Take Note of the Shift

Following the traditional model of Cost+Profit=Price within a fiercely competitive market, outsourcing is either an afterthought or a solution.

Small start-ups and mid-size businesses often reason that in-house control of operating processes more effectively manages quality, costs and schedule compliance. Technically oriented leaders possessing intimate knowledge of the product insist on doing everything in-house to make sure it's on time and right.  Following the traditional model of Cost+Profit=Price within a fiercely competitive market, outsourcing is either an afterthought considered for leveraging component pricing with volume or a solution to We don't know how to do it ourselves.

Continuing in this mode in the new economy is unwise. Customers are now the ones managing quality, costs and schedule, says C.K. Prahalad, professor at the University of Michigan Business School. There is a fundamental and revolutionary transformation of the industrial system that has gone largely unnoticed.  As a result, customers are now partners with suppliers in creating value.

The typical outsourcing model is broadening from simply requesting certain specifications from a supplier. Traditional businesses can find the competition using best practices to identify their core competencies and actively outsourcing their remaining needs based on customer demands. This competitive approach causes them to adhere to the Price-Cost=Profit model, transitioning outsourcing from a short-term price emphasis to longer-term partnerships based on value generation. Their operating philosophy, regardless of organizational size, firmly establishes relationship management skills as equal to technical know-how. Putting people first is critical as e-commerce shifts outsourcing practices from strategic advantage to business necessity.

Where the Value Lies

The long-term competitive advantage gained through outsourcing in the new economy does not come from the availability to all players of Internet search engines or B2B portals. Tapping into the Internet expands the potential supplier universe for everyone, en-abling larger numbers of suppliers to be selected expediently for evaluation. But in the excitement, companies must realize the tools themselves are not the competitive weapons, but the enablers. Recognize these first stepsalong with spot-buying items through reverse auctions or other B2B mechanismsfor what they are: e-procurement standard operating procedures (e-SOPs). Properly understood, they enable the small start-up or mid-size business to level the procurement playing field.

In fact, condensing the e-SOP window allows the buyer to focus on the critical secondary steps of managing the outsourcing process through relationship management. Competitive advantage lies within the value generated from managing the supplier relationship through order fulfillment in the product or program life cycle. Applying broader thought to relationship management separates the wheat from the chaff. Customers start by widening the supplier evaluation envelope, looking beyond immediate pricing negotiations into a full examination of their total solution capability as a partner. Mutual give-and-take opportunities emerge through this process.

Therefore, the value still lies in the partnership. For example, a preferred outsourcing partner learns about the customer's overall operation to better understand how his product or services impact the buying organization's processes. The outsourcing partner can influence design concepts. Inquiring about strategic information regarding future planning in the operation, the outsourcing partner can focus on proactive response and timely support abilities. Solutions are structured to needs regarding delivery, installation, training and launch support and ongoing maintenance support. Areas of difficulty on both sides are shared and clearly defined. Today's enabling technology can facilitate all of these value-added partnering efforts; the more vital element is establishing processes for the partners to maintain a progressive and mutual relationship.

Both parties come away with expanded product or service application insights. Each considers the fit between his company and the potential partner. Each discerns how well the partner works with othersthe customer through reference checks, the supplier through networking questions and the grapevine. The relationship establishes clear lines of communication upfront. The risks and rewards of full commitment to the agreement are understood before contracts are signed.

Fully understanding the competencies each supplier brings to the table enables the customer to create and manage an outsourcing sphere that drives value through improved order fulfillment, increased throughput capacity, improved support in optimizing asset utilization, and reduced inventory and cash-to-cash cycle times. These value drivers improve financial performance, increase shareholder value and inevitably lead to business growth.

Innovative Relationships

eBusiness innovation examines each of the relationships a company serves, then evaluates how that company is going to change the way it does business with respect to all of those relationships. The objective is to use e-commerce technology for accessing and adding value to existing relationships while creating new relationships. Outsourcing through partnerships becomes the standard mantra of the business at all levels.

At the end of the day, the technology of e-commerce tools and their applications are the only parts of the outsourcing trend that are truly new; and they are available to the masses. Differentiation between competitors comes from excellence in the soft skills of relationship management, historically the trademark of progressive, successful companies. Leaders expand, change and reinvent their businesses seamlessly through continual communication and negotiation with partners on each new window of opportunity. The players complementing the new technology tools through strong growth relationships will flourish and prosper.