Exploring outsourcing

Every plant engineer has to deal with outsourcing sooner or later. By some estimates, more than 90% of businesses currently outsource one or more activities.

On the one hand, there is the so-called virtual corporation, in which nearly all functions and resources are outsourced. On the other, there is the vertically integrated corporation, in which nearly all functions are performed by company employees in company-owned facilities. Outsourcing is kept to an absolute minimum.

Which strategy is better? It depends on whom you talk to. But the trend is clearly toward increased outsourcing, even if the virtual corporation is not the goal.

The extent to which services are outsourced in a company is as much a matter of philosophy as anything else. Although financial benefits are most often cited as the reason for outsourcing (35% according to one study), there are many other reasons. In fact, outsourcing can be more expensive than keeping the work internal and still be a good choice. In any case, don’t fool yourself. Be sure you know the real reasons why you are outsourcing or not.

What is outsourcing?

Ask the typical plant engineer for a definition of outsourcing and the answer is likely to be along the lines of “anything we contract out” or “any service we buy.” And that definition is not inaccurate.

But today, outsourcing is coming to mean more specifically long-term contracts for activities that could be performed inhouse. It often implies a level of partnering with the service provider. In its most developed forms, outsourcing involves a basic redefinition of the corporation around core competencies and outside relationships.

Whatever the definition, the promise and the problems are nearly universal.

Outsourcing today

Contracting for specialized services has always been a factor in the plant engineering function. Over the past few decades, contract maintenance (contracting for most or all maintenance services in the plant) gained some favor in certain situations. But that trend seemed to accelerate during the late 1980s and 1990s as companies went on outsourcing binges to reduce employee headcounts and streamline their organizations to core competencies.

Michael F. Corbett & Associates estimates that in 1996 U.S. firms spent some $100 billion on outsourced services. Of that, about 15% went for facility management and operations. By 2001, the firm estimates, outsourcing expenditures will grow to $318 billion.

Edwin K. Jones, a plant engineering and maintenance consultant, estimates that world-class plants typically outsource about 30% of their maintenance work (on a cost basis).

Clearly, creating and managing outsourcing relationships will be an increasingly large part of the plant engineer’s required skills set.

Outsourcing is a serious and complex issue, and it has given birth to a plethora of information, as well as a number of businesses devoted to improving outsourcing methods and management. This article is intended as an aid to understanding and poses many of the questions that plant engineers should explore.

Why outsource?

There are a variety of reasons why a company may choose to outsource various activities or functions. Obviously, the more of these benefits that may be realized, the stronger the case for outsourcing some of your activities.

– Sharpen management focus. Management can focus time and attention on core business; contractor assumes responsibility for day-to-day operations and administration.

– Increase profitability. By outsourcing to contractors who can provide higher productivity and efficiency in their areas of expertise, profitability can be improved.

– Improve business processes. Contractors that specialize in a particular process or technology can provide higher productivity for those areas of specialization.

– Gain access to world-class capabilities. Through partnering with organizations with world-class capabilities outsourcing can bring operational excellence or product quality that was beyond the capabilities of the contracting firm.

– Accelerate reengineering benefits. Companies that are reengineering their business processes can realize immediate benefits by outsourcing these activities to other organizations that have already attained world-class performance.

– Enhance service levels. Contractors may be more responsive to needs than internal service operations are.

– Share risks.

– Reallocate resources. Outsourcing permits redirection of resources to those providing the greatest return.

– Gain scalability. Outsourcing can provide flexibility in expanding or reducing work force, facilities, or capacity.

– Exploit advance technologies. Contractors may provide access to technology that is otherwise unavailable or unaffordable.

– Reduce or control operating costs. Various economies may allow contractors to provide the same or an improved level of productivity at lower cost. An outside provider’s lower cost structure is one of the most compelling short-term benefits of outsourcing.

– Free up capital funds. Outsourcing may allow capital to be shifted from noncore activities to core jobs.

– Gain control of problem activities or functions.

– Avoid large personnel commitments. Outsourcing may provide considerable flexibility in establishing necessary manpower levels.

– Turn fixed cost into variable cost.

– Avoid obsolescence.

Should we outsource?

Like other managers, plant engineers need to make recommendations and decisions regarding outsourcing. Many companies are finding that deciding when and how to outsource are proving to be among their most difficult decisions. Just as the benefits may be enormous, the failure of an outsourcing agreement can be devastating to the organization.

Here are some of the questions that need to be answered.

– Are our resources being effectively utilized now? If not, how will outsourcing benefit us?

– Are we capable of supporting new technologies with our current resources?

– Is outsourcing really the quickest, most effective way to handle our issues?

– Are we able to attract and retain needed talent and expertise internally?

– Can we adequately respond to rapidly changing competitive situations, production volumes, and technical advances?

– Will outsourcing raise our capabilities to a higher level?

– What are the risks of a wrong decision or a delayed decision on outsourcing?

– If employment will be reduced as a result of outsourcing, what is our exposure to litigation?

– What options are open to employees affected by the outsourcing?

– Does outsourcing offer the most effective path to world-class performance?

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