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Strategic Outsourcing for Competitive Advantage

Strategic Outsourcing for Competitive Advantage
By Leonard Hook, Kairos Group

Outsourcing, once used mainly for downsizing and cost reductions at major corporations, should be used as a strategic tool to deliver a forceful impact on corporate growth and financial stability. By outsourcing non-essential work, the corporation can free valuable resources and focus on its areas of competitive advantage. To achieve that result, the corporation must know its core competencies, the type of work within the organization, and manage the outsourcing process.

For the United States, the use of outsourcing has spread from national to global.  For instance, in 1993, an estimated 85% of all business outsourcing was conducted in the United States for U.S. based companies. Much of the remaining  outsourcing activity was provided in Canada. But that situation has changed. Today, nearly half of all outsourcing is conducted beyond U.S. borders; however, much of the outsourcing is for North American companies with outsourcing experience on this continent.

In 1996 it was estimated that American companies spent roughly $100 billion on outsourcing; the projected growth rate will take that spending to $300 billion by 2001. The statistics for corporate use of outsourcing implies substantial opportunities for future growth. A survey previously done by a recognized financial institution found that while nearly 32% of the companies studied were involved in outsourcing, 68% were not. So this suggests there is substantial opportunity for changing thestate of competitiveness of these remaining companies as well as improving the competitive state of those already undertaking outsourcing by examining the future potential of the outsourcing process.

Businesses that have used outsourcing effectively have created positive results, but others who have failed can usually portray horror stories. What are the keys to success

First, innate knowledge of the business and its types of work are essential. Before making any decisions on outsourcing it is important that the CEO and the key executives understand the business’s core competencies and what gives it the competitive differentiation. Kairos Group International has found that identifying the corporate core competencies and mapping out the work of the business are the first two essential steps in strategic outsourcing.

We define core competency as the integration of technologies, constituent skills, and the collective learning that sustains the health of the enterprise and serves as a base for the creation of new businesses in the future.  These competencies form units of competitive advantage. The identified competencies (usually between five to eight) create distinctiveness for the enterprise in the products and services as seen by the end-users, and provide differentiation from competition.  It is a must that senior management fully understands the enterprises’ competencies before undertaking strategic outsourcing for competitive advantage.

As a third step, the types of work performed in the enterprise need to be mapped out in the total process.  A simplified model to identify this work may be seen as follows:

The unit of competitive advantage work is work that should be retained within total corporate control and often described as “in-house” work.  This is associated with the defined areas of core competency. Usually, non-essential work and much of the necessary cost type work are subject to outsourcing. The value-added support work often has a mix of potential outsourced activities as well as work “chosen to be done internally”. For outsourcing to make sense, the enterprise should be able to get the product or service done better, faster, and less expensive. If a vendor or partner in this endeavor cannot do it to defined standards as well as the enterprise, the arrangement will likely fail. 

So, when the core competencies have been defined and the work “mapped-out”, what is needed to raise the probability of success? 

Kairos Group International is a management consulting firm that specializes in strategic development and technology management.
© 1998-2004 Kairos Group International. All rights Reserved

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