Raise High The Roof Beam

Are there limits to outsourcing? Will companies hive off all but the most core of competencies, while establishing carefully planned strategic alliances with suppliers, customers, and competitors? Or wilt outsourcing simply provide the means for weathering the storm?

April 27 1997 by Michael Winkleman

Here’s a vocabulary test tomorrow’s CEOs might look for in the GMATs this fall: Define the differences between the following terms: Outsourcing. Re-sourcing. Co-sourcing. Strategic sourcing. Strategic alliances. Virtual organizations.

Could you do it? Did these terms blur as you read them, like so many variations on some management flavor of the month? Did your penchant for purism lead you to reject all but the first choice, dismissing the rest as simply buzzwords with fancy prefixes? Or did you sense some nuances that, in fact, positioned each of these terms, in order, on some sort of continuum of new strategic thinking?

If you’re like most of the 382 CEOs who responded to a recent Chief Executive/ Andersen Consulting poll on the limits of outsourcing, your response has some direct correlation to how you °and your company currently view and partake of the services being offered by an increasing array to outsourcers. But not to how you’ll be using those services a few years from now.


Despite the ballyhoo that has accompanied the growth of the outsourcing movement these last few years, the vast majority of respondents have been anything but revolutionary in their choice of functions to out-source: Payroll/benefits and information technology lead the list; but barely a quarter of respondents have called upon outsourcers to handle R&D, finance/administration, back-office operations, procurement, or customer services. Nearly half of respondents view their approach to outsourcing as primarily tactical—a reaction to immediate problems that need a quick fix, rather than a proactive, enterprise-wide analysis of how outsourcing fits into the company’s strategy. More than a quarter view their outsourcers as vendors, providing a commodity-like service. That attitude is reinforced by the fact that few respondents have yet embarked on contracts lasting longer than five years most last less than three—or representing a commitment of more than $10 million. And cost considerations clearly dominate not only the reasons respondents cite for why they outsource but the reasons they cite for why they avoid outsourcing additional functions.

But between the lines, a revolution appears to be brewing. Nearly half of respondents say they view their outsourcers as partners or trusted advisors, and nearly a quarter see this relationship as a strategic alliance or joint venture. One-fifth of all respondents say that outsourcing is already critical to their corporate strategic planning, and another third say that its importance is growing. And while just half of respondents claim that their approach to outsourcing today is already primarily strategic, more than 90 percent expect they’ll have strategic outsourcing relationships by the turn of the century.


What drives corporations to increase their use of outsourcing services, and to broaden the range of services they outsource? Primarily, answered respondents, it’s the realization that they can’t do it all followed by positive outsourcing experiences they’ve already had. It appears, too, that once they’ve adopted a strategic stance, that attitude influences every aspect of their approach to outsourcing. On the surface, that’s reflected in some general consistencies of response: Those respondents who view their approach to outsourcing as strategic tend to think of their outsourcers as partners or allies and consider outsourcing a key part of their strategic planning process. But the attitude runs deeper, informing their approach to strategic planning and underscoring the issues they consider their corporations’ greatest challenges. For example:Respondents who take a strategic approach to outsourcing are more likely than others to have pursued outsourcing arrangements for manufacturing and back office operations.

Their reasons for outsourcing are rooted less in the search for efficiencies and more in the quest for competitive advantage, improved business performance, and, to some extent, the opportunity to share risks and rewards.

A greater percentage of strategically oriented companies have made the effort to identify their core competencies and value chains; companies that think of their outsourcers as vendors, rather than partners or strategic allies, are less likely to have made strides in these directions.

Respondents who take a strategic approach to outsourcing are paying more attention to new business opportunities and speed-to-market questions than are other respondents; are relatively undaunted by the notion of restructuring; and are less challenged by questions of gaining access to expertise and creating and managing strategic alliances.

They’re also somewhat further along the path toward building strategic alliances with customers, suppliers, and even competitors. Logically, then, they’re also less concerned about the cost of an outsourcer’s service than are their tactically oriented cohorts (though cost is still an issue) but more concerned about shared risk and reward, flexible arrangements, and creating and managing long-term relationships.

Respondents who view outsourcers as partners or strategic allies say they are less challenged by questions of product and service quality and are more concerned than other companies about customer relations, strengthening core competencies, creating a competitive work force, and facilitating growth.

