Outsourcing: A New Management Tool or Just a Fad?

Outsourcing has become a frequently, and emotionally, debated topic. Those in favor are enthusiastic and want to apply it to a variety of management tasks. Among those who oppose outsourcing are some who are reluctant to entrust operations to an external organization; others distrust it because they are aware of the damage it can cause: loss of control—quality and delivery—and a loss of skilled teams within the company that can aggravate the situation in a crisis. This paper defines outsourcing and its mechanisms, looks at its historical development and considers the implications for and its impact on information services.

What Is Outsourcing?

Outsourcing is a complex procedure. It means finding new suppliers and new ways to secure delivery of goods and services; relying on the knowledge, experience and creativity of suppliers not used previously; and, importantly, employing an outside agency to manage a function formerly carried out within the company. To a certain extent, outsourcing can be defined as an extension of a company's business to a different entrepreneurial entity with its own management.

Historical Development Leading to Outsourcing

The Industrial Revolution of the 19th century brought about the evolution of powerful companies. Success implied control inside the company and dominance within an industry. Life centered around the workplace and for many years the culture of a company was tied up with the regional culture of the society.

The established attitude changed in the 1950s: "bigger is better" was the new motto. The aim was to set up gigantic markets dominated and controlled by corporate management. The advantage of economies of scale was highly valued. Companies became diversified, while power and responsibility were concentrated. The rationale was that profits could be protected by broadening the corporate base; if one market declined, another market would expand. Wise diversification would average out economical troughs, elongate and amplify the good business periods and in doing so guarantee greater stability. This expansion necessitated additional layers of management.

In the 70s a new era of global competition arose. Diversified companies had difficulties being best-in-the-world in all their different businesses. The layers of management added during the diversification period did not lead to the expected increase in the company's sales figures; instead the additional layers added overhead expenses. The advantages of economies of scale had been counterbalanced by a paralysis of movement resulting from bureaucratic management structures that slowed down business and turned out to be an impediment to creativity and flexibility.

What was the answer to this development? Specialized companies leveraged more talent, more time and more resources to more specific goals. More than just saving overhead costs they brought focus to the corporate mission. Consequently large companies had to embrace a different strategy, i.e., focusing on their core businesses. They had to concentrate on activities closely related to their main business. This meant a change in corporate philosophy.

Concentration on the core business emerged as the driving force. The company had to be best in the world in its core activities, recognized by its outstanding expertise in the business. This philosophy led to defining the critical processes or services in the value chain and the possible candidates for outsourcing.

Implications of the Outsourcing Process on Organizations

When a company embarks on outsourcing, it must do so in conjunction with a re-engineering of its business processes, not as a simple cost-reduction strategy. In fact, managers who look to outsourcing for cost reduction alone will likely be disappointed. Outsourcing is merely a "make or buy" decision: can the company manufacture a product or develop a service that can beat the competition in that area? In other words, who will bear the responsibility for best-in-the-world status for the product or service—the company or an outsourcing partner?

Among the considerations in evaluating the merit of out-sourcing relationships for any given product or service is who has the greater potential of improving quality, achieving higher performance, meeting more demanding environmental concerns, maximizing resources and reducing waste?

Successful outsourcing partnerships are very different from traditional customer-supplier relationships. In an outsourcing relationship the partners must share identical objectives. Experience shows that establishing such partnerships can take a year or more and involves considerable management effort on both sides to ensure that the relationship endures.

Impact of Outsourcing on Information Services

Rapid technological developments result in a turbulent environment, especially for Information Services (IS). The introduction of outsourcing often creates more flexibility for certain IS functions, but the key to its successful application lies in proactive behavior by IS managers.

IS managers need to focus on the central strategy of their departments, concentrating on the key functions that contribute most to achieving their goals. Among the goals of an IS department might well be gaining technological advantages, benefiting from specialized expertise, making it more visible to the customers, increasing ability to respond flexibly to customers' need, using staff in the most appropriate way and focusing on the multifaceted role of information professionals.

Any process that does not contribute to the key strategy is fair game for outsourcing. Functions based upon traditional skills, highly standardized or routine functions, could be considered for outsourcing. Such a decision demands an IS manager who is searching for strategic advantage for IS, as well as a supplier capable of providing the needed services to make sure that real gains are obtained.

Assuming all those prerequisites are met, several caveats must be mentioned. Certainly suppliers are expected to have expertise in their businesses. Suppliers, nonetheless, must recognize the customized character of outsourced services. To avoid the difficulties often associated with outsourcing, companies are forced to maintain control of the suppliers and the quality of the services they are delivering. Critical skills, therefore, must still be maintained in-house. Keeping in mind the continued interdependence of the company and its suppliers and to avoid misunderstanding in the delivery of services, communication between the entities has to be valued highly. Last but not least, the IS staff has to be prepared for it.

Outsourcing might address some downsizing measures. Either the staff will be reduced or other positions will be filled. In any case, when such a decision is about to be made, the staff must be involved. Unhappy people cannot function well, especially if there are concerns about job security. Early involvement of staff often helps to avoid unwarranted emotional reactions to changes that may take place.

Finally, I would like to mention that pricing will never be simple. It goes without saying that in most cases there is the expectation that outsourcing will save money. This certainly deserves adequate consideration.

When considering outsourcing as a business opportunity or option, one must consider both sides of the issue. On one side, outsourcing implies risks and should never be applied just to beat the costs. On the other side, it can help corporate efforts to restructure management and give rise to greater competitiveness and flexibility within the company. Outsourcing is more than just a fad; it should be used as a strategic tool in the hands of managers responding to the global markets.

Biographical Information

Irmgard R. Fischli is head of Library and Scientific Information Services at Sandoz Pharma Ltd., in Basel, Switzerland, and a vice chairman of the Information for Industry Committee of the International Federation for Information and Documentation (FIDIII).