Outsourcing: A Brief History

History and evolution of outsourcing 

Outsourcing emerged in the 1950s, but it wasn’t until the 1980s that it began to be perceived as an attractive business strategy. The growth of outsourcing in the 1980s was largely driven by the “focus on core competency” strategy that was developed in the 1970s. Since then, outsourcing has had a significant and positive impact on businesses and in most cases helping them compete effectively.

The growth and evolution of outsourcing have created new areas of possibilities which have allowed various organisations to redefine and restructure their operations. Outsourcing is now an important consideration in strategy formulation, and it can fundamentally change the way a business competes and structure itself. The main driver for outsourcing is the need to compete effectively, and a business will usually outsource when:

• It is more effective and efficient to source externally
• There is a focus on core competency
• It is seeking cost structure improvements

Outsourcing has evolved dramatically in a relatively short period of time and this evolution is divided into three key stages.

In the first stage, from the early 1980s to the late 1980s, ‘traditional outsourcing’ of non-core activities was widely used by businesses to reduce costs. Traditional outsourcing is where a business moves an operation previously conducted internally to an external supplier. This early outsourcing strategy was based on the transaction cost approach where the focus was on sourcing products or services from external providers if it is cost effective to do so. Under this approach, the main objective for outsourcing is to reduce cost and maximise profit.

In the second stage, from early 1990s to early 2000s, the term ‘strategic outsourcing’ emerged. Strategic outsourcing is based on outsourcing strategic business processes. These are activities that have a direct impact on business performance and its ability to compete. Generally, strategic outsourcing can revolutionise a business and the way it operates. Under strategic outsourcing, the aim is not solely focussed on cost optimisation, but also on accessing external expertise that can be used to complement existing and future capabilities. From a business strategy perspective, the main objective of ‘strategic outsourcing’ is to gain competitive advantage by utilising external resources, enhancing internal capabilities and improving processes.

In the third stage, from early 2000s, ‘strategic outsourcing’ evolved into ‘transformational outsourcing’, this type of outsourcing provides the flexibility to adopt new technological advances and rapidly changing business needs. Under this approach, the service provider is seen as an extended enterprise that can deliver innovation and enhanced operational benefits. Unlike traditional outsourcing, transformational outsourcing seeks to change the paradigm and usher in a new business model.

Transformational outsourcing is also used as a vehicle for transforming businesses into agile organisational forms that can increase profits, grow market share and improve shareholder value. From a business viewpoint, the real value of transformational outsourcing lies in its ability to re-engineer business processes and transform people, processes, operations and systems.

By Daniel Usifoh