How to Think Strategically About Outsourcing

Outsourcing isn't just a way to unload noncore costs. The real play with outsourcing is to use it as a tool to drive strategic value, transform businesses, and even fundamentally change industry dynamics. The key: Forget what you think you know about outsourcing.

Outsourcing used to be viewed as little more than a ho-hum tactic for reducing the costs of back-room functions such as payroll and IT. It didn't have much pizzazz and was never confused with a breakthrough management idea. But things started to change in the early '90s, as companies began outsourcing more strategically significant functions such as manufacturing and logistics, and even product design and other innovation-related activities. All of a sudden, outsourcing had morphed into a critical management tool.

Then came the inevitable backlash. Outsourcing, so simple in theory, was turning out to be pretty tough to execute well. It wasn't living up to its promise—companies were outsourcing the wrong things for the wrong reasons and going about it the wrong way. Indeed, a recent study by Cap Gemini Ernst & Young shows that only 54 percent of companies are satisfied with outsourcing, down from more than 80 percent a decade ago.

Even so, now's not the time to give outsourcing the bum's rush. Its status as a strategic management tool remains secure, even if its evolution to this point has been far from smooth. But to get real strategic value from your third-party relationships, you often have to throw out much of what you thought you knew—for example, that shibboleth about always maintaining control of customer touchpoints. Some of the biggest success stories out there are turning this old saw on its head. UPS Supply Chain Solutions (Atlanta) handles everything from order taking to delivery to customer service for its clients.

Outsourcing can free managers to focus on more strategic, higher-value activities, but only if they discipline themselves to use the freed-up time appropriately. Ed Frey, a vice president at Booz Allen Hamilton, says he's seen clients take the outsourcing approach and then fail to reap its benefits because they micromanaged their outsourcing partners. To get the most out of outsourcing, companies need to think "longer-term, about moves with enterprise-level outcomes like improved ROI or greater shareholder returns," explains Jane Linder, senior research fellow and associate director of Accenture's Institute for Strategic Change in Cambridge, Massachusetts. "Usually this means outsourcing with a focus on external results—like repositioning yourself in the marketplace or changing your value proposition to customers in some key way, versus using outsourcing to save 5 percent on the cost of an internal administrative process."

The real play with outsourcing, in other words, is to use it as a tool to drive strategic value, transform businesses, and even fundamentally change industry dynamics.