Back to basics: Why outsource?

I thought I would revisit the reasons why companies outsource. There are a lot of sophisticated models that delve into this topic but when you canvas most people, the first, and often only, answer you get is save money or reduce costs.

Is this really the only reason, or is it a case of an overly simplified reaction?

There is no doubt that all business decisions, including outsourcing decisions, need to make economic sense, but this is different to saying all decisions need to save money or reduce costs. In fact, when I'm discussing this topic with senior executives, I regularly hear them discuss the nuances of this topic of making economic sense.

These nuances can include access to skills, access that may not be available under any business model other than outsourcing. Clearly it would be cheaper to simply not spend money, not access the required skills and not do the work but that's hardly a satisfactory solution to take back to your CEO.

These nuances can also include temporary or permanent increased capacity to undertake additional work. Again, it would be cheaper to not spend money and not do the work. While prioritization of work is important, when you let that become a choke-point preventing business from undertaking activities that have robust business case justification, you're hardly likely to earn kudos from your peers and boss.

The nuances can also include creating flexibility in supply so that costs are more variable and can expand and shrink in a well-understood relationship to revenues. That might mean higher costs at some revenue levels while yielding lower costs at other revenue levels. That predictability and, perhaps, a lower average cost across a range of likely revenue scenarios can also make strong economic sense.

So, next time you hear someone say "save money" is their reason for outsourcing, dig a bit further and try to understand the real nuances behind that statement--in some cases at least, it's not likely as simple as it seems.

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Michael Rehkopf

Michael has more than 20 years of experience in operations, strategy and sourcing covering all major parts of the globe. He has also worked for Australian, Canadian, German and Japanese companies in both business process outsourcing and IT outsourcing.
Michael's industry experience includes the financial services, manufacturing, telecommunications and travel sectors. He leverages this diverse industry experience and his university background in accounting, IT and his Master of Dispute Resolution, to assist clients in the development of business strategies and the implementation of sourcing strategies. These include the associated evaluation, negotiation and organizational change.
Michael is currently a partner at TPI, the world's oldest and largest sourcing advisory firm. Prior to joining TPI, Michael held leadership positions with Siemens Business Services, OpenPlus International, Mitsubishi Electric and Netron.