In recent years, the practice of outsourcing has becoming increasingly popular among many industries. This strategic approach to operations management is defined as the transfer of internal activities and decision responsibilities to a contracted entity for a multitude of different reasons. These include, but are not limited to, financial incentives, improvement opportunities, and organization-focused initiatives. Although the reasons and level of outsourcing may be industry-specific, there are guiding principles that help establish the most appropriate approach. Largely, many companies decide to migrate towards outsourcing operations to focus on "core" competencies that present the highest potential for achieving a competitive advantage. In fact, this streamlined approach to operations has the added benefit of reducing overall cost as well due to the boost in capital returns associated with outsourcing.

While outsourcing provides substantial benefits for an organization, the potential risks cannot be overlooked. The major disadvantages include a lack of control due to decentralized operations, impacts to product or service quality, lapses in communication, employee termination, among others. These risks continue to make outsourcing a polar subject as it is often a complex task to weigh the advantages versus disadvantages of this approach. These concerns highlight the need for differentiating between critical and non-critical activities within an organization. This helps determine the functions that may be suitable for outsourcing opportunities and forecast the potential impact of a transfer. The following characteristics may be used to perform an assessment of activities within an organization:

Required Coordination: This refers to the level of difficulty that will be required to fully integrate a certain activity into business processes. Often, complex tasks require input from a handful of different departments which require both coordination and ease-of-access. These tasks would be suitable for an outsourced entity.

Strategic Control: This characteristic addresses the potential impact to operations as a result of severed relationships with an outside partner. For example, losing access to a specialized manufacturing facility or software may limit innovation in a particular function of the company.

Intellectual Property: The refers to intellectual property management and how secure it remains when shared with outside contractors.

Following implementation of an outsourcing model, it is essential to perform an analysis of effectiveness. This is especially important for smaller organizations that are testing out a novel operations strategy that does not have an established outsourcing network. A continual assessment of these functions is paramount for ensuring success while also minimizing setbacks due to unforeseen third-party issues. An important consideration is flexibility with outside entities since markets, consumer demand, and inventory are subject to rapid change. As such, an assessment of nine indicators of effectiveness was created to perform this analysis. These include Customer Segments (CS), Value Propositions (VP), Customer Relations (CR), Marketing Channels (MC), Revenue Streams (RS), Key Resources (KR), Key Activities (KA), Key Partners (KP), and Cost Structure (ST). By breaking key business sectors into these individual segments, an organization can record impact from outsourced operations on specific functions. Furthermore, a cognitive map of how some of these segments cascade into one another provides a holistic view of downstream risks. This should help clarify decisions regarding the optimization of outsourcing functions and driving continuous improvement.

Questions:

What are some ways that outsourcing has positively or negatively impacted your specific organization or industry as a whole?

2. Are there alternatives to outsourcing operations that mirror similar cost-reduction and innovation? If so, what are they and are they viable long-term options?

References:

Kulembayeva, F., Seitkaziyeva, A., & Yelshibayev, R. (2022). Economic efficiency of outsourcing business models: A comparative assessment. Global Journal of Flexible Systems Management. Retrieved March 23, 2023, from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8526280/

McIvor, R. (2008). What is the right outsourcing strategy for your process? European Management Journal, 26(1), 24-34. https://doi.org/10.1016/j.emj.2007.08.008

Zwilling, M. (n.d.). Six Key Factors in the Right Outsourcing Decision. Business Insider. Retrieved March 23, 2023, from https://www.businessinsider.com/six-key-factors-in-the-right-outsourcing-decision-2011-4