OUTSOURCING IS NOT A DIRTY WORD

The outsourcing of logistics services is not a new concept by any means; and for the past 50 to 60 years it has seen a consistent growth. While this growth was steady, it was moderate until the early 1990’s when management guru Peter Drucker published his book, Post-Capitalist Society. There he described outsourcing as a needed change in business philosophy. He wrote that this change:

 “means that the big business, the government agency, the large hospital, the large university, will not necessarily be the one that employs a great many people. It will be the one that has substantial revenues and substantial results – achieved in large part because it, itself, does only work that is focused on its mission, work that is directly related to its results; work that it recognizes, values and rewards appropriately. The rest it contracts out.”

Up until then many firms had seen outsourcing primarily as a cost cutting measure; but in the 1990’s an increasing number of firms began to realize that the real competitive edge was to be found in enhanced customer service and relationships and found outsourcing to be an effective method of accomplishing this. This was particularly true of smaller companies that could contract with logistics service providers that would offer service superior to that which they could facilitate on their own.

Today, Armstrong & Associates estimates that worldwide, the revenue of logistics service providers is $727 billion, $142 billion of which is in the United States. The penetration rate of the total potential market in the United States is 21%, more than double that of 2002. In spite of this growth, for the past several years outsourcing has gotten a “bad rap” in some circles. Many writers and publications have used the terms “outsourcing” and “offshoring” interchangeably. To many average Americans outsourcing means moving jobs offshore to low cost sweat shops, saving money for corporations, and putting thousands of U.S. citizens out of work. Nothing could be farther from the truth.

Outsourcing can be global or domestic and particularly in today’s environment often has little to do with labor costs. A recent issue of Fortune Magazine contained a section on outsourcing that helped to clarify the issue. (This was especially ironic since Fortune was one of the publications that has been perpetuating the confusion.) In a statement that I believe was squarely on target, the author said, “These days, anyone who outsources and gets nothing more than low-skill, inexpensive labor is arguably living in a time warp.”

Since its inception, outsourcing has changed in concept, character, and complexity every decade or so. Today it is about providing complex, technology-rich solutions to targeted audiences. As the McKinsey Quarterly once succinctly put it,“Outsourcing is moving from economies of scale to economies of skill.”

Written By: Clifford F. Lynch