The authors report the results of a study on the motives of corporate headquarters in large European manufacturing firms for engaging in outsourcing and the risks they perceive to be associated with strategic outsourcing operations. Four main issues can be highlighted: preoccupations about core businesses and reduction of cost of capital are linked; access to external expertise and quality improvements are specific expectations for outsourcing firms; operational cost savings, still a predominant concern, must be balanced with the cost of monitoring suppliers; the ‘increased flexibility’ objective emerges as a distinct issue
Corporate headquarters in large, diversified European companies are under great pressure to create value for their businesses. They must achieve a ‘parenting advantage’ and strive to be the best possible parents for their businesses (Goold et al., 1994, p. 8). To create advantages for their companies, corporate parents, according to Goold et al. (2001, p. 85), assume three roles or channels: a minimum corporate parent role that consists of ensuring the existence and development of the firm as a legal entity, a policy-making role and a service provision role for the businesses.
To meet the value creation challenge for their businesses, corporate managers look more and more to outsourcing. Increasingly requiring company-wide policies to be consistent and shared services to help the firm’s businesses develop, outsourcing modifies the firm’s frontiers. Intense is the pressure from the market and the financial operators to reduce asset investments and to outsource certain activities (e.g. inventory, warehouses or real estate), as these actors expect improvements in the value created for shareholders. Indeed, there is evidence that outsourcing contributes positively to market value (Rappaport, 1986, Alexander and Young, 1996a and Hayes et al., 2000). Yet it must also create value for the firm (reduced costs, improved performance) and for the end user. For outsourcing to be meaningful, both value creation and value appropriation processes must be appraised (Alexander and Young, 1996a and Auguste et al., 2002).
Outsourcing is a choice that lies in the corporate policy, not just business strategy, area, as it modifies the firm’s boundaries as a legal entity and generally involves top management decision makers. Affecting company-wide resource allocation policies and asset management practices, outsourcing decisions often involve several divisions in large, diversified companies, as in the case of IT outsourcing operations.
In the first part of this paper, we review the different features of strategic outsourcing. In the second part, we highlight the current trends in strategic outsourcing. In the following sections, we examine a hierarchy of the motives and risks associated with outsourcing operations. Finally, we propose a number of recommendations that require managers to focus on several key points involved in the implementation of strategic outsourcing operations.