Book Review: The Outsourcing Revolution

The Outsourcing Revolution by Michael F. Corbett (Dearborn Publishing, 2004) is a must read for economic developers trying to understand outsourcing and what it means to businesses in your communtiy. Also, read my related article on the subject earlier this week here.

The first myth about outsourcing is that it’s new. Actually, the term dates to the 1970s, when manufacturing companies seeking efficiency began hiring outside firms to manage less-than-essential processes. Outsourcing worked.

Today many manufacturers outsource 70% to 80% of the content of their finished products. Large companies commonly outsource half of their IT operations. Organizations outsource their entire back office operations, including human resources, payroll and accounting. Companies may soon be more outsourced than “in-sourced,” signifying a fundamental reorganizatio that will affect employees, managers, customers and executives. Consumer choices will increase, product costs will drop and workers’ roles will change.

Today, outsourcing is at a crossroads. Companies no longer outsource only vertical busines units. The new cross-functional approach follows a process horizontally throughout an organization — so-called business process outsourcing, or BPO. Now more companies are seeking strategic advantages based on outsource alliances. While the relentless push to operate more effi ciently remains the driving force behind outsourcing, it has also become a competitive, strategic marketplace tool, allowing companies to improve response times and develop new products faster than ever. Once focused just on reducing expenses, today’s outsourcing initiatives are likely to help companies do things they previously could not do.

Once technology made it feasible to outsource operations abroad, media attention made outsourcing part of the public lexicon. Intense debate ensued as jobs left domestic boundaries and headed overseas. Opponents often overlook outsourcing’s benefits, such as allowing consumers to buy better products for less money. And, tens of millions of stockholders of major companies benefited as the value of outsourcing companies markedly increased.

More than 90% of companies say that outsourcing is an important part of their growth strategy. Management expert Peter Drucker calls outsourcing America’s fastest-growing industry, involving such companies as ARAMARK Corporation, Electronic Data Systems Corporation (EDS), General Electric (GE), International Business Machines Corporation (IBM), United Parcel Service of America, Inc. (UPS), Xerox and others. Many U.S. fi rms provide outsourcing services. Outsourcing is one of the very few business techniques that can transform a firm fundamentally and increase its competitiveness exponentially.

According to survey results from the 2004 Outsourcing World Summit, a trade show, only 3% of companies outsource to achieve innovation. An equal percentage outsources to conserve capital for other investments or to improve product quality. About 4% believe outsourcing will increase revenues. About 9% outsource to obtain skills they can’t find or can’t afford. Some 12% of firms outsource to obtain the benefits of a variable cost structure. Another 17% say outsourcing helps them improve their organization’s focus. And fully 49%, or almost half, say cost reduction is the primary benefit. How significant are the savings? In 1988, General Motors Corporation had 3,290 employees in various departments handling payable s, payroll and accounts receivable. GM reengineered its accounting processes without outsourcing and reduced the number of people doing that work to 560, slashing costs in this area 60%. When it outsourced those activities in 1998 it reduced costs another 20%.

Want to learn more, order the book at Amazon.com here.