The History of Outsourcing
The origins of outsourcing. Ford vs General Motors
It is customary to explain the concept of outsourcing as a tool for business development in the example of the confrontation between two outstanding engineers – Alfred Sloan and Henry Ford. It was they who led the giants of the auto industry – General Motors and Ford. Since the 30s of the twentieth century, these companies have come together in fierce competition and almost at the same time realized that they could not remain self-sufficient and rely solely on personal resources. It became obvious that it would be wise to transfer certain processes that ensure the operation of production into the hands of other organizations whose specialty these same processes are. The removal of some production and management functions marked the beginning of practical outsourcing.
Outsourcing development stages
Among outsourcing researchers, there is still some debate over the exact division of the outsourcing stages. However, below is the most accepted picture of the historical development of outsourcing.
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FIRST STAGE
The period of development of international outsourcing in the field of manufacturing is considered to be the first stage. According to a WTO’s 1998 report, the Ford car was assembled as follows:
- 30% of the finance is transferred to Korea where the car is assembled.
- 17,5% is transferred to Japan in exchange for the development of new technologies and the production of car parts.
- 7,7% is paid to designers from Germany.
- 4,4% is shared between Singapore and Taiwan for delivery of small parts.
- 2,5% is transferred to Britain for advertising and marketing services.
- 1,5% is earned by Ireland for information processing.
And only 37% of the total income goes to the United States. At the same time, it is still profitable for the company to give 63% for outsourcing. Similar cases were not isolated. The company producing the Barbie doll bought raw materials in Japan and Taiwan, assembled the doll in Malaysia and Indonesia, bought the doll itself directly from the United States while the clothes for the doll were sewn in China.
SECOND PHASE
The strengthening of the IT outsourcing direction took place in parallel with the development of BPO (Business Process Outsourcing) which eventually became the basis of the second stage.
The second stage took place under the flags of business processes. During this period of time, companies are trying to identify those processes that can be outsourced for remote management to outsourcing companies. Until the 90s, this opportunity was treated with extreme caution but, by the end of the decade, the market had acquired a high growth rate thanks to such areas as accounting, recruiting, processing primary information, etc. According to Fortune magazine, 90% of companies use outsourcing at least in one of these directions. Such large market representatives as Toyota, Honda, and Chrysler transfer 70% of their business processes into the hands of outsourcers. Even though the growth of the outsourcing market may not be as fast anymore as it used during the first years of the new millennium, it still amounts to several percent per year.
THIRD STAGE
The third stage of outsourcing development takes place at the beginning of the 21st century and is characterized by the active development of a new direction, KPO (Knowledge Process Outsourcing) or “knowledge outsourcing”. KPO can undoubtedly be called the result of the evolution and symbiosis of IT and BPO outsourcing, and even consider it a subspecies, however, its scale and development prospects make it possible to distinguish it as a separate type of activity.
Knowledge outsourcing deals with the management of processes that require deep analytics, the formation of a knowledge base, etc. At this stage, the following intellectually capacious knowledge begins to be outsourced:
Animation and design.
Education and consulting.
Legal services.
Formation of intellectual property.
Research and development.
Medical services.
Registration of patent applications.
What lies ahead for outsourcing?
Global outsourcing is already one of the most popular concepts of doing business today. Using the possibilities of the optimal division of labor, world-renowned companies are able to lead a competitive struggle for customers. Those who can effectively use the geographic location and time zone difference gain the greatest success which allows their company to earn money anywhere in the world 24/7.
