Leadership Yin-Yang: Retain business functions internally or outsource?

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Businesses must consistently build and acquire capabilities to maintain an end-to-end advantage throughout product introduction, growth, maturity, and decline.

Whether to outsource or build in-house is a significant and individualized decision that can vary widely across different industry sectors, and organizations within those sectors. As part of my Leadership Yin-Yang blog series, let’s explore potential leadership approaches based on company-specific objectives.

Outsourcing

Outsourcing is an option most business leaders consider at one time or another to broaden their resource pool and to accomplish initiatives more efficiently than full-time employees and on-site mechanisms.

Since the Industrial Revolution, organizations have sought to exploit their competitive advantages to bolster markets and profits. Throughout the twentieth century, the ideal model was a large integrated company that owned, managed, and directly controlled its assets. Then, in the 1950s and ’60s, corporations diversified to leverage economies of scale.

However, diversification often blocked agility, and when organizations looked to compete globally in the 1970s and ’80s, they were stymied by bloated management structures. To boost flexibility and creativity, many large companies developed a new strategy focused on their core business that required critical processes to be identified and decisions about outsourcing to be made.[1]

These days outsourcing can help to reduce capital and operating expenses while mitigating risks associated with procurement, software development, IT integration, manufacturing, staffing, and program management.

Companies known for strategic outsourcing

  • Unilever, a British-Dutch transnational consumer goods company, reduced costs in 2005 by outsourcing integration of dozens of enterprise resource planning (ERP) systems to save US$785 million annually in its operational activities.[2]
  • Taiwanese hardware and electronics corporation, Acer, protected and built its core competencies in branding and marketing laptops in 2000 by outsourcing manufacturing duties to third parties.[3]
  • Big-four technology giant Apple does not own and operate manufacturing or production facilities. Outsourced companies manufacture proprietary hardware such as the processors found in iPhones and iPads. Even the MacBook and iPhones are assembled in different outsourced facilities.[4]
  • By 2000, it was clear to Procter & Gamble that their invent-it-ourselves model was not capable of sustaining robust top-line growth. The explosion of new technologies was putting increasing pressure on its innovation budgets. P&G’s Connect & Develop model for outsourcing R&D led to a 60% increase in innovation productivity, generating more than $10 billion in revenue.[5]
  • Even startup Alibaba began by outsourcing its development to a US firm to help it compete with eBay despite Chinese internet restrictions.[6]

Initially, outsourcing may have focused on highly transactional back-office processes or non-critical services, but now it encompasses strategic functions, with some companies off-loading entire value-chain segments.

In fact, some firms are looking to their outsourcing partners for a more strategic collaboration to improve their organization’s ability to innovate and enhance end-user experience. Capgemini’s Applied Innovation Exchange (AIE) platform provides an immersive global environment to help businesses discover and leverage innovation in their sector. AIE offers a framework for action and a high-performance engagement experience via a broad community of designers, technologists, sector experts, business and technology partners, academics, research organizations, and startups.

Outsourcing is not a preset, one-size-fits-all formula. And that’s why it is critical for business leaders to strategically develop a plan that accommodates their organizations’ unique needs and goals.

In-house development

Although outsourcing offers numerous benefits, a company’s dynamic business environment may provide opportunities for in-house development. Insourcing utilizes established resources within the organization to accomplish tasks and achieve corporate goals.

Capabilities developed in-house enable the business to generate ideas and iterations based on the experiences and expertise of the individuals most familiar with the organization. Employees who have invested time with a firm are often the most committed to its mission and vision as well as to its operational success.

Moreover, because business today is so dynamic, full-time employees may sometimes be more prepared than outsourced staff to adapt when there’s a need for quick and responsive transition. In-house captured data can be used to build custom products or services using unfiltered and direct information.[7]

Decisions, decisions

Leadership Yin-Yang

Leaders can weigh in-house versus outsource factors through a decision matrix based on how to achieve top performance and the most competitive advantages.

  • Strategically essential activities are often kept in-house so that control and oversight are maintained.
  • Functions necessary for operational effectiveness, but which are not critical to the overall strategy, are often outsourced safely.
  • A collaborative alliance with an external supplier may be a valid option to accomplish activities and tasks that support business strategy.

Decision matrix

Leadership Yin-Yang

As business leaders adopt a strategic approach to outsourcing, vendors become collaborative partners with significant influence on firm performance. Thus, sourcing and partner selection are high-impact decisions, and the most successful partnerships are those in which the vendor successfully meets client demands and also identifies with the client’s culture for ease of integration and innovation.

In today’s highly interconnected, inter-dependent business world, business leaders must evaluate their ecosystem positioning more carefully to identify where strategic outsourcing can add more value than working within a silo.

  • Outline your company’s core competencies. Which core functions move the revenue or product needle?
  • Scrutinize your roadmap and milestones — goals, methods, timeline.
  • Which functions can be outsourced for faster and better results?
  • Evaluate, assess to determine the ongoing relevance of low-impact functions.
  • Establish procedures and expectations. What does success look like?

Sourcing success

As a competitive strategy, outsourcing can be attractive and offer quantifiable advantages, but it takes planning and careful execution to bring it to life.

As I mentioned, there is no one-size-fits-all secret to sourcing success and two-by-two matrices are not a silver bullet of decision making! It takes leadership introspection to determine the most efficient and effective implementation plan. Leverage it as a baseline and adapt according to your firm’s size, industry, and age.

Careful risk and change management can minimize ecosystem disruption – evaluate the current state of delivery, set goals for the new state and evaluate how effectively these services can be delivered through both scenarios.

To learn more on the topic, feel free to get in touch with me on social media.

The author would like to thank Khushboo Agarwal, Melissa Rapthap, and Tamara Berry for their contributions to this article.

[1] North Carolina State University, “A Brief History of Outsourcing, SCRC SME,” June 1, 2006, https://scm.ncsu.edu/scm-articles/article/a-brief-history-of-outsourcing.

[2] Outsourcing Insider, “The Best Outsourcing Success Stories Of All Time,” August 16, 2017, http://www.blog.infinit-o.com/outsourcing-success-stories-time.

[3] Anderson Group, “Acer: Transforming Business Models With Outsourcing,” Edgar Maurice Rollon, June 16, 2017, https://andersonbpoinc.com/acer-transforming-business-models-outsourcing.

[4] Porfulus, “The business strategy of Apple: A concise analysis,” Mathew Emmanuel Pineda, November 22, 2017, https://www.profolus.com/topics/business-strategy-of-apple-concise-analysis.

[5] Harvard Business Review, “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation,” Larry Huston and Nabil Sakkab, March 2006, https://hbr.org/2006/03/connect-and-develop-inside-procter-gambles-new-model-for-innovation.

[6] Codeable, “14 Multi-Million Companies Who Were Built Leveraging Outsourced And Remote Developers,” Matteo Duò, April 18, 2017, https://codeable.io/top-companies-outsourced-development.

[7] Boston Consulting Group, “Is It Time to Bring More of Your Marketing In-House?” Jody Visser, Alannah Sheerin, Dominic Field, July 31, 2018, https://www.bcg.com/publications/2018/time-to-bring-more-your-marketing-in-house.aspx.

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