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Study Finds Most Companies Fail to Think Strategically About Outsourcing

FOR RELEASE: May 3, 2005

CONTACT: Douglas MacDonald — A.T. Kearney
  (+1) 312-223-6892
  douglas.macdonald@atkearney.com
CONTACT: Jean McHale
  (+1) 800-888-6276, ext. 3143
  jmchale@ism.ws
Majority make outsourcing decisions based on cost-reduction, operational goals, not revenue growth ones

Chicago and Phoenix, May 3, 2005 — Companies continue to make outsourcing decisions that are driven by cost reduction and the desire to focus on their core operations, rather than pursue outsourcing in an effort to drive more revenue and seize competitive advantage.

That is the conclusion of a new research study conducted jointly by CAPS: Center for Strategic Supply Research and global management consulting firm A.T. Kearney. The study, "Outsourcing Strategically for Sustainable Competitive Advantage," surveyed 165 companies representing 24 industries.

More than 80 percent of companies in the study said reduced operating costs, reduced capital investment and the need to focus on their core business were the primary reasons for their outsourcing activities. Fewer than half of the companies cited reasons related to revenue growth such as increased speed to market (46 percent), improved quality (42 percent) and faster customer response time (40 percent).

The majority of companies with cost-related goals for outsourcing said they met or exceeded those goals. The average cost savings for these companies was 13 percent, but more than one-third reported savings greater than 15 percent. In contrast, the majority of companies with revenue-related goals for outsourcing reported falling short of those goals.

"It's clear there are two different approaches to outsourcing at work," said Bill Markham, a principal with A.T. Kearney and co-leader of the study. "Companies seeking quick savings focus their efforts on finding less expensive alternatives to operating their business today. Companies focused on tomorrow's business needs are seeking more significant long-term benefits and looking to leverage marketplace skills, technologies and scale to cut costs and increase revenue."

The study examined the breadth and depth of outsourcing across 14 different activities in research and development, marketing and sales, supply, manufacturing and distribution, and corporate support. Every company studied reported outsourcing at least one of the activities, with 50 percent saying they outsourced parts of more than eight activities.

The most common activities being outsourced were information technology (reported as outsourced by 36 percent of companies), distribution/fulfillment (32 percent), legal/regulatory affairs (30 percent) and manufacturing/operations (24 percent).

However, companies are not outsourcing at a very deep level according to the study. Eighty-six percent of study participants said they outsource less than 25 percent of activities overall. The average level of outsourcing penetration across the 14 activities was 15.8 percent. Even in information technology, the area with the deepest penetration by outsourcing, only 14 percent of respondents said they outsource more than 25 percent of their IT activity.

"Tactical outsourcing is a follow-the-leader approach, not a road to competitive advantage. Strategic outsourcing can create new ways to compete and possibly rewrite the rules for whole industries," said study co-leader Robert M. Monczka, Ph.D., C.P.M., director of strategic sourcing and supply chain strategy research at CAPS and research professor of supply chain management in the W. P. Carey School of Business at Arizona State University.

The report suggests companies define from the outset whether the strategic intent of their outsourcing efforts is cost reduction or revenue generation. It also recommends the following steps to give companies an edge in achieving their outsourcing goals:

  • Anticipate shifts in the future business environment such as political and social backlash, changing demographics in emerging economies and dwindling natural resource supplies, and consider the effect these shifts would have on future outsourcing activities
  • Build tomorrow's corporation by seeking skills, technologies and scale from the marketplace rather than assuming that these capabilities must be developed internally
  • Address the execution issues inherent in any outsourcing activity by clearly defining roles and responsibilities across the corporate functions involved.

A copy of the report can be downloaded from www.atkearney.com or www.capsresearch.org.

A.T. Kearney
A.T. Kearney (www.atkearney.com) is one of the world's largest management consulting firms. With a global presence that includes offices in 56 business centers in 36 countries, spanning major and emerging markets, A.T. Kearney provides strategic, operational, organizational and technology consulting and executive search services to the world's leading companies. A.T. Kearney is the high-value management consulting subsidiary of global services leader EDS.

CAPS: Center for Strategic Supply Research
CAPS: Center for Strategic Supply Research (www.capsresearch.org) is a non-profit organization affiliated with the Institute for Supply Management (ISM) (www.ism.ws) and the W. P. Carey School of Business at Arizona State University. Its mission is to help organizations achieve competitive advantage by providing them with leading-edge research and benchmarking information to support the evolution of strategic purchasing and supply management.


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