And while the outsourcing dealmaker in almost all companies is still primarily the senior manager in the division where outsourcing is occurring, the CEO appears to be more likely to wield the pen in companies that take a more strategic approach (as well as in companies with annual sales below $100 million, where CEOs, in general, tend to be more hands-on).


Not surprisingly, respondents at companies with annual sales topping $3 billion were considerably further along in most aspects of strategic thinking and planning than were their smaller counterparts. Often, it appears, the combination of a strategic orientation with the economies of scale available to larger organizations influenced both their approach to business in general and their approach to outsourcers in particular.

The largest companies, therefore, were more concerned with quality, speed-to-market, and, of course, global growth than were smaller companies (mid-sized companies, with annual sales between $500 million and $3 billion, were equally concerned with global growth but said they found mergers and acquisitions a particularly large challenge—perhaps because they saw M&A as a quick way to move into the larger category).

But the largest companies were less concerned about organizational efficiency, creating a competitive work force, increasing head count, and gaining access to expertise. Similarly, they were more likely to have restructured and/or re-engineered and, in the process, to have identified both their core competencies and their value chains. Along the way, they’ve also been more likely to strike up strategic alliances with not only suppliers, but competitors as well—in fact, a nearly whopping 36 percent of respondents at $3 billion-plus companies have entered such alliances, compared to 24 percent for all respondents.

While respondents at the largest companies tend to mirror most other companies in terms of how they relate to their outsourcers, a considerably higher percentage 11 percent compared to 5 percent—said they saw their outsourcers as part of a virtual organization, arguably the farthest point along the continuum that starts at the old-line, insular corporation. Along those lines, they also say they’re more interested in expanding their repertoire of outsourced services because of other capabilities their current outsourcers have. And they’re less perplexed by the difficulties of coordinating an array of outside providers. Nonetheless, they’re just as concerned as other companies with getting outsourcers to understand their business and maintaining lines of communication with these strategic partners. But, perhaps because they’ve entered into more, bigger, and longer outsourcing deals (which they have: 28 percent say their biggest deals are worth more than $25 million, compared to 5 percent of all companies), they’re also more concerned about maintaining cultural fit, sharing financial information between parties, and finding metrics to measure the business results of their engagements.


G2 Research, a Mountain Valley, CA-based research organization that pays attention to the market for outsourcing services, predicts that this market which it estimates is worth $138 billion today, not even including IT, may well double, hitting $283 billion by the turn of the century. Fueling that, claim outsourcing’s proponents, is the increasing propensity for corporations—and their CEOs—to think about outsourcing not as just a means for fixing the leak but as a key part of the corporation’s strategy—and outsourcers as part of the corporation’s extended family. Doug Sewell, a partner in Andersen Consulting’s Business Process Management practice, the firm’s outsourcing entity, says he’s seen that propensity among corporations asking him for proposals. “What we’re seeing,” he says, “is a clear move toward making the scope of the opportunity sound more like it’s strategic. They say, ‘We want two RFPs, focused in different directions.’ The first says, ‘Here’s the IT scope of services we offer; please respond to our outsourcing needs.’ The other says, ‘Here’s what we call our Teflon/Velcro room. Throw some ideas across the room and see what sticks.” Where this leads, he claims, is toward “some sort of strategic alliance, seeing what sorts of synergies we can put together.”

Do respondents agree? Perhaps the answer is embodied in how they responded to a variation on the potential GMAT question posed above. Asked to choose the term that seems to most appropriately define outsourcing, half of all respondents chose outsourcing itself, nearly a quarter chose strategic alliances, and 18 percent chose strategic sourcing (while some coined their own terms, most notably: “subcontracting,” “tactical alliances,” “insourcing,” “blame someone else,” and the straightforward “doing business”). But variations from the norm followed clearly along the lines set up throughout the rest of the survey: 73 percent of respondents who think of outsourcers as vendors felt outsourcing was the term of choice, while 63 percent of those who see their relationships with outsourcers as joint ventures opted for strategic alliances or strategic sourcing. Is that self-justification or a case of familiarity breeding comfort? It’s hard to say. The evidence, at present, is anecdotal, and the logic that propels the case for strategic outsourcing doesn’t necessarily translate into corporate behavior. But it’s worth watching—or at least finding someone who can watch it for you.