Companies often hear that by outsourcing their non-core activities, they can improve the performance of their core activities. Retain what is core and outsource what is non-core. Pretty simple, right? While this explanation is generally true, it is a broad statement that doesn’t explain how a company should decide what is and is not a core activity. Yet creating this distinction is crucial to using outsourcing as an effective strategy. How can organizations determine which activities are best suited for outsourcing?
Make outsourcing part of overall strategy
There are two main types of business strategies, according to The Times 100: generic and competitive. Generic strategies are types of strategies such as growth (purchasing new assets), globalization and entering new markets, and retrenchment (concentrating on what you do best). Competitive strategies deal with differentiating products and selling goods at lower prices. Benefits from outsourcing cut across many of these strategies, and as such outsourcing can be used as a tool to achieve a variety of corporate goals. When deciding what to outsource, it is important to understand how outsourcing fits with the overall goals of the company and what its use is expected to achieve.
Leave behind the core/non-core distinction
At the same time, it is important to figure out which activities would bring most benefit to the company when outsourced. “Core” activities are generally defined as strategic tasks that improve customer value and drive profits. “Non-core” activities are generally defined as day-to-day routine tasks that add little value and are not a profit center. As mentioned, the core/non-core distinction is not overly helpful. In fact, it can be outright misleading, since it is hard to designate any business function as merely routine and less conducive to future business development (where would your business end up without systems maintenance?). Furthermore, the core/non-core distinction is outdated, since it does not take into account recent changes in outsourcing, such as increase in Business Process Outsourcing or Knowledge Management. These tasks can be routine day-to-day activities that are actually vital to company’s development, but here they are being outsourced to a third-party. What gives? The distinction is purely a generalization and does not constitute a solid framework on which to base outsourcing decisions. A better way is to concentrate on what is strategic and what can be internal.
Define what is strategic and internal
According to “Linking Outsourcing to Business Strategy” by Richard C. Insinga and Michael J. Werle, as explained in the Ivey Business Journal, it is more helpful to decide which activities deserve to be outsourced by evaluating:
(1) the likelihood a task will bring competitive advantage (strategic) and
(2) the strength of internal capability for conducting a task (internal).
Note: In the article the author rather counter-intuitively calls the second the company’s “core”, yet retaining the word “internal” seems to make more sense to avoid confusion.
When using this approach it becomes evident that the strategic vs. internal capability framework help identify which tasks will bring more value if done internally, and which tasks will bring more value if outsourced. If a task is determined to bring some competitive advantage with weak internal capability, it might be beneficial to outsource it (such as new mobile app development at a company without developers). Similarly, if an activity has a strong competitive advantage potential and a strong internal capability, it should be completed in-house (mobile application development when developers are in-house or can be acquired quickly). If a task has a weak competitive advantage and weak internal capability, the business might be better off buying a solution. And so on.
Beware of pitfalls – outsourcing is not a panacea
The consideration between competitive advantage and internal capabilities seems to be an optimal lens through which to determine potential outsourcing activities. This approach avoids the pitfalls of core/non-core divide since all tasks are considered essential to the company. Nevertheless, caution should be employed (as a Russian saying goes: “Better is the enemy of Good”). When using this approach, companies should be aware of potential interconnectedness of some of the tasks. Outsourcing should also not be a substitute for internal capabilities – companies shouldn’t “forget” their own capabilities as a result of outsourcing. That can potentially lower value, rather than raise it. Decision makers need to stay in touch not only with the latest developments within their business, but they also need to understand the marketplace and how it affects their business processes – for example, latest technologies might not be readily accepted by the market.
Now that you know how to select which activities to outsource, it’s time to consider some of the risks you’re likely to face.
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