24 May 2001
As the global economy slows, firms are breaking traditional moulds for savings. But there are pitfalls for purchasers if they don't have clear long-term strategies, warns David Arminas
Employee lay-offs among major manufacturers in the UK, and Europe in general, are numbered in the hundreds and sometimes the thousands as firms prepare for tougher economic times ahead.
The list of major firms cutting back is growing every week. Witness mobile telephone maker Ericsson closing its manufacturing sites in the UK and Sweden with over 3,700 job losses during the next 18 months.
Ericsson's decision to market their UK plants as an outsourcing centre is commendable because it safeguards jobs. Similar innovative moves by other companies and government agencies are likely to be seen on both sides of the Atlantic.
It appears that corporate restructuring is gathering pace among UK firms, such as BT's major shake up announced last week. Within the restructuring programmes, purchasers will be asked to develop strategies that may include outsourcing as companies struggle to maintain shareholder value. In light of this, the policy statement and documents on outsourcing and negotiating published this month by CIPS are especially apt.
The benefits of outsourcing are many. These include gaining expert advice from a supplier where the knowledge does not exist within the client company, training opportunities for client company staff, a higher quality of delivery by the supplier, and concentration by the client on more profit-oriented core businesses.
But CIPS recognises the many pitfalls for buyers when it comes to reasons why outsourced contracts may not benefit the bottom line. Poor requirement specification, failure to attract a supplier with innovative capabilities, badly-written contracts and inappropriate allocation of risk and rewards could explain non-performing outsource deals.
These pitfalls are waiting for purchasers long before the supplier moves on-site or starts work for the client. Clarity of vision is needed to see off the problems. Importantly, will purchasers have an outsourcing strategy for long-term corporate health or an outsourcing tactic designed - hopefully - to cut costs in the short term?
In Ericsson's case, the strategy may be never to manufacture again and brand telephones from a quality manufacturer. It may also taking manufacturing back in-house if the economic situation changes. Outsourcing should be about options.Complete outsourcing
Cisco, the world's leading supplier of telecommunications network exchanges, has outsourced all of its manufacturing. Such a strategy means the brand becomes the company's most valuable asset and procurement professionals become the driving force for maintaining the image. In this respect, because of their skill at negotiating and contract management, the next several years may see procurement staff becoming some of the company's most valuable employees.
Understanding the decision to outsource as a long-term strategy or short-term tactic is something purchasers will have to be good at, according to Damon Jones, the vice president of global sourcing at consultancy QP Group.
Jones believes that the trend towards outsourcing will continue, but warned against the quick-fix outsource called for by many corporate boardrooms where purchasers find themselves driving forward a policy that is fraught with danger. Outsourcing should be about sharing the risk of the outsourced service with the supplier and, importantly, gaining flexibility for the client.
A problem for purchasers in the manufacturing sector is not negotiating a facility for scaling up or scaling down of output by their supplier. Without this flexibility, after initially cutting costs by outsourcing, the client is left with the same inflexible manufacturing set-up as when production was in-house.
Outsourcing can be a sensitive topic for many employees who fear for their jobs, and even buyers can be nervous when it is first mentioned within the company, noted Steve Haslet, managing director of the Independent Manufacturers' Alliance.
Purchasers can see outsourcing as a way of losing some authority. However, in many instances, it increases authority over an area where they had limited control before, and so raises their profile within the company, noted Haslet. In effect, a buyer can go from managing processes within a division to managing the strategies and the outsourced supplier who now manages the processes.
Some business leaders are forecasting that the economic downturn will continue well into 2002, with the result that more companies will likely explore the outsource alternative. Purchasers should recognise the opportunities for raising their profile.