Relevance and importance

Outsourcing has become an increasingly accepted management tool in recent years, with virtually every facet of the organisation potentially open to being outsourced. There has been a trend away from the vertically integrated company structure. In today's demanding business environment, with shorter product life cycles, the SME may not be able to fulfil all the requirements or have all the core competencies necessary to manufacture or introduce new products in a timely way. The outsourcing of manufacture or R&D offers the ability to concentrate on core competencies, lower operating costs, shared risks, a shorter time to market for new products, and reduced capital investment requirements as the cost is borne by others. In effect it can enhance the capability and flexibility of the SME allowing it to accomplish things that would normally only be open to larger companies to do.

Overview

The outsourcing of manufacturing or R&D may be easier and less complex for SMEs than managing an alliance partnership.

Rather than hiring and training employees it may be more cost and time efficient to outsource the activities to specialist external organisations. This can be particularly relevant if the SME has a lack of internal expertise or experience, or costs are high. In addition the suppliers may be adding creative input and there may be cross-training of company employees.

The specialist contractors can rent or share equipment giving access to world-class facilities not available internally. One example would be to sponsor research at another party's facilities e.g. university.

Outsourcing offers an augmented risk management profile as the risks on R&D would be shared over the pay-back period. Further, the client usually retains ownership of the intellectual assets.

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Recommendations and practical tips

	Outsource only those activities which are non-critical competencies.
	Redirect any cost savings towards activities which are more value enhancing or give a greater return.
	Focus your resources on main lines of business and concentrate your energies on managements' core competencies.
	Set targets and clarify the output and results required from the outsourcing contract.
	Consider the appropriate duration of the outsourcing arrangement.
	Agree a performance plan to motivate and share risks and rewards with the supplier.

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Warnings and potential pitfalls

	Consider carefully which activities to outsource and which to keep in-house. Ideally the core competencies should not be outsourced as they critically underpin competitive advant
	An outsourcing agreement may be more suitable for short-term solutions, while an alliance may be better if a longer term partnership is required.
	Ensure there is an appropriate system of control and supplier management in place, and consider the organisational implications of the amount of time needed to manage the outsourcing arrangement.
	Bear in mind the potential inefficiencies and costs of any pre-existing infrastructure no longer utilised as a result of the outsourcing, e.g. manufacturing equipment, buildings.
	If possible ensure that appropriate substitute sources are available to cover requirements in the event of unsatisfactory contractor performance or disruption of supply.

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