University of Tennessee researchers attempt to tackle an inherent conflict in the current system.
The University of Tennessee has been researching companies that outsource as part of a research project funded by the United States Air Force. The challenge? Study how some of the world's most successful outsourcing relationships overcome the fundamental conflict caused by conventional models to achieve true success.
"Do what you do best and outsource the rest!" That's the advice legendary business consultant Peter Drucker gave companies. By the mid-1990s many companies had begun shedding non-core activities. Early outsourcing helped companies realize balance sheet improvements, access lower-cost labor and often improve productivity.
But just as receding water reveals rocks in a river, the weakened economy has exposed fundamental flaws in the way many companies are outsourcing. In recent months the economy has forced many companies to further pressure suppliers to reduce costs. And for many suppliers, the profit margins are already at a bare minimum.
By nature the company that is outsourcing and the service provider have the same goal: to make a profit. However, they approach this goal from opposite viewpoints. The flaw in the current system is that a cost to the company that is outsourcing means more revenue to the service provider. Most of today's outsourcing contracts are still very much transaction-based; that is, payment is exchanged for a unit of activity or a head count. If the service provider makes significant improvements in productivity, it is simply bad business, because that progress drives reductions in its own revenue and profit.