Three Reasons Why a Company Might Choose to Outsource
A normal reason why a company might choice to outsource activities or business processes is to do with focus.
This is about the "idea" that outsourcing of supportive activities would streamline the organization and make it more competitive.
That competition and focus are highly correlated can be demonstrated by comparing a company with running for the Olympic Games.
If you are to prepare to run for both the 100 meters, 200 meters and 400 meters you will decrease you overall chances than when you would choose to concentrate on one distance.
Cost efficiency could be another reason.
The supplier or business partner that is selected to in-source the business process is assumed to handle these in a more efficient way by concentrating on economies of scale.
Both companies win in this deal because both concentrate on what they do best.
Flexibility is a third reason which is less visible but even so strategic.
If you setup a service level contract that is transaction based than your company benefits from a more flexible structure.
In this construction, you are charged for the number of transaction (orders or contracts) that are handled by the sourcing partner.
This is a solution that a company can hardly manage by itself and collaborating with a sourcing partner could be very profiting.
In order to profit from economies of scale you need a large pool of flexible workforce, which is very costly if your company is relatively small, but which is possible for a company that handles large numbers; it is like a balanced portfolio: one client focusing an economic down turn could be compensated by many others.
You could compare this with a banking function; you do not expect that all clients will request their savings at one and the same moment.
In this last cast you should select a reliable sourcing partner, rather than an average supplier.
© 2006 Hans Bool
This is about the "idea" that outsourcing of supportive activities would streamline the organization and make it more competitive.
That competition and focus are highly correlated can be demonstrated by comparing a company with running for the Olympic Games.
If you are to prepare to run for both the 100 meters, 200 meters and 400 meters you will decrease you overall chances than when you would choose to concentrate on one distance.
Cost efficiency could be another reason.
The supplier or business partner that is selected to in-source the business process is assumed to handle these in a more efficient way by concentrating on economies of scale.
Both companies win in this deal because both concentrate on what they do best.
Flexibility is a third reason which is less visible but even so strategic.
If you setup a service level contract that is transaction based than your company benefits from a more flexible structure.
In this construction, you are charged for the number of transaction (orders or contracts) that are handled by the sourcing partner.
This is a solution that a company can hardly manage by itself and collaborating with a sourcing partner could be very profiting.
In order to profit from economies of scale you need a large pool of flexible workforce, which is very costly if your company is relatively small, but which is possible for a company that handles large numbers; it is like a balanced portfolio: one client focusing an economic down turn could be compensated by many others.
You could compare this with a banking function; you do not expect that all clients will request their savings at one and the same moment.
In this last cast you should select a reliable sourcing partner, rather than an average supplier.
© 2006 Hans Bool
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