Pros and Cons of Outsourcing

Accenture: Auto suppliers missing out on benefits of strategic outsourcing

Traverse City, MI  August 8, 2001  While some auto industry suppliers are turning to outsourcing as a Band-Aid to overcome short-term business issues, they are missing out on the benefits that could come from strategic outsourcing of non-core business activities, such as payroll, procurement or logistics, according to new research from consultancy Accenture.

The Accenture survey found that 74 percent of those companies that currently outsource said they will continue to do so, but they expect outsourcing activity to remain at the same level in the next year.

Additionally, while 73 percent of those polled reported outsourcing at least one business process, such as benefits, 27 percent said their company was not currently engaged in outsourcing of any kind. Within this group, no significant movement toward future outsourcing was evident.

"Our research indicates that the industry turns to outsourcing as a quick-fix, often aimed at relieving immediate business and IT pressures," said Randy Barba, a partner in Accenture's automotive industry group. "Only a handful of companies recognize that aggressive and strategic use of outsourcing is important to their overall strategy."

Thilo Koslowski, a senior research analyst who covers the auto industry for technology consultancy Gartner, agreed that more outsourcing would be beneficial for the auto industry. "However, the big challenge," he said, "is that there are not many companies providing these types of [outsourced] services specifically to the automotive industry today."

The Accenture survey, designed to obtain an understanding of current outsourcing trends among automotive industry suppliers, involved a three-week poll of industry executives from 30 automotive suppliers with revenues ranging from $500 million to $10.5 billion.

Just 21 percent of companies surveyed for the Accenture research anticipate increasing their outsourcing initiatives, and none discussed undertaking additional outsourcing as a complement to their competitive strategies. One company expects an increase only in Europe, while another plans to introduce outsourcing within six months. Still a third supplier plans to seek outside help as a result of company growth.

"OEMs {original equipment manufacturers] are seeking ever greater levels of product innovation at lower costs from suppliers," said Barba. "Companies that outsource more of their non-core functions in order to focus on enhancing design, production and manufacturing have a better chance of surviving in a tough climate that mandates it."

Barba added that the right recipe for outsourcing can provide a supplier with 10 to 25 percent in reduction of affected operating costs, as well as reduce assets.

Koslowski concurred that auto industry suppliers are looking for new technologies that will allow them to take advantage of outsourcing as a means to cut expenses. "Suppliers see e-business and IT in general as a way for them to respond to demands from manufacturers to lower their costs," he said.

When asked which benefits of outsourcing were most important, respondents ranked them in the following order:

  • Cost containment/predictability (23 percent)

  • Access to human capital and leading technology (19 percent)

  • Flexibility (15 percent)

  • Strategic redeployment of resources to core activities (15 percent)

  • Cost reduction (15 percent)

  • Better service levels (8 percent)

"Companies will benefit from more closely aligning strategic outsourcing initiatives to their growth plans and using outsourcing to transform cost structures and service levels," said Barba.

Koslowski added that outsourcing could allow the supplier to gain competitive advantage by leveraging technologies that fall afield of their own core competencies. "I don't think in certain cases that they have a choice but to go outside and get this type of service from an independent service provider," the analyst said. "A lot of the suppliers don't really have the know-how, the expertise in-house."

Given what he sees as increasing demand for outsourcing services among auto suppliers, Koslowski expects to see growing numbers of providers bringing solutions to market and therefore increased outsourcing. "I do think that we'll see more of that in the future," he said. But until the providers come to the table with their offerings, Koslowski said, "there is a market for this but there are no real answers."