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Excerpt from 2003 Special Advertising Section in BusinessWeek.

Sure, outsourcing can reduce costs. But can it also enable you to outmatch your rivals? Discover how smart companies are using outsourcing for competitive advantage.

By Frank Casale, Founder, The Outsourcing Institute

In today's business environment, just about every company is looking for ways to reduce costs. And organizations have long recognized that outsourcing can be an effective weapon in the cost-cutting arsenal. In fact, more than one-third of companies that outsource information technology do so for cost savings, according to IT Toolbox, a research firm.

But outsourcing is about more than shrinking budgets. Pursued strategically, outsourcing can deliver a broad range of advantages. Progressive companies are using outsourcing to:

1. Benefit from best practices
2. Focus on core competencies
3. Adapt to changing market conditions
4. Rethink and actually transform the business

In short, companies are applying outsourcing as a strategic mechanism for becoming more competitive in the marketplace.

PART OF THE PROCESS

What's appropriate for outsourcing? Anything that's not core to your business or related to your strategic direction. In general, functions that affect revenue generation, such as product development and direct customer contact, are core. Anything that's not core, though, is simply "context" - necessary for doing business, but not strategic.

In the past, outsourcing targeted clearly definable functions. In IT, for example, activities like help desk, security, and backup and recovery are ideal candidates for outsourcing. But forward-thinking companies have discovered effective ways of outsourcing entire functions. Such business process outsourcing (BPO) can include financial accounting, payroll and benefits management, and even some aspects of customer care.

The National Cancer Institute was a BPO pioneer 10 years ago when it tapped Science Applications International Corporation (SAIC) to manage its labs and research facilities, plus more than1,600 of its people, including doctors, scientists and researchers. "We have special knowledge and expertise in science and engineering that customers don't have, that we can provide through business process outsourcing," says Randy Walker, corporate executive vice president of commercial and international business for SAIC.

It's the same reason organizations turn to outsourcers like Penske Logistics, which provides supply chain services to help companies cut costs, reduce cycle times and improve service. "Companies that hire us find over time that our solutions help them use their supply chains to gain a competitive advantage, as well as realize significant cost savings - providing more value to their shareholders," points out Vincent Hartnett, president of Penske Logistics.

BEST PRACTICES MAKE PERFECT

In addition, business process and other kinds of outsourcing enable companies to take advantage of best practices. An oil and gas company, for example, might be expert in exploration and refining. But why shouldn't it outsource financial accounting, say, to a company that has invested in developing expertise in that function?

Large IT service providers such as IBM, HP and Unisys allow organizations to offload a portion of their IT infrastructure or even their entire data center. These providers invest in state-of-the-art hardware, software and security, and spread those costs across multiple customers. They can also attract and retain the best talent, and keep staff trained on the latest technology. By outsourcing to such providers, you can scale operations up or down as needed while avoiding risks associated with managing your own resources.

CUT TO THE CORE

Outsourcing is also acknowledged as an effective way to free a company from routine administrative tasks to focus on core competencies and strategic initiatives. In fact, companies are using outsourcing as much to sharpen focus as to cut costs, according to a recent survey by The Outsourcing Institute.

Sharpening focus was the challenge presented to John Wilder, executive vice president and CFO of Entergy Corp., a major energy company. As Wilder explains, his boss challenged him to take all noncore tasks and businesses and sell them, set up joint ventures, or outsource them. As part of that initiative, Entergy turned to SAIC, which assumed responsibility for a wide array of Entergy's IT functions. Those functions include data center operations, operations and support of distributed servers, desktop support, telecommunications and field services, plus application development, support and maintenance.

Since outsourcing, Entergy has enjoyed numerous additional benefits, including faster help-desk response and improved system uptime. And the company anticipates continued success. "We just extended the contract two more years, and the scope expanded to human resources and its retail networks, such as its call centers," SAIC's Walker reports.

FROM HERE TO TRANSFORMATION

Finally, smart companies are using outsourcing as a way to transform the business to succeed in new competitive environments. Companies are taking advantage of new outsourcing models and collaborative partnerships with outsourcers to drive strategic business change. In short, outsourcing is transitioning from a tactical means of controlling costs to a strategic mechanism for executing business strategy.

With this new approach, outsourcing is less a way of controlling change and more a means of managing uncertainty. By focusing on greater flexibility and shared risk, companies and their outsourcers can rapidly respond to changing market dynamics. It's no wonder, then, that the decision to outsource is increasingly being made in the boardroom. It also requires that stakeholders from across the organization be involved to ensure that outsourcing decisions are aligned with overall corporate strategy.

For outsourcing to deliver such transformational value, you and your outsourcer need to work together as partners. Both parties should benefit from the relationship, and both should work toward mutual goals. That often requires a close cultural fit between the two organizations.

© The McGraw-Hill Companies Inc. 2003.