How much should a company outsource? That's one of the questions addressed by a recent book on the topic, Outsourcing: Design, Process and Performance by Michael J. Mol, a senior lecturer in strategic management at the University of Reading Business School and a visiting researcher at the Management Lab at London Business School. In his book, Mol examines outsourcing from an academic perspective but includes examples of successful and unsuccessful outsourcing experiences from the world of business.
Central to Mol's argument is the idea that, at any given time, any given company has an optimum level of outsourcing that is specific to that company. He points out that there are some things few businesses would outsource -- such as their CEO position -- as well as some activities few companies would try to do in-house -- such as generate all their own electricity. In between, Mol maintains, are a wide range of activities, with varying degrees of what he calls “outsourceability.” He suggests that, if one could graph the relationship between a company's possible outsourcing levels (on the horizontal axis) and its resulting performance (on the vertical axis), the graph would look something like an upside-down U -- at some optimum point the organization is outsourcing an ideal amount, at the high point of the curve, where the performance benefits are maximized. Outsource too much or too little, Mol argues, and the results are less than optimal, as the organization's performance moves further down the curve from the peak.
But the exact shape and slope of that outsourcing curve, Mol thinks, varies by company -- because the advantages of outsourcing vary as well. Toyota Motor Corporation, for example, has found a competitive advantage through outsourcing that involves long-term, close partnerships with a number of suppliers, Mol notes. But he also shares examples such as a British railway infrastructure company whose outsourcing of maintenance functions left it without sufficient in-house capability to verify that maintenance was being done well.
The optimum level of outsourcing for a company can be hard to figure out in practice -- and can vary over time, depending on factors such as changes in information technology and in transportation costs. And, Mol suggests, a company sometimes can benefit from choosing a different outsourcing strategy than is common in its industry, if the company's business model warrants that. To find the right level of outsourcing for your company, Mol offers this advice: Think in terms of conducting small outsourcing experiments and creating mechanisms to evaluate the results over time.