Innovation and Outsourcing

In the last blog, we summarized the various classifications of theories that we had discussed over the last few weeks. In the current blog we begin looking at a very interesting study conducted by 2 Professors at IIMB on the concept of Outsourcing and the decision making process associated with it.

Through the blogs on innovation, we haven’t explicitly mentioned the underlying common understanding - It is specialization that eventually enables innovation. The range of activities that an organization has to take is pretty broad and, this makes innovation a difficult task for organizations. But it is essential for the organizations to innovate constantly to stay ahead of competition. Given this need to innovate and the pre-requisite of innovation in organization the company would like to focus on a specific activity while procuring the remaining from the market. In other words - "Outsourcing". It is important to understand that specialization and outsourcing are complementary business imperatives.

The generally held opinion about outsourcing that companies generally outsource activities that are "non-core" while conduct the "core" functionalities of the company in house. The opinion should be reconsidered if we look at the choices that companies like "Nike", "Dell" and even "Bharti Airtel" have done. While "Bharti" and "Nike" have decided to focus on "marketing" as a core area "Dell" has focused on "Supply Chain Management". 

In order to understand the manner in which the organizations can make a choice we would have to look at the decision made on the following:

1. Cost Minimization 
2. Resource Access
3. Resource Leverage
4. Risk Diversification