On the Negative Consequences of Outsourcing

Outsourcing is mostly used as a tool to reduce a company’s costs. While outsourcing works well in some areas, such as call centres or shared service centres, more and more, the negative consequences of outsourcing are highlighted in other areas such as manufacturing. What causes this disconnect? I argue that a company has some key competencies that, when outsourced, dramatically increases the bargaining power of its contract manufacturer, allows it to take on more functions of the original manufacturer than first intended and ultimately enables it to act as a direct competitor. These key competencies include manufacturing while it excludes shared services, hence the above disconnect. Companies must identify the danger that outsourcing a given activity causes: How easy it is to replicate the company using only this one skill that the company wishes to outsource? Beyond this, several good practices are shown that help diminish the danger posed by outsourcing, such as outsourcing products only at a certain point in their lifecycle or spreading the manufacturing among several companies.