Top Management Story

Writen by Kevin Dwyer

According to Kenny Rogers, we have to "know when to hold them, know when to fold them and know when to run". The gambling refrain also applies to the outsourcing of an organisation's activities. We have to know what activities we need to do ourselves, what we need to partner others to do and what we need to procure to be done.

Many organisations, however, make errors in what they outsource whilst other organisations make errors in that they outsource nothing. The result of the former error is usually a loss of control of the activities of the organisation which build value. The result of the latter error is higher operating and or financial costs than is necessary.

To determine what activities to outsource requires an understanding of how activities add value to the "business" which the organisation is in. Knowing what business an organisation is in is a significant piece of work for many organisations.

For example, is a soft drink company in the bottling business, the soft drink distribution business or in the beverage marketing business? Dependent on the answer, what adds value to the business will be very different.

Determining what "business" organisations are in and what adds value is, by design, somewhat circular. The "business" an organisation is in is where they add most value to their stakeholders in the future. It is further complicated by the fact that the emerging competitive environment may well change what is considered to be value adding from today.

After clearly determining what business we are in, then we can turn our thoughts to what we can or indeed, should, outsource. A starting point for determining what makes sense to outsource is to map the processes of our business.

An example I know well is the sampling, testing and analysis of used oil in truck fleets. By analysing the used oil at set intervals, scientists can not only determine the condition of the oil but also the condition of the engine or gearbox of some very expensive equipment.

Not only is the equipment itself very expensive, but so is the downtime impact of unscheduled maintenance. Being able to predict what the condition of the equipment is going to be and to be able to schedule maintenance in a large trucking fleet saves millions of dollars.

The high level process flow for the activities to sample and analyse used oil is as follows.

Plastic bottles, labels and sampling tubes are manufactured and sent to the oil company upon placement and processing of an order. Bottles' labels and sampling tubes are sent to the trucking company. Used oil is collected in bottles and a label with pertinent details is put on the bottle. The bottle is sent to a laboratory.

The laboratory tests the oil and reports the concentration of a range of metals in the used oil. A highly experienced mechanical engineer with a good knowledge of metallurgy analyses the results and predicts the wear of components of the machine from which the used oil was taken. The results are sent to the trucking company.

Value is added in each step. In all bar the evaluation by the experienced mechanical engineer, in Europe the added value is about low cost and quality parameters such as timeliness, quantity and accuracy.

In Europe, hundreds of companies can manufacture the bottles and labels. Hundreds of companies can courier the empty and filled bottles. Tens of companies can test the oil. Experienced mechanical engineers who can evaluate the results of the tests however, are hard to find and if they know their worth are very expensive.

So in Europe, the greatest value is added by the process involving a scarce resource, an experienced mechanical engineer, evaluating the test results. This is the process that organisations wishing to win in this market must own.

The testing of the used oil is not difficult but there are only a handful of companies who can handle the scale of work that a major oil company would create. This is the process that the same companies should partner, seeking synergy and some exclusive services from an outside supplier.

The same companies should seek to procure couriers, bottles and labels to a standard of performance at the lowest cost.

In other geographic regions with different supply capability, the result is different.

To understand what to own, partner or procure, organisations need to determine what adds value and is in scarce supply. "It" may be people, intellectual property or plant and equipment and if it fits the foregoing criteria, must be owned. They also need to understand what, meeting their requirements, is readily available in the market and therefore should be procured. What lies in the middle should be considered under a partnering deal with an outside supplier.