Outsourcing: Is it always good or bad?

Outsourcing: Is it always good or bad?

How strategic sourcing that usually worked for most companies turned out bad for Hewlett Packard and Dell?

Outsourcing is subcontracting a part of the business function to an out of the site or system supplier that was previously performed internally. Many companies outsource their production and services division for various reasons but cost cutting is one of the important reasons for most of them. There is no definitive answer whether outsourcing is good or bad but doing it strategically is what makes it successful. I found it interesting because almost all major companies have outsourced some part of their business functions for some strategic reasons but not every company is successful at pulling it off. This makes it more challenging and exciting to know how the outsourcing strategy, which appeals as an economically efficient strategy for everyone, turned out bad for Hewlett-Packard’s business.

According to the Forbes article, the main reasons for the failure of HP business strategy are:

1. Outsourcing
2. Bad Acquisitions
3. Lack of Innovation

All the reasons are interrelated for the failure of HP business strategy. As mentioned earlier, one of the main reasons for HP to outsource its production facilities is to reduce cost and improve profitability. The article comments that by outsourcing HP gave away its competitive advantage and led to lack of innovation. While focusing on dying PC market, HP failed to see the lack of innovation and vision in the areas such as design, branding and marketing. HP could have benefitted if they thought about these things strategically while formulating their outsourcing division.

Last year, HP and Dell shares fell by 14% in desktop and laptop market. Their profit margins and revenue also fell steeply due to the decreased interest from customers on PC over the newly entered tablets in the market.

Company	Profit Margins	Quatery Revenue Growth	Quaterly Earning Growth
HP	-10.86	-5.60	-16.10
Dell	4.17	-10.70	-30.6

Source: Yahoo Finance, 2013

A company loses its competitive advantage when it starts outsourcing any production or service just on the cost aspect. HP outsourced its production capabilities for lowering its cost and to utilize the time saved in production management for other purposed. Outsourcing leads to the fragmentations and disintegration of the supply chain, bringing in numerous independent subcontractors and increasing the overall complexity and management of the supply chain. What HP needs is a competitive supply chain with an improved visibility of the product supply.

I feel that there were many wrong decisions for the wrong reasons behind their fall in the PC market today. I agree with the article from HBR “Strategic Sourcing” about outsourcing that it is no longer just a matter of low cost providers but also responsible for determining an organization’s value chain, the flow of productive activities involved in bringing a product or service to the market. Strategic sourcing involves not only the supply chain design but also efficient supply chain management.

Outsourcing the production capabilities is not a bad sign for the company as long as it can remain competitive in other areas such as product design development, branding and marketing. HP and Dell failed to distinguish themselves from others in the market resulting in decreased consumer attraction and thereby low sales and profits for both the companies. In contrast, Apple and Google limit their outsourcing to production while having other services such as branding, marketing in-house and remain very competitive in their market by their ability to distinguish themselves from others in their market.

HP should also look at outsourcing whether it is an appropriate strategy in terms of both operational and business planning. It helps the company shape its image to keep both the perspective in alignment.

Outsourcing for the right reasons can bring huge success to a company by following strategic capabilities such as

1. It can bring great amount of global talent in order to grow the company’s and also bring the cost structure down by innovative talent and ideas. HP, which lacks innovation could take advantage of this by outsourcing the R&D and develop new products or services.
2. It can build partnerships that both capture value and reduce risk. An example would be Hasbro toy manufacturers kept their relationship at arms length and also monitors their overseas operations constantly to ensure quality management.  HP should also need to make an effort to keep up with the relationships and monitor their operations, which are outsourced to reduce inefficiency.
3. It can seize new local market opportunities and makes its presence before the competitors such as AstraZeneca, which made huge investments in Chinese pharmaceutical markets by outsourcing from manufacturing to sales. HP should always be keen to look to market opportunities and makes its presence over worldwide by outsourcing their products manufacturing or services which ever is best for their successful operational and business plans.
4. To get to market faster and boost innovation, companies such as P&G outsourced their R&D, which increased productivity by 60% and generated $10 billion in revenues. As mentioned above, HP’s big failure is lack of innovation. If HP also try to outsource R&D, It may benefit from external sources and talents.
5. To disrupt traditional models, companies such as Acer outsourced product design, manufacturing except branding and marketing. It knew its strengths and capabilities well enough to take advantage. This made this company world’s second largest PC manufacturer. It increased its sales and revenue. It has lean and flexible operation. HP can also learn which operations it can outsource, which are difficult and cost more to produce in-house so that it can leverage other strengths and focus its attention in those areas.

This topic creates some interesting questions such as

1. What are the definitive variables of interest or factors that a company should evaluate before deciding on outsourcing its production or services?
2. What are the internal and external strengths of any company in term of outsourcing that can leverage them against the competitors in the market place?
3. How outsourcing strategies needs to be designed in accordance with the organizational and business planning?
4. How effectively a company can outsource while maintain its competitive advantage in the market?
5. What are the major factors to be considered before a company begin to plan on outsourcing the product or services in order to improve operational efficiencies and reduce defect rates?

Sources:

1) http://www.forbes.com/sites/panosmourdoukoutas/2014/05/23/whats-haunting-hewlett-packard-outsourcing-bad-acquisitions-and-lack-of-innovation/

2) http://www.forbes.com/sites/panosmourdoukoutas/2013/04/14/how-hewlett-packard-and-dell-destroyed-their-pc-advantage-piece-by-piece/

3) http://www.forbes.com/2010/06/15/outsourcing-capability-sourcing-leadership-managing-bain.html

4) http://www.forbes.com/sites/merrillmatthews/2012/07/20/companies-outsource-because-thats-where-the-sales-are/

5) HBR Article: Managing Sourcing