Cost reduction with an outsourced delivery model is a possible target even with the improved service levels, reduced risk and greater depth and breadth of skills provided. This is largely due to economies of scale, particularly in relation to supply chain and purchasing capabilities. Access to the outsourced provider’s lower cost structure, due to the result greater economies of scale and purchasing power, particularly within the supply chain, is one of the most compelling tactical reasons for outsourcing.
Outsourcing can also flatten operational expenditure and provide more accurate and consistent financial forecasting over a longer period leading to increased ‘Cost Certainty’. Outsourcing can potentially transfer ‘fixed’ economic exposure to the outsourced provider offering the benefit of insulation from external economic variables. This is potentially extremely valuable in times of economic uncertainty. In addition to this there may be the option to contract out capital items such as infrastructure upgrade, replacement or refurbishment as operational expenses spread over a contracted period with the outsourced provider, This transfer of capital costs to operational cost can be particularly attractive to some business and potentially free up capital for other projects elsewhere in the business.
Management and Delivery
Companies that attempt to take on non-core functions and operate at low volume, especially across a diverse portfolio or multiple sites are likely to incur significantly higher training, recruitment, supply chain, research, development, marketing and deployment expenses, all of which are passed on to the customer. An outsourced provider’s lower cost structure, which may be the result of greater economies of scale or other advantage based on specialization, can reduce a company’s overall operating costs and therefore increase competitive advantage.
Control and management challenges are often given as a reason for outsourcing. However, there may be underlying causes such as unclear management expectations or difficulty in measuring performance. Outsourcing is one option for addressing this issue but outsourcing alone is not the whole solution. Outsourcing in this case merely moves the symptoms of the problems elsewhere without identifying or dealing with the underlying causes.
Mere abdication of management responsibility does not solve the underlying problems, rather the organization needs to examine the underlying causes. If the requirements, objectives, expectations or needed resources are not clearly understood, then outsourcing cannot improve the situation; it may in fact exacerbate it. If the business does not understand its own requirements, it will not be able to communicate them to an outside provider.
Well defined outcomes and clear deliverables set for the outsourced provider ensure consistent service quality over time with less likelihood of service degradation due to loss of focus, misaligned goals and objectives, complacency and changing business conditions and requirements.
For outsourcing to be successful, business management must have a clear and agreed set of objectives in mind and a clear sense of the benefits and risks involved. It should also be noted that the client business should always retain a limited amount of in-house knowledge to properly engage with and manage the outsourced supplier(s). Many outsourcing contracts fail to deliver the promised rewards due to misaligned goals and objectives, lack of clarity on the part of the client and in some cases failure to grasp or act upon the technical feedback provided by the outsourced supplier within their domain of expertise based up the detailed knowledge and understanding of their in-house team of subject matter experts.