Since the days in which the Ford Motor company owned its own coal mines to fuel the smelting of the steel for the Model T, there has been a steady trend away from vertical integration toward a gradual decoupling of core and non-core business activities. That trend, represented today by the explosion of off-shore outsourcing, has come to a cross-road in the early years of the 21st century. Is there, as some business and social critics insist, a line separating what can be outsourced from other activities that must be carried out by traditional company employees?
PricewaterhouseCoopers' (PwC) research strongly indicates that businesses today are actually asking a profoundly different but equally revealing question. That question is not whether many corporate functions should be outsourced, but how? In answering this question, successful outsourcers and outsourcing providers working together have invented new models that have transformed the nature of outsourcing itself. This dynamic emerges specifically from new forms of customer and service provider relationships, according to PwC's latest Global Outsourcing study, which asked nearly 300 executives around the world about their outsourcing experiences and expectations.
What immediately becomes clear from their comments is that, like news of Mark Twain's death, the end of outsourcing has been greatly exaggerated (1). A large majority of outsourcers (87 percent) say today's outsourcing delivers the benefits projected in their original business plans and that 91 percent of this same group feel that outsourcing is a core tool in their operational toolkit and they would outsource again, whether or not they have had entirely happy experiences in outsourcing themselves.
What is changing is the range of approaches that companies from a variety of industries are taking to the outsourcing paradigm. Traditional single-source outsourcing contracts are highly focused on fixed-price negotiation and delivery of "commodity" services such as IT infrastructures services, and this type of outsourcing is not going to disappear. Indeed, 39 percent of the survey population expects to increase their use of this model for outsourcing.
At the same time, as companies explore newer areas for outsourcing such as procurement systems, finance and research and development, they are discovering that other models promise to deliver more value. Fifty percent of the executives polled say that they expect to increase multi-sourcing arrangements, and 45 percent plan to increase their use of joint ventures. What binds together all of the newer approaches to outsourcing, it transpires, is a different kind of relationship between customer and supplier. In a nutshell, those companies that describe themselves as having highly successful outsourcing arrangements are also those most convinced that collaboration rather than a conventional arms length customer/vendor agreement is the key. Deeper collaboration, according to the respondents, is based on honest and transparent business relationships, joint decision-making on matters of mutual interest, joint governance structures, and shared risks and rewards.
Within this framework of enhanced collaboration, two dominant variations of multi-sourcing models appear to be emerging: the lead supplier model and the collaborative partnering model. In the lead supplier model, one service provider functions as general contractor who orchestrates other suppliers. The outsourcing customer may or may not be involved in the economics and governance of the subcontractor relationships, but the general contractor is accountable for results. In a collaborative partnering model, a collection of master partners governs relationships and deliverables for the benefit of end customers or consumers. They are supplemented by a collection of specialist providers but the relationships are governed by transparent mechanisms, explicit rules of governance and engagement, and alignment of risk/reward incentives.
Notably, we see this collaborative partnering model emerging among a group of companies that believe they have experienced the highest degree of success in outsourcing to date, giving them the appetite, it would appear, for more complex relationships. It is this group that is moving more quickly into outsourcing in R&D and innovation (56 percent planning to increase outsourcing in this area) rather than the balance of respondents (only 37 percent moving into this area). These outsourcing leaders also understand that managing the kind of extended network of relationships in the newer models requires more transparency, better communication, greater trust, and genuine reciprocity than in the past. This makes them more likely to believe in trust-based supplier management (66 percent versus 49 percent) and flexible business terms rather than highly specific contracts (51 percent versus 38 percent). According to these leaders, success in this environment will heavily hinge on shifting the customer-service provider relationship from adversarial to collaborative; from one based on procurement to one grounded in partnership.
In the expanding global business marketplace, flexibility and speed are at a premium as never before. As value is increasingly located across an extended business network involving business partners, customers and suppliers, the skills and experience gained through collaborative outsourcing will create positive impacts on the entire enterprise, helping it to navigate risk and capture new business opportunities.
About the Author: Pat McArdle is a global outsourcing partner at PricewaterhouseCoopers, a firm specializing in assurance, tax, human resources, transactions, performance improvement and crisis management. www.pwc.com.
(1) "The reports of my death are greatly exaggerated," was a statement made by Mark Twain quotation after hearing that his obituary had been published in the New York Journal.