Strategic outsourcing

From CEOpedia | Management online

The primary distinguishing features of this type of outsourcing are associated with a company approach to objectives and benefits of outsourcing. Main assumptions of the implementation of the strategic outsourcing are:

  • ability to focus management activities and resources on core business,
  • extend range of outsourced processes compared with the tactical outsourcing,
  • giving up involvement in the supervision of outsourced activities by the company's management,
  • limiting the number of service providers to those offering comprehensive services and providing the highest quality of service,
  • partner relationship with service providers, based on mutual benefits.

From the point of view of the strategic nature of this outsourcing above mentioned benefits are seen as essential. Those benefits are subject, however, to adopted conditions of cooperation with the service provider.

In spite of the increased (in comparison with the tactical outsourcing) requirements for service provider, the basic premise of strategic outsourcing is limiting the amount of units, with which the customer undertakes cooperation. This is one of the distinguishing features of the strategic outsourcing. In tactical outsourcing main emphasis was on reducing the risk of non-performance or improper performance of the outsourced tasks, and thus to make cooperation with more units providing services to the same extent. Services provided by specialized units often determine company's survival on the market (for example: logistics services, information technology services). Different expectations of specialized service providers make relationship known as "by-client" turn out to be insufficient in strategic outsourcing. Involvement of service providers in improvement of service processes together with the company is associated with the provision of partnerships based on the equal status of cooperating units and on the mutual benefits [D. Brown, J. Wilson, 2005, p. 24].

Examples of Strategic outsourcing

  • Technology Outsourcing: A company may choose to outsource certain aspects of its technology, such as software development, system maintenance, and other IT services. This can help to reduce costs, increase efficiency, and improve the quality of a company’s technology services.
  • Manufacturing Outsourcing: Companies may choose to outsource certain aspects of their manufacturing process to other companies in order to reduce costs and improve efficiency. This can help to improve the quality of the products and reduce the time to market.
  • Business Process Outsourcing: Business process outsourcing (BPO) is when a company contracts out certain processes such as customer service, accounting, and human resources to other companies. This can help to reduce costs and improve efficiency.
  • Supply Chain Outsourcing: Companies may choose to outsource certain aspects of their supply chain, such as procurement and logistics. This can help to reduce costs and improve the efficiency of their supply chain operations.
  • Knowledge Process Outsourcing: Knowledge process outsourcing (KPO) is when a company contracts out certain knowledge based processes such as research and analytics to other companies. This can help to reduce costs and improve the efficiency of their operations.

Advantages of Strategic outsourcing

One of the primary advantages of strategic outsourcing is that it allows companies to concentrate on their core competencies and focus on their primary goals. This can be beneficial as it can lead to increased efficiencies, greater specialization, and cost savings. The following are some of the other advantages of strategic outsourcing:

  • Cost savings: Strategic outsourcing can help to reduce labor costs and other expenses associated with production, as well as help to streamline processes and increase efficiency.
  • Greater flexibility: Companies can outsource specific tasks or projects that require additional skills or resources, allowing them to remain flexible and have access to a wide range of capabilities.
  • Access to specialized services: Companies can benefit from access to specialized services or expertise that would otherwise be unavailable.
  • Improved customer service: Strategic outsourcing can help to improve customer service by increasing the speed and quality of service.
  • Risk management: Companies can reduce the risk of failure or disruption by outsourcing certain activities.
  • Increased innovation: Companies can benefit from access to new technologies and processes that may be available through outsourcing.

Limitations of Strategic outsourcing

The primary limitations of strategic outsourcing include:

  • Increased complexity of the outsourcing process due to the need of defining the objectives and desired outcomes.
  • Risk of vendor lock-in and potential lack of flexibility in the vendors’ approach.
  • Difficulty in finding the right vendor partner with the necessary skills and experience to meet the requirements and objectives of the project.
  • Increased cost of outsourcing due to the complexity of the process and the need for higher levels of expertise.
  • Potential lack of control over the quality of the services provided by the vendor.
  • Difficulty in maintaining the desired level of performance over the long term.
  • Potential difficulties in dealing with vendor disputes and contract violations.

Other approaches related to Strategic outsourcing

One approach related to strategic outsourcing is the establishment of long-term relationships with external service providers. This allows for greater control over the quality of the services and a more predictable cost structure over the life of the contract. Other approaches related to strategic outsourcing include:

  • Leveraging outsourcing for competitive advantage: This approach seeks to identify opportunities to outsource processes or services that can enable the company to gain competitive advantage in its markets.
  • Improving operational efficiency: This approach focuses on reducing operational costs by outsourcing non-core processes or services to external service providers.
  • Innovation and business agility: This approach seeks to use outsourced services to help the company innovate and become more responsive to changing customer needs.

In summary, strategic outsourcing is a company approach to outsourcing that focuses on long-term relationships with external service providers, leveraging outsourcing to gain competitive advantage, improving operational efficiency and innovation, and enabling business agility.

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