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
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
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.
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.
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 $92 billion by early 1999.
And activity in the Asia-Pacific region is substantial
as well. North American and European companies cite Chine, China’s
Special Administrative Region Hong Kong, Japan and Australia as
the leading outsourcing markets in the region.
While some of the increases result from companies
new to outsourcing, organizations that are already outsourcing will
purchase 88% of all such services; planned expenditure increases
by these companies is 15%.
Information technology represents about 28% of all outsourcing expenditures.
Nearly every company that outsources does so with some aspect of
its IT function. The D&B Barometer shows that planned IT outsourcing
spending for 1998 is 12% higher than 1997’s figures. Finance
and human resources are the next most likely functions to be outsourced.
However, the average annual outsourcing expenditures by finance
and HR are less than one-third of this in IT.
Over the next 12 months, companies the world over
will increase manufacturing outsourcing by 25%. While much of this
involves the use of contract manufacturers in Asia and Eastern Europe,
some companies, such as Sara Lee, have decided to use outsourcing
vendors closer to home.
While the numbers are still small - 1% of all expenditures
- companies are actually expanding executive management outsourcing.
Large companies, such as General Electric, have long moved skilled
turnaround managers into business units requiring a turnaround,
or growth specialists into growth areas. However, smaller companies
are less likely to have this internal management depth and are increasingly
turning to outsourcing for executive talent.
Outsourcing in many other areas will expand, as well.
Fully 47$ 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.
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.