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Is There Too Much Outsourcing?.

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Procurement Leaders are currently carrying out research into outsourcing within the procurement community. Leveraging third-party capability has been a major push for many companies over the last few years in their pursuit of low costs. But where do we stop?

 

The answer to this question came primarily from an understanding of ’core’ capabilities. When looking at make-or-buy decisions, the focus on core categories tends to rest on making whereas non-core are subject to buying.

 

For buyers, this has often led to a rather simplified distinction between directs (which are sweepingly considered core) and indirects (which are considered non-core). However, there is much more to it than that.

 

In a recent survey, Procurement Leaders asked what sort of factors determined being ’core’. It was found that, chief among these, was ’competitive advantage’. This was followed by ’profit impact’ and ’level of value-add’.

 

Although these factors appear a little vague, they all get to the heart of the businesses primary mission: its ability to distinguish itself in the market and turn a profit.

 

The potential for certain categories to achieve this status is unclear, and we see many leading organisations implementing processes for determining an item’s importance to the wider business. However, without aligning outsourcing activities to the central mission of the organisation, there is the prospect for misallocated resources.

 

We have seen in more than several instances that outsourcing projects are conducted as a means to extract short-term savings, with the potential for inefficiencies in the future. This is even more troubling if a category has been outsourced when it is core.

 

Yet we find that outsourcing even core activities is commonplace. Across the board, we find that about a third of such categories are outsourced. Although the savings reported here are significant, one wonders if this is at the cost of missed opportunities in the company by investing in those areas which add competitive advantage and more value in the long term.

 

We must question whether these organisations understand what is core to them and whether they are making the most of this process.

 

As such, there are two questions for companies to answer prior to making a decision:

  1. Do we have a process for determining what is core within our organisation?
  2. Has this been correctly applied to the activities that we have outsourced?

If a company cannot easily answer the above, there is potential for the loss of control of the key distinguishing aspects of the business. This potentially squanders a key lever for running a successful business.

Jonathan Webb
Posted by Jonathan Webb