Outsourcing effort equals bigger profits

Dr Alessio Ishizaka - Reader in Decision Analysis

Dr Alessio Ishizaka – Reader in Decision Analysis

Companies could save millions of pounds if they followed 18 key success factors for outsourcing products and processes, according to researchers at Portsmouth Business School.

Outsourcing allows companies to achieve major benefits they would not be able to achieve otherwise, but the gains are not guaranteed and the risks are high.

The business world is littered with examples of outsourcing not working. Lego, the world’s fifth largest toy-maker, decided to outsource most of its manufacturing activity to help turn its fortunes around and two years later, the company brought its manufacturing back in-house. And Boeing outsourced most of the manufacturing on its new 787 Dreamliner to more than 50 suppliers worldwide, but after major delays and engineering problems, the company brought all major production back in-house.

Dr Alessio Ishizaka, a specialist in Operations and Systems Management at Portsmouth Business School, and his co-author, BA Business Studies student Rebecca Blakiston, have designed the 18 C’s model to increase the gains and alleviate the risks. In it, they urge businesses to give serious and continuous attention to their outsourcing arrangements.

Their research is published in the journal Industrial Marketing Management.

Dr Ishizaka said: “The rewards of outsourcing can have a huge impact on any company’s bottom line, and a long-term relationship between client and supplier can create a feeling of trust which, in turn, promotes performance.

“But too many see it as just a cost-cutting exercise and don’t invest time and management in building and maintaining excellent relationships with those they outsource to.

“This negligence helps explain the high failure rate that continues to plague many companies trying to outsource activities. You could say some are doomed to fail.”

Dr Ishizaka’s and his student’s model is based on an in-depth study of a multi-national pharmaceutical company which, in 2002, outsourced five activities and, by 2007, was outsourcing 16 activities – a 527 per cent increase in the outsource value. The company also saw a 30 per cent drop in in-house facility management costs in the first three years.

The 18 C’s model shares the responsibility for success between the client and service provider. It specifies that the client needs commitment from senior management, has clear aims and objectives, confidence and a good team working environment.

The service provider needs to be able to provide the “right sort of staff; people who know the business”, have clearly defined roles, client knowledge, be consistent, undergo continuous improvement succession planning, be customer focused and offer continuity.

There also needs to be a cultural fit between the client and the service provider, two-way communication and a connection at the top of the business. The contract needs to be flexible, allowing room for growth and change, and of a suitable scale, so that the most senior members of staff in both client and provider companies are able to talk to each other direct.

Dr Ishizaka said: “Outsourcing has become a widespread management strategy, but management of the relationship is essential to ensure it is successful long-term.”

Lego and Boeing both had difficulties with their outsourcing arrangements and both opted to bring production back in-house as a result.

In 2004, Lego was facing the largest financial crisis in its 70-year history. Among the many initiatives to turn the company’s fortunes around, it outsourced a major chunk of its production to an American company based in Singapore which, in turn, managed much of its injection-moulding and packing in its supplier’s factories in Mexico and Hungary. Three years later, Lego ended the outsourcing agreement due to continued and on-going problems. The outsourcing arrangement may not have worked, but it taught the toy maker valuable lessons, including the need to embrace a global manufacturing model. In 2009 Lego recorded one of the highest profits in its history.

Boeing had for decades been responsible for some of the biggest advances in aviation and, in 2003, began developing the carbon-composite lightweight Dreamliner, planned to enter service in 2008. Boeing outsourced about two-thirds of the development and manufacturing of parts to a global network of suppliers but problems became apparent in 2007 when engineers assembling the first Dreamliner found a gap between two sections, each manufactured by different suppliers. In 2008 more delays were reported, including problems with the global supply chain. In 2011, the Dreamliner won certification to carry passengers but due to fires, leaks and battery problems, the airliner was grounded worldwide in January 2013. Boeing has now brought major production back in-house.

1 comment on this postSubmit yours
  1. Well, risks are always involved in business. Managing outsourcing risks is a crucial task that needs to have proper metrics and standards. If you become knowledgeable with this, putting out your best effort to strategically manage your services can be the next step. Besides, it’s already given that once you’ve done your best; a positive outcome will always go along the way – that is, bigger profits.

2 total pingbacks on this post
Submit your comment

Please enter your name

Your name is required

Please enter a valid email address

An email address is required

Please enter your message

UoP News © 2014 All Rights Reserved