A brief history on outsourcing

I have written the following piece of text as a kind of introduction for an article, but the piece would become too large with it so I had to skip it. For those who are new to the world of outsourcing it can however provide a bit of theoretical background info on the subject.

Outsourcing started in the 1970s-1980s when companies used to produce goods and services in the same country as they were consumed were confronted with imported goods of higher quality and lower costs. These market pressures forced companies to rethink their own backward and forward integration-based business model and worked as a catalyst to differentiate between strategic and non-strategic activities. The concept of looking at a company as a collection of value added activities was described by Quinn et al in 1990 (Quinn J. B., Doorley T. L., Paquette P.C., Beyond Products: Service Based Strategy. Harvard Business Review, March/April 1990). Executives world-wide capitalised on their ideas and analysed their value chains to find those parts that gave them an edge over the competitors. These strategic or core activities where kept in-house while non-core activities where reduced, leveraged in shared service centres, outsourced, or eliminated.

The initial focus of outsourcing was on manufacturing products, but this shifted in the early 90’s to include services when globalization and communication technology was pushed further. Where the traditional purchase department is perfectly capable of dealing with the first type of agreements, it is however questionable whether it can cope equally well with services which often have far more complex attributes.

In the service economy we live in today knowledge is the production factor driving the capability to meet various consumer demands by becoming ever more flexible and agile as a company. In the words of Peter Drucker : “Whatever advantages bigness by itself used to confer on a business have largely been cancelled by the universal availability of management and information” (Drucker, P., The new society of organisations, Harvard Business Review, September/October 1992).

The technology allowing for almost instant availability of information to anybody on the globe has thus become an important driver for buying instead of making in-house. The result is that value chains are broken up in smaller pieces and companies becoming part of a network, each focussing in its core competencies . Or as Gottfredson et al state it: “Its no longer a company's ownership of capabilities that matters but rather its ability to control and make the most of critical capabilities, whether of not they reside on the company's balance sheet” (Gottfredson M., Puryear R, Philips S., Strategic Sourcing, from Periphery to the Core, Harvard Business Review, February 2005).

This makes the advances in information technology and knowledge as the key asset of a company a two edged sword: it can greatly enhance the value of the company, but failing to attain and retain the expertise to make the right make/buy decision and capability to govern complex service chains is likely to result in destroying at least part of the potential added value of outsourcing.

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