Phil Thompson, head of BPIF Business, considers the options of outsourcing and internal diversification.
In such a competitive and increasingly globalised economy positioning a business to not only defend its position but also prosper requires challenging, but not impossible, strategic focus. The quest is on to provide ever more services, but does that mean diversifying and growing in-house or outsourcing?
Outsourcing is not a new concept - it has been part of business for years. The difference now is that the improvements with IT infrastructure and communication systems has meant that information transfer both within the organisation and externally is significantly faster and more reliable. The decision now is how much to outsource, and can range from seeking to create sustainable competitive advantage all the way through to a one off cost cutting exercise aimed at removing a non-core competence.
On the other hand, what about expanding your offering via a strategic and flexible diversification programme?
There are plenty of examples of companies that have tried unsuccessfully to outsource, and it’s used as a one off cost cutting exercise, a remarkably small percentage of these generate the expected savings. The same with diversification. So what can be done to make sure that the business is able to make the most out of each of them.
First, identify what your competencies are. There are a number of analysis tools and techniques available including Cost Rate Reviews to assess the financial make up of the production, and performance measurement tools like Overall Equipment Effectiveness (OEE) of machinery that can then be compared against industry best practice. If it can be measured it can be improved, by vigorous application of this, companies will be able to identify what areas will need to be improved or removed.
This can then be developed further by breaking down areas of the business into smaller constituent parts. By generating a map of the business, the management team will then be able to perform sophisticated analysis - for example transactional cost analysis. In terms of diversification, this will provide a clear picture of the cost of developing a product for a particular customer and the risks that it involves.
By removing non-core competencies management time is freed up to let the team focus on specific areas of expertise and as a result improve them. Care should be taken with this as it can produce an internal facing business. With the industry evolving at such a fast pace, business will always need to be aware of the changes going on externally.
With management freed up and information transfer mapped clearly through the whole production process, companies will be able to identify the areas of possible growth. Removing the number of steps taken in a business not only eliminates waste but it will also enable management to then measure individual processes within a business. By comparing measured performance against expected performance future investment strategy could be beefed up, alternatively underperformance can be managed.
Feedback and timeframes
Success of any type of improvement project will always be determined by how well the strategy is communicated and by setting clear time frames. Be it outsourcing or diversification, feedback loops for example ‘plan do check act’ need to be integrated in the process as this will make sure that performance can be assessed with problem areas identified early and rectified quickly.
Key to this will be process modulation. Breaking down the business into smaller better defined parts will be core to understanding the relationships between departments and also segment areas of the business that will be affected. Freeing up resource and capacity will enable increased diversification and simplification of lines of communication will support outsourcing.
Businesses will increasingly have to look at ways of sustaining competitive advantage. This can be by increasing diversification or by outsourcing, but whatever the strategy, by radically streamlining processes, distinguishing the various departments and their relationships within the business, management will be able to compare the business to the best around.