Outsourcing not just about costs

The trend for outsourcing has been cost-driven, with a reported 60% of companies focusing only on cost savings in making their decisions about which business processes to outsource and whether to choose an onshore or offshore third party to partner with.

by Knowledge@Wharton 8 February 2006
Last Updated: 31 Oct 2014

But as well as the risk of not achieving expected costs savings, companies should be assessing the potential knock-on effects for their business – the possible damage from losing control to a third party for example.

Before outsourcing any business process, companies should consider the importance of that process to making their products better than those of the competition.

The Revenue Distance model developed by Ravi Aron, professor of operations and information management at Wharton, offers a tool for putting a comparative valuation on different candidates for outsourcing.

Each business process should be ranked – one to ten (one being the most important) on two separate counts: its contribution to creating value for customers and its contribution to capturing that value for the company. Adding up the two will then create an overall Revenue Distance ranking.

Those with the lowest scores are the processes that are most critical overall – and which therefore should be kept close to home – and those which are least important, and score higher on the system are better suited for outsourcing.

As well helping companies identify what can be outsourced at least risk, this exercise should also weed out processes that are kept in-house at high cost. Processes may help create value but are not crucial to beating the competition, for example, much of the documentation and administration in a home loans business. While necessary, such processes are not differentiators and therefore can be safely outsourced.

Inevitably, many if not most business processes will only create a minority of value for a business, while a few will be disproportionately important.

By keeping the low-value processes in-house along with the high-value, a company is financially inefficient and wastes managerial time and talent.

This sort of approach to outsourcing is strategic rather than just operational. It may also help to highlight other opportunities from outsourcing, such as operational flexibility.

Source: Finding Value for BPO through Revenue Distance
Special Report: CFOs at Work: Viewing Business Strategies through a Finance Lens

Review by Steve Lodge

Knowledge@Wharton 8 February 2006 recommends

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