Why Outsourcing Is In

Earlier this year, IBM entered into a $5 billion manufacturing outsourcing arrangement with the Sanmina-SCI Corporation, an electronics contract manufacturer. Straightforward financial reasons justify the outsourcing — but, more important, the agreement supports overall business strategy at both companies. The deal also offers an archetype of a broader trend: strategic operations outsourcing.
In the past, outsourcing focused on tactical, nonessential activities such as payroll processing or manned security stations. But the focus is shifting. Strategic operations outsourcing encompasses core activities — such as manufacturing or logistics — that could substantially affect a business if not performed well. The best companies pursue it through a critical reevaluation of their positions along industry value chains, aiming to improve financials in mature businesses. When multiple companies in or around an industry come to the same strategic conclusion, a reinforcing cycle of strategic outsourcing can initiate a fundamental restructuring of entire industries. Understanding the motivations that drive strategic outsourcing and the appropriate way to apply it positions your company to drive such restructuring in the industry, rather than merely react to it.
Why do companies outsource? Over the last decade, the reasons have shifted as strategic needs have evolved. Think of the motivations as six overlapping waves that reflect emerging strategic priorities:
Factor cost advantage
• Superior competency
• Asset transfer
• Utilization improvement
• Economy of scale
• Business risk mitigation