Outsourcing

Outsourcing is the act of moving some of a firm's internal activities and

decision responsibility to outside providers. The terms of the agreement are established in a

contract. Outsourcing goes beyond the more

common purchasing and consulting contracts

because not only are the activities

transferred, but also resources that make the

activities occur, including people, facilities,

equipment, technology, and other assets, are

transferred. The responsibilities for making

decisions over certain elements of the activities

are transferred, as well. Taking complete

responsibility for this is a specialty of contract

manufacturers such as Flextronics and

Solectron. In the electronics industry, for example,

11 percent of manufacturing is performed

by such contract manufacturers,

many of whom manage the full supply chain,

even including distribution and repair.3

The reasons why a company decides

to outsource can vary greatly. Exhibit 9.6

lists 20 examples of reasons to outsource

and the accompanying benefits. Outsourcing

allows a firm to focus on activities that

represent its core competencies. Thus, the

company can create a competitive advantage

while reducing cost. An entire function

may be outsourced, or some elements of an

activity may be outsourced, with the rest

kept in-house. For example, some of the elements

of information technology may be

strategic, some may be critical, and some may be performed less expensively by a third

party. Identifying a function as a potential outsourcing target, and then breaking that function

into its components, allows decision makers to determine which activities are strategic

or critical and should remain in-house