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Executive Overview
In today's business environment, companies are driven to conduct a few functions inhouse and to obtain the rest from other sources through aggressive outsourcing. While outsourcing may seem attractive at the strategic management level, serious pitfalls are often encountered as the strategy is pushed downward into operations. At the operational level. the strategic intent tends to be lost in a hectic day-to-day, problem-to-problem business environment. Outsourcing decisions made at the operational level can easily lead to dependencies that create unforeseen strategic vulnerabilities. These pitfalls are addressed by a systematic methodology that can guide the operational level to achieve strategically appropriate actions.
Pressures to Outsource
The goal of companies that aggressively outsource most functions is to enhance competitiveness by achieving a higher return on assets through less capital commitment and increasing the ability to adjust quickly to a changing environment through less commitment to in-house resources.' Their adage is: do more with less.
Outsourcing is motivated by growing pressures on management to remain competitive by accomplishing more with fewer resources at a faster pace. Competitive pressure is a constant driver to increase efficiency. Organizations have been, or are being, restructured, downsized, and reengineered in a relentless attempt to achieve a state of efficiency, effectiveness, and agility expected to deliver increased productivity.
In order to do more with less, a company must focus its limited resources on those activities that are essential to its survival and must leverage activities that are peripheral. The result is a greater use of partnerships, collaborations, and simple buying to substitute for in-house capabilities.
Outsourcing's Pitfalls
While outsourcing may seem attractive at the strategic management level, serious pitfalls are often encountered as the strategy is pushed downward into operations. At the operational level, the strategic intent tends to be lost in a hectic day-to-day, problem-to-problem business environment. In lean operational management structures, implementation is in the hands of semiautonomous teams that are tightly focused on measurable objectives-- most often, cost reduction.2 At this level, the dominant success metric of outsourcing becomes lower cost, period. As such, the stage is set for classic suboptimization at its worst. Outsourcing at the operational level can easily lead to the development of dependencies that create unforeseen strategic vulnerabilities. These pitfalls prompted the...