How business trends drive shared services and outsourcing, part 1?

Most of the stories about outsourcing are these days about cost cost cost. This provides in my opinion a too one sides view on the benefits that shared services and outsourcing can provide to a companies’ value chain. For this reason I made the following overview of generic business trends and how various sourcing options can help to address them.

Competition. Especially during the current economic crisis is competition among companies fiercer than ever. But even in two years time when the current situation is likely to be all but forgotten, competition will be something that remains an integral part of our economic system. Some of the symptoms of competition are:

  • Demanding customers and multiple bidders to fulfil a demand
  • Decreasing pricing power and profit margin
  • Continuing pressure to increase productivity

Shared services can help primary in the area of increasing productivity and thus keeping the profit margin at a healthy level. Shared services are typically about producing more output for a given input (or same output for less input). Outsourcing can also help to reduce the input for a given output, but can potentially also provide access to new knowledge and markets, thus enabling the company to compete on more than price alone.

Globalization. After the fall of the Berlin Wall, countries such as India, China and Russia began to open up their economies to the world. This enhanced horizontal collaboration across the globe even further than it did before. (Thomas L. Friedman (The World is Flat) called this the third en more important ‘flattener’). Globalisation results among others in:

  • Lower trade barriers and easier access to labour pools in low-cost countries
  • Faster deployment of resources and technology for worldwide facilities
  • More options for sourcing outside own region and at a lower risk

Both through shared services and outsourcing access can be gained to the labour and resource pools of countries that were previously closed to foreign investments (country as source of supply). At the same time opens globalisation access to new consumer markets (globalisation as source of demand). To function as a market for a company it is however required in certain cases to establish a local supply entity. In for example Malaysia is it due to the tax rules almost impossible to sell a car without assembling them locally (like 200%+ tax to import an European car). I would however not call this ‘outsourcing’ or ‘shared services’, but a form of sourcing driven by government regulations. One of the effects of globalisation on governments is reducing the amount of regulations to make it easier for goods, services, money and people to move from country to country.

Rapid pace of innovation and changes. Only a century ago flying was considered something very special and dangerous while today it is seen as special like taking a bus. Especially innovations in communication technology has enabled ever faster development and production cycles. Some of the symptoms of the increased pace of innovation are:

  • Increasing cost of R&D
  • More product variety and a product is sooner obsolete
  • Faster response to changing market

The increased cost of R&D can be mitigated partly by consolidating R&D activities into a shared service centre as it allows to reduce overhead and other indirect costs. It can also facilitate cross-functional innovations and cost can further be reduced by offshoring part of the centre to a country with relative high education levels, low wages and young population (adequate supply). Outsourcing and joint ventures can provide similar benefits, but have the additional benefit of getting access to new knowledge, skills, intellectual property and markets.

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