I read a very interesting blog posting this week by Ben Gomes-Casseres in Harvard Business (“Outsourcing: Where Will You Draw The Line?”). Here are some of the key points that he makes in the piece, none of them new or groundbreaking, but they’re worth recalling nonetheless.
- The main reason many companies outsource is to focus on “core competencies.” But Ben argues that “the question to ask is not if a task is ‘core’ or ‘non-core,’ but if it is ‘contractable’ to an outside vendor. [There is] ample theory and evidence to advise corporations on where to draw the outsourcing line.”
- Vendors/service providers often have to make investments in people, technology, and assets to provide a service. If these investments can be leveraged across multiple customers, then there’s no problem. But if there’s only a single buyer (in the extreme case), then the vendor needs assurances from the buyer, such as a guaranteed minimum revenue, to justify the investment.
- “Tasks that are hard or costly to outsource require an extra dose of management. Or you should do them internally.” Ben cites Boeing’s experience with the Dreamliner 787 project as an example. I made a similar point last month, when I highlighted Boeing’s acquisition of Vought Aircraft Industries (see “Boeing’s 787 Dreamliner: Supply Chain Lessons and Questions”). Here is part of what I wrote: Boeing’s acquisition of Vought’s 787 operations raises an important question: What’s the right balance between outsourcing and maintaining operations in house? Between the “flexibility” outsourcing supposedly offers and the greater “control” that keeping operations in-house supposedly provides?
- “The term ‘outsourcing’ is an unfortunate one,” is how Ben ends his posting. “With every outsourced task comes a new responsibility to govern that task properly. The burden of manufacturing a part or running a call center may be shifted to an outside company. But the responsibility for managing the supplier and for ensuring quality doesn’t budge. Denying this amounts to governance myopia.”
When it comes to logistics outsourcing, where do you draw the line?
One of the reports I always look forward to reading is the annual “State of Logistics Outsourcing” report published by Dr. John Langley (Georgia Institute of Technology) and Capgemini. You can access the report at www.3plstudy.com. Below is one of the charts that appears in the report every year, and every year the data tells the same story. To quote from the 13th annual report: “The services 3PL users choose to outsource also don’t change dramatically from year to year. The most frequently outsourced activities in 2008 are domestic and international transportation, followed by warehousing, customs clearance and brokerage, and forwarding. Consistent with previous years’ studies, customer-facing or more strategic logistics services are outsourced less frequently. This is continuing evidence that 3PL users are reluctant to outsource activities that may directly affect revenue or customer relationships.”
Outsourcing of Logistics Services (Source: 13th Annual Third Party Logistics Report, Dr. John Langley, Georgia Institute of Technology; click to enlarge)
In other words, despite the efforts of logistics service providers to move up the value chain and become strategic partners, customers continue to draw the line between transactional/tactical activities and strategic responsibilities.
Will this ever change? Can performance-based outsourcing (aka Vested Outsourcing) help to erase this line, or at least move it up the value curve?
You’re the customers. Post a comment and let me know.
