Companies today must continuously seek out ways to reduce costs while increasing innovation to compete on a global level. The practice of one company trying to replicate another’s internal operations, but at a lower cost, is being replaced by the act of partnering with suppliers that will drive creativity to improve overall operational excellence within the value chain; outsourcing a specific activity or task to a company that can perform it better.
The days of outsourcing a process to a low-cost country and expecting the same output are gone. Rising global wages, transportation costs, and shifting trade winds have decreased the return on investment of geographic wage arbitration. This is why forward-thinking leaders are outsourcing critical parts of their business tasks to supply partners with a distinctive core competency, enabling companies to take advantage of drastic improvements in not only cost, but in quality, reliability, and service as well.
Challenges
In the past, outsourcing invoked a tactical or negative connotation, however, many organizations are realizing financial and operational success by strategically partnering with supply partners to outsource core parts of their businesses.
Rapid outsourcing is the efficient transition of critical processes to strategic partners to leverage best-in-class core competencies and align supply with customer requirements. Unfortunately, the basic question of what to outsource is not as simple as running a make vs. buy analysis and then selecting the lower cost, net present value option.
It is often default business best practices, underpinned by academic training, that inhibit firms from realizing new creative business models required to bring disruptive new products to market. Traditionally, companies have outsourced specific tactical functions, i.e. maintenance repair and operations (MRO), or international logistics, etc., which work well to reduce costs.
Future of Outsourcing “Tasks”
Companies are now more closely studying how customers value their products holistically, not as discreet functions or components, but as a service provided. Thought leaders in the space, such as Harvard’s Clayton Kristensen, are embracing the idea that companies should look at work as a series of “jobs to be done.” “People don’t simply buy products or services, they ‘hire’ them to make progress in specific circumstances,” as Kristensen outlines in his Jobs to be Done Framework.
Technology is playing a critical role in allowing companies to outsource broader more traditional in-house strategic functions, such as procurement or supplier quality, by better connecting the flow of information between buyer and supplier. This reframes the product value creation process into smaller activities for processes and services and expands the possibilities for reducing waste by streamlining operations into core value-added tasks.
Low-cost cloud software has been a big driver for companies to outsource smaller amounts of work that, habitually, could only be cost effective when executed in house. Further, many companies are starting to outsource various operations to firms that have developed a high level of expertise in various supply chain related functions, such as identifying suppliers or plant audits. This is enabling companies to receive instant benefits in bandwidth on a micro level, which is extremely helpful for firms undergoing change, contracting, or growth.
5 Steps to Achieve Rapid Outsourcing Success
1. Map Core & Non-Core Value Added Tasks
Ahead of outsourcing, it is important for an organization to review operations and information flow by developing detailed product life cycle, “cradle to cradle” value stream maps with cross-functional team members, and to define its current state and desired future state core competencies.
Why a firm decides to outsource is as critical as the underlying technical analysis.
Our recent collaboration with Software Advice highlights five major factors for why companies outsource and will assist organizations in selecting non-core activities to contract out:
- Cost: Will outsourcing this process reduce my costs?
- Skill: Do external providers have the skills necessary to perform this process?
- Risk: Does outsourcing this process create a risk for my company?
- Speed: If I outsource this process, will it result in faster production?
- Innovation: Will outsourcing this process give my company a competitive advantage?
Regardless of the reason for deciding to outsource, companies are finding that leveraging an elite group of firms who are best-in-class at their respective core competencies empowers them to operate at lower costs, and faster, than the competition; and becoming what technology and entrepreneurial thought leader Salim Ismail describes as “Exponential Organizations” – his aptly-named book.
2. Outline Non-Core Tasks to Outsource
My talk at the 2017 ISM Global Conference, Rapid Outsourcing in a Boom Economy: How to Create Competition to Drive Performance, highlighted the traditional approach firms take to outsourcing, focusing on goods and services, and the newer micro-tasks view firms are embracing.
Specific tasks that firms are outsourcing include:
- New Product Development
- Qualifying Suppliers
- Quoting Suppliers
- Onboarding Suppliers
- Transitioning Suppliers
- Supplier Management
- Supplier Ratings
- Cost Reduction
- Shipment Track & Trace
- Prototype Development
Detailed process breakdowns will bring to light tasks that are critical to creating customer value, but are either underperforming or deemed non-core competencies of the firm.
Once future state core competencies are agreed upon and specific tasks to be outsourced are documented, identifying a strategic supply partner that can support the task(s) is the next step.
3. Locate Strategic Partner with Aligned Incentives
Outsourcing initiatives should be considered a strategic activity, as a potential supply partner will be supporting tasks that are critical to delivering value to your end customers. Today, firms are aligning incentives across the value chain to create high-functioning extended enterprises, or “virtual companies”.
Contract performance metrics such as joint 50/50 cost reduction sharing can ensure alignment and mutual buyer-supplier success.
If an organization does not have experience selecting a partner for an outsourcing supply need, it is vital for it to seek third party guidance. Investing in an advisor should not only expedite outsourcing, but it should also generate a return through the selection of a lower cost and risk partner.
4. Build Detailed Launch Plan for Success
Service providers and business process outsourcing firms vary widely in capabilities, experience, and expertise, thus, it is critical to obtain a detailed proposal that includes costs, scope of work, timeline, ramp-up plan, program personnel, and their experience. Sourcing a given firm based on reputation or recommendation alone leaves many variables unaddressed, so gathering and identifying the specifics of what the firm is proposing significantly reduces sourcing risk.
Outsourcing partners bring new core competencies, ability, and agility to an organization, but “new” often equates to risk. As a result, launch plans should account for the time needed for new team members, processes, and technologies to harmonize.
Outsourcing transitions are one of the riskiest business actions companies can take, so creating a detailed Gannt Chart and facilitating weekly project check-ins with team members from both the buyer and supplier, until completion, will maximize success.
5. Track Performance to Continuously Improve
After a company issues a purchase order to a supply partner, it still has more work to do. The specific key performance indicators (KPIs) defined in the agreement – cost, timelines, etc. – need to be monitored so the supplier’s performance can be continuously improved. Qualitative, intangible KPIs should be tracked as well to improve working relationships, communications, and rapport with the supply partner. The more the two firms can resemble “one seamless team”, the better results will be.
The long-term benefit of selecting a first-rate supply partner is that it will get better over time, as will the performance of an organization’s extended enterprise.
Conclusion
Gone are days of outsourcing to distant lands for cost arbitrage. Instead companies outsource to tap into critical technologies, capabilities, and ingenuity to create a competitive value stream advantage.
Rapid outsourcing is a mix of analysis rigor and acquired intelligence, both of which are necessary to facilitate a lower-risk sourcing environment during strategic outsourcing initiatives. The very technologies that will accelerate many companies’ next frontier of growth will require greater investments and force firms to outsource non-core tasks in new and different ways. Freeing up this valuable capital for redeployment into new product development will provide organizations with the operational flexibility needed for innovation.
An organization should be viewed as a series of tasks that together create customer value. Outsource non-core tasks to unlock hidden potential and realize a lower-cost, more agile operation that will run circles around its competition.
-William
