Companies' core areas shrinking under outsourcing onslaught
THE outsourcing model evolved from the realisation that companies do not have all the expertise in all areas. However, the logic deepened when companies found out that their bandwidth of management and resources did not permit them to do all areas diligently and cost effectively. Added to this phenomenon were other important dynamics such as quick technology changes, skill shortfall, capital expenditure freezes in bad business cycles, growing lack of in-house accountability in fringe tasks and competitive weaknesses. When you outsource an activity, you also convert some fixed costs to variable costs. This was considered a legitimate way to "improve" balance sheets and to shore up cash flows by divesting non-essential assets.
The initial penchant for this was limited to peripheral areas - IT resources, IT applications, equipment servicing, aftersales support etc. The model has now been perfected and both the outsourcer and the outsourcee are comfortable with each other, have brought in tweaks to improve the economics on both sides and achieved some level of operational maturity. The question that remains is where will the outsourcing trend lead us next? What will remain core areas?
A few years ago, a German company outsourced all its equipment maintenance tasks in all its factories to a company. The outsourcee took over all tools and manpower engaged in the activity. The outsourcee was nothing but a new firm the company's maintenance crew opened! Thus all in-house employees became vendors and all in-house resources for the maintenance activity were sold and converted to cash.
The company entered into a long-term maintenance contract for all its production assets, with monthly lease payments, as well as a rate card for specific jobs that are not part of the monthly routine. This is one of the first cases of narrowing the "core" activity. In the telecom industry, players such as Bharti Airtel of India outsourced many areas - towers, IT platform for customer activities and billing, sales outlets etc.
These companies restricted their attention to branding, price plans, advertising and communication, and spectrum wave acquisition. It became effectively a marketing department and a spectrum management unit.
The concept was extended to offshoring, as companies in high-wage countries tried to identify lower-cost service providers. Thus India, the Philippines, Malaysia and parts of eastern Europe became fertile off-shore businesses. As the quality of these services were not uniform, some companies improvised by owning such offshore entities in low-cost countries, rather than contracting to an external entity. The quality problem was solved and cost savings accrued still. The outcry against transfer of jobs from these high-wage countries is now a permanent issue in election campaigns! The next wave of this could be seen in the emergence of "outsourced in-house departments".
PACKAGE DEAL
IT hardware channel companies now offer a full package consisting of machines, Wi-Fi and network infrastructure (cabling etc included), staff to manage the machines, periodic update of standard software including operating systems, anti-virus, storage backup etc, disaster recovery services and user training. These are charged on a pay-by-use basis and provide excellent insurance against technology changes, machine obsolescence, skill gaps and initial and frequent cash outflow for capital expenditure. It also guarantees cost competitiveness as the contracts, typically of one to three-year cycles, are renewed based on performance and new pricing. Of course, there is the attraction of accounting for theseas variable costs which are tax deductible.
In services, I came across an example where a school outsourced the teaching of all non-core subjects - music, dance, art, drama - to enrichment companies. Many of the government schools in Singapore follow this model. Their reasoning is based on similar factors - lack of expertise, inability to hire and retain special talents, variable demand etc. A fast rising company in India, Edusports, offers the full scope of sports services to schools, including playground facilities, if the schools do not have their own.
The company provides coaches, equipment, balls, racquets, curriculum, profficiency assessment and even certification. Pharmaceutical companies have, during the past few years, outsourced segments of their drug discovery processes to smaller R&D houses, with specialist skills and nimble operations. E-commerce operators outsource A-Z of the supply chain activities.
Redefining the core areas will now gather even more momentum, as the concept is now proven. Publishing houses do not need a printing press now. They may even be able to outsource the editorial department, retaining only branding, marketing, core publishing guidelines and intellectual property.
Go-to-market is now a lot easier in many industries. Some low-cost airlines started quickly with leased aircraft and outsourced ticket booking and customer management systems. Governments can potentially outsource many citizen services to outside vendors, especially those based on IT automation.
Managers sometimes "cheat" the system by hiring outsourced resources instead of in-house headcount, which may not be granted. In all these examples, the outsourcees act as in-house departments (as some outsourcees do dedicate a crew for a certain outsourcer). You may even find a lot of people in your office or campus, who are essentially on the payroll of outsourced vendors. This shift in employment is subtly changing the workforce pattern in many countries. New jobs are not coming from big companies, as small and medium enterprises moved in to cash in on the outsourcing boom.