The end of outsourcing?

November 28, 2012 / By  

The past few months have seen the debate over “the end of outsourcing as we know it” fueled by KPMG Institutes’ The Death of Outsourcing and HfS’ The Death of the “O” Word blog posts. Far from signaling the end of outsourcing, they tend to describe the emergence of a new kind of partnership.

Analysing “how outsourcing is dramatically changing to bring more value and build stronger relationships between buyers and service providers” in their Obsolescence of Outsourcing series (Part 1: Out with the Old. In With the New , Part 2: Getting to Innovation), KPMG observes that companies are now “expecting a more comprehensive level of value out of their outsourcing relationships and expecting vendors to behave more like partners with a certain amount of shared priorities”. Implications include:

  • outsourcing shifting from a pure cost savings exercise to a “more of a value play today than ever before”;
  • outsourcing decisions being made at a level in the organisation more closely connected to the business strategy (If services providers “are not adding to the strategy, then they will detract from it”);
  • innovation being given a new chance to flow from service providers when “third-party relationships [are] better governed and integrated with the business”; and
  • using outsourcing as a means to gain competitive advantage.

Traditional transaction-based outsourcing deals are giving way to new forms of partnerships where the economics are in the results, not in the transactions themselves. In Vested: How P&G, McDonald’s, and Microsoft are Redefining Winning in Business Relationships, Kate Vitasek describes how under the Vested Outsourcing model each party has a vested interest in mutually-defining and desired outcome. Being invested in the success of each other’s overall business with a “what’s in it for we” mentality will strengthen the sense of partnership and encourage a more lasting relationship. This longer term approach incentivises partners for helping their client achieve a specific strategic result within a constantly changing environment.

In Build, Borrow, or Buy: Solving the Growth Dilemma, Professors Laurence Capron (INSEAD) and Will Mitchell (Duke University’s Fuqua School of Business) argue that sustainable growth strategies should not emphasise just one way of securing needed resources (know-how, technology, processes, people). This might result in falling into an “implementation trap” and losing out to competitors with more inclusive approaches. Instead, companies should select different growth modes and balance internal development (‘build’), contracting and partnering (‘borrow’), and mergers and acquisitions (‘buy’). The study found that while most companies use only one or two of these pathways, firms using multiple modes to obtain new resources are more likely to survive over a five-year period.

Clearly, outsourcing is transforming and might even shed its name, but partnerships are here to stay.

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