Outsourcing and the SMB

Outsourcing is not a new concept. In the late 1890s, Coca-Cola decided it did not have the capital, time or expertise to produce its own bottles, even though bottling was considered an emerging source of competitive advantage. So bottling was

outsourced — for the next 80 years. Today, it is widely believed that Nike is a maker of athletic gear. Not so. Nike is in the business of designing and marketing athletic gear, activities the company considers to be core competencies.’ The manufacturing of sneakers and other products is considered non-core, and is outsourced. So popular is outsourcing that IDC has pegged the worldwide IT outsourcing services market to reach nearly $100 billion in sales in 2007.

Outsourcing is not contracting. Rather, it occurs when an organization transfers, to a supplier, processes or services it used to perform internally. What distinguishes this from other business arrangements is that it’s a transfer of ownership of the organization’s business process — or the responsibility for the business outcomes — to the supplier. The organization does not tell the supplier how to perform the services; it communicates what results it wants to buy. The buyer defines the what, the supplier the how.

There are many reasons to outsource. Throughout most of the 1990s, much of the action was focused on IT outsourcing, with the goal often limited to cost-cutting. And while the pressure to reduce costs continues, the last four to five years have witnessed a rapid growth in business process outsourcing (BPO). With BPO, strategic business processes such as finance and accounting, HR and manufacturing are outsourced. The goal is typically longer-term and the focus in on the realization of overall business benefits, such as enhancing an organization’s competitive position or improving shareholder returns.

With BPO, outsourcing has evolved from a ho-hum tactic aimed at reducing costs into a strategic management tool. Gartner Dataquest seems to agree. It predicts the global business process outsourcing market will be worth $234 billion (US) in 2005, and $310 billion in 2008.

Even with its growing popularity, now spreading to the small- and medium-sized business market, outsourcing is not for everyone. But firms wanting to cut costs, provide better service, access leading-edge technology or focus on core competencies might be interested. For smaller companies, outsourcing can also help stabilize an otherwise unstable environment. But it’s not a panacea. Any organization should examine its reasons for outsourcing and ensure that they make good financial and strategic sense.

Those taking the leap must be aware of outsourcing’s contradictions. Outsourcing deals are usually intended to last between five and 10 years, though nothing in business stays in place for more than a few months. The parties are negotiating a close partnership, yet the negotiations themselves are sometimes a slugfest. And even though people are commonly key to any successful outsourcing, management often focuses purely on cost-cutting when negotiating the deal. It is worth keeping in mind that many outsourcing deals do not work out nearly as well as planned. If you are not experienced in outsourcing, consider getting business and legal help early in the process. You will not regret it.

Denis Chamberland is vice-president of outsourcing and procurement services with ABTS Global, and a partner with the law firm Aird & Berlis LLP. He can be reached at (416) 865-3078.

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