The Russian oil and gas concern Gazprom has a staff of 400,000 people, China’s postal service has 900,000 people, and Wallmart, the largest American retailer, has 2.2 million people. All three companies share one thing: they do not know about outsourcing.
This word has recently appeared in the everyday life of modern entrepreneurs and managers. And the reason for this is obvious — the rapid growth of technology, which makes it possible to build communication with employees anywhere in the world at any convenient time, so there is no need to keep a bloated staff. Although in practice, outsourcing was used at the beginning of the last century. The legendary automotive tycoon Henry Ford handed over many components to third-party factories. As a result, today only 30% of the Ford cars components of are made by the autoconcern’s own manufacture.
Usually, stuff outsourcing helps to transfer company’s non-core functions to external organizations and contractors. Other words, the company transfers some production functions or business processes to another company. We are talking about legal support, accounting, IT services and other services.
The Taiwanese manufacturer of personal computers Acer in a short time managed to take the second place in computers selling around the world. And the main role in this achievement was the effective use of outsourcing. The leaders of Acer knew that they were good at branding and marketing. That’s where they concentrated, giving non-core functions to other companies. This allowed them to increase sales and take a larger share of the market. Today the company employs 6,800 people and this is 10 times less than the nearest competitor.
The main question is: what are the advantages of outsourcing? Let’s try to answer with these points:
- allows you to get components or services of higher quality and sometimes cheaper;
- improves the company’s innovative capabilities through interaction and partnership with world-class suppliers that have great intellectual potential and rich innovative experience;
- provides greater flexibility for the company in a sudden market changing. It is easier and cheaper to find new suppliers with the necessary capabilities and resources than to rebuild the company’s internal operations, eliminating some capacities and resources and creating new;
- accelerates the acquisition of resources and skills;
- since the company transfers part of the functions to the outsourcer, it has the opportunity to concentrate all attention on the main activity. In addition, the previously used resources can be redistributed and invested in supporting the core business.
- possibility to reduce the staff
Making a decision to transfer non-core tasks to third-party companies, the general directors make a standard error — they are trying to calculate the effect of saving wages. And it is almost impossible to do this. After all, the company’s cost reduction is not so much because of staff reduction, but because of optimization of business processes and productivity growth. And with the right approach, you can achieve 30% savings.
Procter & Gamble example
The world-famous company Procter & Gamble did not dare for a long time but decided to transfer some activity to other countries. After that, the productivity of the company showed a significant increase — by 60%. Outside the company, more than 400 products were developed, which brought Procter & Gamble 10 billion more revenue.
It will be correct to talk not about shortcomings, but about risks of outsourcing. The following situations may not occur, however, each company that uses outsourcing must take into account possible risks.
- Being too «carried away» by outsourcing, it is possible to transfer too many spheres of its activity to the third-parties. In this case, there is risk to avoid many of profitable opportunities;
- The company may face a lack of effective management;
- Risk of losing confidential internal information.
And in conclusion, we note that previously all companies worked on the principle of self-sufficiency, it was the basis of the structure of most large enterprises. This happened within the framework of the command economy, when a separate enterprise was isolated from the world market, the production process at the enterprise was often provided with its own resources, there was a break in economic, political and cultural ties with the outside world.
The market helped to understand one simple truth: this it is more profitable to buy subcontractors or even competitors than to produce oneself.