Top Ten Reasons Companies Outsource

For outsourcing to be successful, management must have a clear set of goals in mind and a clear sense of the benefits and risks involved. Studies conducted since 1991 by the Outsourcing Institute point to the following reasons for outsourcing:

1.) Improve company focus

Outsourcing sets up a framework for an outside expert to assume responsibility for operational details, allowing management to focus on the more important business issues associated with meeting customer needs.

2.) Obtain access to world-class capabilities

Because of the nature of their specialization and their own core activities, outsourcing providers bring extensive world-class capabilities, including leading-edge technology, to help companies satisfy the needs of their customers and become more productive.

3.) Accelerate reengineering benefits

An organization can realize the anticipated benefits of reengineering quickly if it contracts with an outside organization - which is already reengineered to world-class standards - to take over the process.

4.) Share risks

Outsourcing enables management to turn over to its suppliers certain classes of risks - such as demand variability and capital investments. Unlike the buyer, the outsourcing provider can spread these risks over multiple clients.

5.) Free resources for other purposes

Outsourcing permits and organization to redirect its resources from non-core activities to ones that have the greatest impact on the business.

6.) Make capital available

Contracting out certain functions as operational expenses can reduce the competition for capital since the outsourcing company provides the capital investment as part of its overhead.

7.) Obtain a cash infusion

Outsourcing sometimes involves the sale of assets to the provider, which the customer realizes typically as some combination of cash and loan.

8.) Reduce and control operating costs

Access to the outside provider's lower cost structure, which may be the result of greater economies of scale, is one of the most compelling tactical reasons for outsourcing.

9.) Obtain resources not available internally

Outsourcing is often a viable option for companies experiencing rapid growth, expansion into a new geography, or spin-offs from the parent company - where normally required resources are not readily available.

10.) Function difficult to manage or out of control

Control problems are cited as a reason for outsourcing. However, there may be underlying causes - such as unclear management expectations or difficulty in measuring performance - for which outsourcing alone is not the solution. Management in this case should work with outsourcing providers to define requirements.