Innovation through Outsourcing in HiTech Companies..Is it Achievable?
In recent times Hi-Tech companies have increasingly looking to outsource substantial portion of their manufacturing to vendors in developing nations like India, China, ec. to uncover substantial reduction in costs. This outsourcing helps the companies to improve competitiveness and profitability and to some extent even helps in making the Hi-Tech companies operations viable in the marketplace.
Hi-Tech companies have sought, among other things, to divest themselves of production capacity (and the inherent risks associated with owning capital equipment), lower their labor costs and maintain greater flexibility in the face of ever-shrinking product lifecycles. The impact of market forces and need for innovation is driving this need.
But does this outsourcing promote innovation? How does Hi-Tech companies ensure that they have selected the right partner, established the proper relationship and adapt adequately to the change so that it can encourage innovation?
The benefits the Hi-Tech company expects from this is :
- Economies of scale
Aggregation of multiple orders reduces costs, both in purchasing and in manufacturing
- Risk Sharing
Demand uncertainty transferred to the suppliers
Suppliers uncertainty through the risk-sharing effect
- Reduction of capital investment
Capital investment transferred to suppliers.
Suppliers’ higher investment shared between customers.
- Focus on core competency
Buyer can focus on its core strength
Allows buyer to differentiate from its competitors
- Increased flexibility
The ability to better react to changes in customer demand
The ability to use the supplier’s technical knowledge to accelerate product dev cycle time
The ability to gain access to new technologies and innovation.
This it is seen that there are significant benefits to Hi-Tech companies by outsourcing "non-value added" activities to suppliers. But does this attitude really contribute to better innovation? Lets examine some aspects and see how it could be done.
Traditionally outsourcing decisions revolves around the notion of core and non-core activities of the firm. However in the new age with significant advancement of information and communications technology and blurring of the concept of core competency for a firm itself, this yardstick is flawed. Hi-Tech companies must look beyond just cost reductions as the primary driver and look towards the real strategic and organizational business drivers before taking the decision to outsource.
It is also seen that most of the outsourcing decisions are driven by ‘make’ and ‘buy’ considerations. Hi-Tech companies have to look beyond just the cost or make or buy considerations and be driven more by product-level strategies. The need is to outsource in those the areas where supplier will be able to contribute to innovation and thus help is achieving the maximum benefits of outsourcing.
The Hi-Tech companies also need to look at their firms not as isolated entities but rather as agents in a complex value chain within which they maintain and develop existing and new competencies. Thus they need to look at this as a network if innovating organizations than look at just their company. This will help bring in new kinds of relationships and partnerships. This will lead to development of innovations that will be shared across this whole network which will ultimately help the Hi-Tech company derive maximum benefits of outsourcing.
