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Outsourcing '98: Winning in Today's Global Marketplace

—As printed in the July 1998 issue of Fortune Magazine
Outsourcing is redefining the modern organization in ways few people envisioned even a decade ago. It is unlocking the power of knowledge and innovation to ignite an explosion of new ways of doing business - both around the corner and all around the world. Along the way, outsourcing has become a central driver of economic success.

Executives everywhere report that expenditures for outsourcing will rise 27% over the next 12 months - up from a 23% growth rate in 1997; total expenditures will reach nearly $235 billion worldwide. Most importantly, companies that outsource are three times less likely to have financial problems that those that do not.

These are just a few of the key finding from the 1998 Dun & Bradstreet Barometer of Global Outsourcing. In its second year, the D&B Barometer continues to be the only survey that globally tracks business-to-business outsourcing by companies with annual revenues of more than $50 million.

From Fad to Essential Business Tool
Many business trends quickly fall from favor, are labeled a fad, and get replaced by the next wave of new ideas. Not so with outsourcing. The question “Is outsourcing just another business fad?” is seldom asked anymore.

As we approach the new millennium, outsourcing has become an essential business tool. The traditional, vertically integrated, self-sufficient organizational model simply no longer works. In its place, a new set of words defines business success - speed, expertise, flexibility, innovation.

In a global economy, markets are redefined daily; customer expectations expand exponentially; new competitors appear on the scene literally overnight. Today’s global winners have learned to focus on a few ell-chosen core competencies - those skills and knowledge sets that truly differentiate them from the competition. Through outsourcing - the assignment of critical, but non-core, business functions to outside specialists - these leaders immediately bring their entire operations up to best-in-world standards at a cost equal to or less than current expenditures. At the same time, they often avoid huge capital investments.

It is this integration of the best talents of multiple firms that is at the heart of outsourcing. The result is a business transformation as profound as one can find anywhere in history.

Momentum Actually Gaining
Outsourcing continues to accelerate, and shows no signs of peaking. To date, about 60% of all outsourcing is in North America, where expenditures during 1998 will increase by 21% ($25 billion), to $141 billion. This rate is up from 15% in 1997.

But outsourcing is also growing in Europe, with the United Kingdom, France, Italy and Germany seeing the greatest activity. In fact, expenditures in Europe will grow this year even faster than in the U.S. - by 34%. This increase will bring European expenditures to more than $92 billion by early 1999.

And activity in the Asia-Pacific region is substantial as well. North American and European companies cite Chine, China’s Special Administrative Region Hong Kong, Japan and Australia as the leading outsourcing markets in the region.

While some of the increases result from companies new to outsourcing, organizations that are already outsourcing will purchase 88% of all such services; planned expenditure increases by these companies is 15%.

Information Technology is Key Diver
Information technology represents about 28% of all outsourcing expenditures. Nearly every company that outsources does so with some aspect of its IT function. The D&B Barometer shows that planned IT outsourcing spending for 1998 is 12% higher than 1997’s figures. Finance and human resources are the next most likely functions to be outsourced. However, the average annual outsourcing expenditures by finance and HR are less than one-third of this in IT.

Over the next 12 months, companies the world over will increase manufacturing outsourcing by 25%. While much of this involves the use of contract manufacturers in Asia and Eastern Europe, some companies, such as Sara Lee, have decided to use outsourcing vendors closer to home.

While the numbers are still small - 1% of all expenditures - companies are actually expanding executive management outsourcing. Large companies, such as General Electric, have long moved skilled turnaround managers into business units requiring a turnaround, or growth specialists into growth areas. However, smaller companies are less likely to have this internal management depth and are increasingly turning to outsourcing for executive talent.

Outsourcing in many other areas will expand, as well. Fully 47$ of companies are evaluating increased outsourcing for 1998 and beyond. Nearly all companies currently outsourcing finance, marketing, customer service, facilities management, fleet management, and media are considering additional opportunities in those areas.

Making Outsourcing Work
Despite the positive impact of all this, problems can occur. In fact, 24% of companies report terminating an outsourcing agreement within the pat two years. Poor performance and a lack of coordination between the companies involved are the problems most often cited.

The message is clear - outsourcing demands new ways of thinking on the part of management. Executives need to move away from the notion that outsourcing means that a particular activity is unimportant; nothing could be further from the truth. Outsourcing works best when it’s seen not as abdicating responsibility but as leveraging talent and resources. It is the organization’s ability to harness the special skills and capabilities of the outsider that produces the greatest value. Here’s what Amy M. Fadida, President and CEO of A.M. Fadida Consulting in Washington, D.C., has to say on the subject: “The difficulty executives and, to a greater degree, mid-level managers, have in relinquishing control of their operations to the outside specialist too often keeps them from realizing the full potential of outsourcing”.

Thus, outsourcing must be approached strategically. The goal is not to get the best deal; the goal is to get the best partner. The partnership must than be surrounded by a solid management system. Organizational links at the operational, tactical and strategic levels are required; a scorecard that clearly defines the expected results is essential. At the same time, changes and problems must be anticipated and a process for dealing with them agreed to.

Finally, businesses need to invest in developing leadership skills for an outsourced world. Managers entrusted with these relationships must have a desire to manage, not to do. They must be champions of change with a proven ability to build trust. They need solid communications, negotiations, strategic planning, project management, team leadership and even marketing skills. What they need is the skill set historically associated with the best general managers.

It is this balanced attention to the relationship structure, the management structure and the leadership skills that makes outsourcing work. Outsourcing is not a turnkey, hands-off solution. It requires the same high-quality attention to excellence demanded of any other important business undertaking.

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