Outsourcing to Gain a Competitive Advantage

By Elmuti, Dean; Kathawala, Yunus et al. | Industrial Management, May/June 1998 | Go to article overview

Outsourcing to Gain a Competitive Advantage


Elmuti, Dean, Kathawala, Yunus, Monippallil, Matthew, Industrial Management


Executive Summary

Outsourcing has become a useful tactic to lower costs and gain a competitive advantage. Now that international markets have become easier to access and more reliable, global outsourcing has become more of a concern. By using a well-managed outsourcing agreement, companies can gain in markets that would otherwise be uneconomical. Global outsourcing can contribute to short- and long-term benefits. However, the long term should be the driving force. Considerable time and energy must be put forth by all involved in order to create a successful alliance. The only way to have an outsourcing strategy flourish is by having an agreement that is solid and flexible. The best-laid plans will eventually fail if care is not taken to ensure a fair and equitable relationship.

A 1995 study conducted by the Economist Intelligence Unit and Arthur Anderson noted that 85 percent of all executives in North America and Europe already outsource all or at least part of one business function. This percentage is expected to increase to 93 percent in the next one to three years. Dataquest estimated that the information technology outsourcing market would reach $54.1 billion by this year and $76.6 billion by the year 2000.

The global outsourcing market has been growing furiously in recent years. By the year 2000, global outsourcing is expected to be a $121 billion market, showing about a 10 percent average growth rate per year. Outsourcing has become one of the most important and popular strategies in an increasingly competitive marketplace. Global success requires development of and recommitment to the core competencies of the company.

Outsourcing allows companies to return to their most successful work and enjoy the benefits of allowing their outsourcing partners to do the same. The popular areas of outsourcing include information systems/technology (40 percent), real estate and physical plant (15 percent), logistics (15 percent), and administration, human resources, customer service, finance, marketing, sales, and transportation (30 percent).

According to the Outsourcing Institute, companies are realizing a 9 percent cost savings and a 15 percent increase in capacity and quality, on average, through outsourcing. There is enormous pressure on major corporations to establish competitive positions in a global marketplace. Executives of most corporations believe that, in order to compete globally, they have to look at efficiency and cost containment rather than relying strictly on revenue increases. As companies seek to enhance their competitive positions in an increasingly global marketplace, they are discovering that they can cut costs and maintain quality by relying more on outside service providers for activities viewed as supplementary to their core business.

Bill Concannon, CEO of Dallas-based Trammell Crow Corporate Services, says, "Today, outsourcing relationships have evolved from one-dimensional contracts based on cost savings to multidimensional partnerships that support the core business of client corporations. The trend is for outsourcing relationships to function more and more as partnerships. Outsourcing providers are taking increasing responsibility in realms that have traditionally remained inhouse, such as corporate strategy, information management, business investment, and internal quality initiatives." Reasons for outsourcing

A number of reasons can be identified for outsourcing. Longterm reasons include the following:

To free resources for other purposes-Many companies engage in several different activities besides the core activity By outsourcing some of these activities, companies can concentrate their resources on the core business. This allows the staff to add value to the firm and focus on the most valuable asset-the customer.

To share risks-By outsourcing, companies can share all the governmental, economic, market, and financial risks that occur when engaging in a business. …

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