In this series of blogs, Mark Danna, Owens’ VP for new business development, will highlight common mistakes that can cause an outsourced partnership to fail and detail a methodology for approaching an outsourcing agreement that can minimize the risk and costs involved and help ensure a successful partnership.
August 8, 2011 – In today’s business environment, many companies, both in emerging industries such as solar and mature industries such as semiconductors, are outsourcing those aspects of new product development that do not fall into their areas of core competency. Such outsourcing partnerships, if executed effectively, can certainly help speed product development time, while reducing the costs and risk involved in bringing a new product to market. Unfortunately, when poorly executed, such partnerships can be an extremely painful and potentially expensive experience for all involved.
Outsourcing is often seen — in industry and government — as an excellent means of minimizing costs, while maintaining or adding services or capabilities to an organization. There is a general assumption that if a function is not one of an organization’s core competencies, it will be less costly to outsource it. The assumption often proves true; however, the problem is that this is only true under certain circumstances. Under the wrong circumstances, outsourcing becomes a costly source of frustration. One of the tricks to making outsourcing work for your organization, then, is knowing the right questions to ask to determine whether or not outsourcing makes sense.
Deciding to outsource
The first thing to consider is what you want to outsource and why. Is your company moving into a market where it lacks experience and skill: an area outside its traditional core competencies? Do you lack the resources to add the manufacturing capacity needed to respond to an upsurge in demand or to accelerate product time to market? Will outsourcing help mitigate the initial investment and risk involved in entering a new market or ramping up production of a newly introduced product? Are you a start-up company that needs to add resources to meet the high engineering demands involved in the initial design phase of a product — resources that you may not require once the product is launched? If the answer to any of these questions is yes, then, outsourcing may be the right choice, if certain other factors are also in play.
Consider the actual cost of outsourcing. Will outsourcing really be less costly by the time you’ve put in place the oversight and infrastructure needed to support it? How much cost will be involved in identifying and establishing the necessary working relationships with vendors whose capabilities can enhance and serve as force-multipliers for your own internal capabilities? The time and effort involved in answering these questions and establishing effective vendor relationships tend to make outsourcing more cost-effective as a long-term rather than a short-term strategy.
It’s critical that you are partnering with a company that really has the capability to solve your problem. Does your potential partner have proven experience in the area in which you intend to collaborate, or is it a new entrant into the market? Does it have a proven track record of success in similar collaborations?
When to say no to outsourcing
100% internal buy-in is a major factor for outsourcing success. If stakeholders in your own organization are not on board, the outsourcing project can easily rack up costs and create difficult working environments, if not entirely fail.
Two other related potential pitfalls involve intellectual property (IP) and business objectives. Conflicts over IP issues can rapidly doom a project to failure and have the potential to land both companies in a prolonged and costly legal battle. Misaligned business objectives can also lead to missed deadlines, cost overruns and lost market opportunities.
Lack of team compatibility and unrealistic project expectations can easily scuttle an outsourced project. Outsourcing inevitably adds a layer of complexity to a project, simply by virtue of the additional communication required. Differences in personality and corporate cultures can pile on more stress and inhibit the project. If your group and the outsource vendor are not on the same page when it comes to the technical scope of the project — who is responsible for what — as well as deadlines, your project will be in trouble from the beginning.
Conclusion
Outsourcing can be a powerful tool to help a company speed the time to market of a new product, to accelerate product ramp ups or to mitigate the risk involved in entering a new market or introducing a new product. Ensuring that it is an effective tool, and not one that turns in your hand, requires asking some critical questions at the beginning of the project. The initial time and investment involved in getting the answers to those questions can make the difference between a successful project that reduced company overhead or an expensive failure.
Next up in the series: Picking the right outsourcing partner: Once you’ve decided outsourcing will be a positive step, you need to choose the right partner out of the field.