THE BUSINESS REVIEW FOR PROCUREMENT LEADERS
Most of the outsourcing decisions reviewed by the author and his colleagues over the past 10 years have been failures rather than successes. By understanding what goes wrong strategically and tactically when outsourcing, managers will be in a better decision to understand how to be successful.
There are three main failures organisations make. First, outsourcing strategically critical assets, such as IBM did with its PC operating system and microprocessor to Microsoft and Intel respectively in the 1980s. Second, retaining tactically non-critical assets in-house when they could safely and cost-effectively be outsourced to suppliers.
Third, outsourcing fails when managers do not sufficiently understand post-contractual "moral hazard" and lock-in. The buyer overlooks how power circumstances can change over time, and the ways that high switching costs can tie them into long-term supply relationships.
To avoid these three mistakes, organisations need to develop a robust make/buy methodology; train managers better; involve more functions in outsourcing decisions; understand how power relationships can change over time; and ensure that they have a clear exit strategy in place.
