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Outsourcing carries great risks-especially when the balance of power tilts to the provider of outsourced services. By giving up control to another party, companies leave themselves open to the possibility of opportunistic behavior and abuse. In the face of this risk, supply chain managers need to think like investigators and examine all outsourcing decisions based on means, motive, and opportunity.
In September 2003, a California jury agreed with a breach-of-contract claim of nearly $1 billion against Flextronics, the world's largest electronics manufacturing services provider. The lawsuit bad been brought by Beckman Coulter, a seller of test equipment to medical labs and drug companies. Beckman alleged that Flextronics had failed to comply with a contract to produce circuit boards for a Beckman blood analyzer, pressured Beckman for additional payments, and refused to relinquish crucial materials unless Beckman also bought unrelated parts.
Beckman ultimately recovered more than its actual damages and legal expenses-the two companies later agreed on a $23-million settlement rather than continue a potentially protracted and uncertain appeal process. But the outsourcing failure jeopardized the Companys future, and the litigation was a major distraction for more than two years. Regardless of whether the events actually occurred as claimed, this episode underscores the compelling need for companies to tread carefully when outsourcing production-or any other function for that matter.
To be sure, there are benefits to outsourcing. Outsourcing can allow companies to replicate an existing function at lower cost or with incremental quality improvement. Occasionally an outside party may offer the quickest or even the only path to new capabilities. But with outsourcing, there is no guarantee of a happy ending. In fact, for many types of outsourcing, there is a growing body of examples in which the outcome has been a disappointment.1
For example, outsourcing can sacrifice critical capabilities. Communication between internal and outsourcec functions can be difficult. The client company becomes not only vulnerable to the service provider's underpeformance but also to the provider "holding hostage" certain assets that are critical to the client's business (as allegedly happened to Beckman Coulter). A provider could also use the client's knowledge to benefit the client's competitors or even to become a competitor itself. The recent spate of corporate scandals should also provide a sobering warning...