Criteria for Evaluating Outsourcing Potential

At a high level, there are a number of frameworks for evaluating outsourcing decisions. The graph below is commonly used during supply chain assessment projects. It uses alignment of a process with the business strategy, and the current level of performance (relative to industry leaders), to classify processes.

Business processes which are not crucial to achieving an organization's strategic objectives, and which are performing less efficiently than processes a leading outside provider could deliver, are typically the best candidates for business process outsourcing. This corresponds to the low performance-low strategic importance quadrant of the graph above. Payroll and accounts payable are prime examples of processes that fall into this category for many companies. The customer typically does not see or interact heavily with these processes. On the other hand, outside providers have the scale and expertise to perform these functions for a lower cost, with a high degree of reliability.

Processes rated as having high strategic importance are central to achieving the mission and objectives of a company. To compete effectively, these processes demand a high level of performance. When these processes are underperforming they must be reengineered or outsourced. Outsourcing may be appropriate when there is limited opportunity for differentiation and competitive advantage. Common examples include shipping and logistics. A number of third-party logistics providers exist who can provide a level of service and economy of scale that would not be possible for many individual companies.

Strategic processes that typically provide greater opportunities for differentiation include forecasting, master scheduling, production scheduling, and order promising. Handing the operational development and maintenance of these strategically important business processes to a third party decreases the level of control over performance. It also requires sharing supply chain strategies with a third party. Both of these factors may impact the ability to maintain a competitive advantage over the long term.