Why do organizations outsource?

Organizations have carried out a wide range of diverse and frequently non-core activities in-house before the modern era of outsourcing.  There was a perceived benefit to running them in-house, however, these activities were driven by poor supplier management and bargaining or lack of real competition in service provision.  These non-core activities came as baggage after an acquisition or merger and the opportunity was not taken after a thorough viability study.  Pure size of the organization was a goal regardless of the actual nature of the operations.  French and Japanese banks were classic examples of this where the only measure used was asset size and any operation that increased this was brought into the organization.  Traditionally, a vertical integration was pursued as manufacturers sought to control the value chain, for example, to ensure the supply of a rare commodity.  This resulted in divisional heads building empires without due regard to their true corporate goals and vision.

            Changing markets and increasing regulation in many operational areas, such as debt collection, are now forcing a fundamental re-assessment of these activities.  This has led to an increasing shift back to core operations and activities often leading to further shrinkage of the value chain directly under the organization’s control.

            The most important reasons why companies outsource are thus as follows:

• Reduce and control operating costs
• Improve company focus
• Gain access to world-class capabilities
• Free up internal resources for other purposes
• Obtain resources not available internally
• Accelerate re-engineering benefits
• Deal with a function that is difficult to manage or out of control
• Make capital funds available
• Share risks
• Obtain a cash infusion

“Leveraged benefits” will also accompany the implementation of outsourcing that are not usually expected such as:

·        Acting as a catalyst for change by highlighting the need for improvements within the organization

·        Challenging, aiding and supporting internal initiatives such as IT implementations, process modeling and business process re-engineering

·        Initiating cultural change, especially in the South African context, by educating people about creative service delivery options

·        Stimulating critical business analysis as business processes and their costs need to be documented

·        Focusing on the current cost of services when outsourcing becomes a reality

·        Where it works well, introducing outsourcing to other areas of the organization

·        Invigorating everyday business practices by converting sluggish functional areas into dynamic, successful ones and stimulating internal competition and price.

·        Implementing BEE initiatives by outsourcing to the unexplored market