Outsourcing Strategy : The Advantages and Risks

Valid until 31 January 2015 (unless noted)

Back to management, this time we will discuss about outsourcing strategy. What is the core concept of outsourcing? Outsourcing involves a conscious decision to abandon or forgo attempts to perform certain value chain activities internally and instead to farm them out to outside specialists and strategic allies. Many companies had applied outsourcing strategies to drive their success. Outsourcing often very efficient because it allows a firm to focus its entire energies on those activities at the center of its expertise (core competencies). Outsiders can often perform certain activities better or cheaper. That are the most critical to its competitive and financial success.

The Advantages of Outsourcing Strategies
A company should generally not perform any value chain activity internally that can be performed more efficiently by outsiders. The chief exception is when a particular activity is strategically crucial and internal control over that activity is deemed essential. Outsourcing pieces of the value chain to narrow the boundaries of a firm's business make strategic sense when:

1. Any activity can be performed better or more cheaply by outside specialists. For example : In PC industries, many PC makers now using contract assembler rather than assembling units in-house because of the sizable scale economies associated with purchasing PC components in large volumes and assembling PCs.
   
2. The activity is not crucial to the firm's ability to achieve sustainable competitive advantage and won't hollow out its core competencies, capabilities or technical know how. Outsourcing of maintenance service, data processing and data storage, fringe benefit management, website operations, and similar administrative support activities to specialist has become commonplace.
   
3. It reduces the company's risk exposure to changing technology and / or changing buyer preference. For example : PT. Telkom Indonesia (telecommunication company) outsources certain parts, components and services (computer, cable / cable installation, etc.) to outsider (supplier). Its supplier must bear the burden of changing technologies, undertaking redesigns and upgrades.
   
4. It improves a company's ability to innovate. Collaborative partnerships with world-class suppliers who have cutting-edge intellectual capital and are early adopters of the latest technology give a company access to ever better parts and components.
   
5. It streamlines company operations in ways that improve organizational flexibility and cuts the time it takes to get new products into the marketplace. Outsourcing gives a company the flexibility to switch suppliers in the event its present supplier falls behind competing suppliers.
6. It allows a company to assemble diverse kinds of expertise speedily and efficiently. A company can nearly always gain quicker access to first-rete capabilities and expertise by partnering with suppliers who already have them in place than it can by trying to build them from scratch with its own company personnel.
7. It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.

The Risk of an Outsourcing Strategy
The biggest danger of outsourcing is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilities. In such cases, a company loses touch with the very activities and expertise that over the long run determine its success.

Source :
Thompson, Jr., A.A., Strickland III, A.J., and Gamble, J.E. (2005), Crafting and Executing Strategy – The Quest for Competitive Advantage: Concepts and Cases, 14th ed. New York, NY: McGraw-Hill/Irwin