifying invest-
ment; the same function
in-house remains a cost
center and will always
struggle to justify the requisite investment.
Probably the biggest misconception around outsourcing among those who have not done so before
is that it is a ‘cost play’. Costs can be reduced but an
outsourced service is not always cheaper. Sometimes
the advantage is in changing the cost model, making
the costs more predictable and spread over time. Additionally, costs can be directly linked to a business as a
variable cost, as opposed to a fixed cost.
The closer a firm gets to a utility model, the greater
shared cost benefits it will realize. The more bespoke
an operating model is, the higher the cost for the firm.