Outsourcing is not necessarily Offshoring

It is interesting how much noise and controversy there is about a topic over which there is so much misunderstanding and that at times is used to stir fear, uncertainty and doubt. This topic is open to being cynically exploited because so many people do not really understand it.

The main confusion surrounds the words outsourcing and off shoring. It is interesting that the two words are used indiscrimately and invariably assumed or interpreted to mean the same or are synonyms. They are not.

One can outsource without offshoring and one can do offshoring without outsourcing. Therefore outsourcing work can be done anywhere in the world including in ones own country.

To outsource a service or a function merely means that one will no longer be performing that service or function within ones own corporation or in house but instead subcontract it out to some organization or company outside ones own.

One of the main objectives of outsourcing is to get something done by someone who is either an expert at that service or function, can do it more efficiently or cheaper or both. The main drivers for outsourcing really came from the need for subject matter experts (SME’s) and achieving critical mass. Another major factor was the increasingly higher investments in plant and equipment required to keep an operation efficient and competitive.

The person who performs the function or service better and more efficiently than anyone else tends to have the most success in the market place.

So what happened that made outsourcing such a popular discipline and changed the world’s traditional business models?

In the 1990’s the market place began ruthlessly demanding lower prices, technology was advancing and changing at an increasingly rapid pace, but the investment necessary to produce all this complicated rapidly advancing technology at lower prices grew out of all proportion and soon became unaffordable for the smaller players.

One of the forerunners of outsourcing was the concept of Original Equipment Manufacturing (OEM). Many companies needed new products in a hurry, that they did not have the facilities for to produce, were operating at full capacity, did not have the money to build or it was not clear whether the product would be successful and worth the investment required.

So they started to look around for producers that had the expertise and could start production of these new products almost immediately at the right price. Therefore many corporations started subcontracting with other corporations to produce these products on their behalf and then stamping their logo on it as if the larger corporation had manufactured it in house.

Also, the combination of an inability to keep up with the investment required to keep an operation cost competitive and the concept of SME’s forced organizations to contemplate their future and look at what their expertise was and what they wanted to be when they grew up. So each company looked at their strengths and weaknesses and focused on their subjects/things that they were expert in and shed/outsourced activities that they knew least about.

Thus the SME component manufacturing focused on component manufacturing, the SME assembly focused on assembling products, the SME transport focused on logistics and so forth in order to attain critical mass and survive.

The transportation industry is an interesting example; you may have noticed that all the big guys now call themselves logistics experts. Whilst looking at their strengths and weaknesses the transportation industry found out that they were experts at moving stuff from place to place (distribution), they further knew that in operating their business efficiently they used hubs, huge ware houses where they sorted picked and packed and shipped their customer’s packages. Thus they were experts in logistics and started to offer their expertise to customers and offered them a bundled value proposition which included warehousing, distribution and logistics.

Bingo! They offered a specialty product of greater value in which they were the SME that would greatly increase the use of all their capital intensive assets in a sector that SME’s in another sector were ready to shed or outsource.

As the above illustrates that outsourcing does not have to be offshoring e.g. FedEx, UPS,Component Suppliers to GM Ford & Chrysler, IBM, ADP Total Source, Paychecks and so on.

Tomorrow I will share with you why offshoring does not have to be outsourcing.