Outsourcing About More than Reducing Manufacturing Costs

While outsourcing is really the consequence of competition and price pressures that are causing companies to re-evaluate their business models, too many businesses don’t have a clear understanding of why they are doing it, or even what outsourcing really is.
Going offshore is not the same as outsourcing, says Mark Paling of consulting firm Alvarez & Marshal. Presenting to the Global Automotive Aftermarket Symposium that wraps up today in Dearborn, Mich., Paling says that whether going offshore is really outsourcing or not depends on ownership of the facility. And it can take a variety of forms. It can be manufacturing, or in business processes or information technology.
The process of outsourcing, and the reasons for it, have changed over the years, he says.
“It started out as a tactical efficiency play. This is where a lot of companies still start, with the attractive source of low-cost country labour,” says Paling.
This has evolved the point of strategic outsourcing, where it is a formalized, integrated part of the business.
“These companies are not only making outsourcing a part of their business model, but as a core competency that is integrated and repeatable. As they evaluate fundamental changes, analysis of their outsourcing model is also part of that process.”
He says that a company can start at any point along the continuum, as long as the pieces to support it are part of the business.
It is important for companies to understand why they are considering it and what they hope to accomplish, says Paling. While he admits that these points might seem obvious, when companies seek to outsource as a reaction to what competitors are doing, the basics sometimes get left behind.
Regardless, the impact of outsourcing is unquestionable. This is primarily in logistics and procurement, some 33% of the total of all industries, just ahead of 31% in manufacturing. Information Technology is the leading service sector at 16% (think of EDS), while finance and accounting are in the single-digit percentages.
“Our survey indicated that few have taken steps to outsource back office functions,” says Paling, but he adds, this will become more prevalent as price and cost pressure drive increased efficiencies in these areas.
So where is it headed? One study says it is only at 10% of where it is headed.
“EDS recently announced plans to double its workforce.” Even Canada was included along with India and China and Eastern Europe as potential recipients of outsourcing.
He recommends Thomas Friedman’s “The World Is Flat.”
“Calls placed to American companies are answered by individuals in India who speak English and even adopt American names. No longer does an Indian citizen who aspires for the American dream have to move here. They apply for a coveted position . . . and the American dream comes to them.”