The head of a European manufacturing firm got a call from his largest client, a client who accounted for 40% of his sales, “We’ve been working with you for 10 years and our contract is up. We are getting budgetary pressure to reduce costs and need to renegotiate our terms.” The firm’s profits were likely to suffer if it went ahead with price cuts with no change to its cost structure. What approach, however, could allow the manufacturer to remain competitive without hurting profits?
Pricing pressure — a big challenge to businesses
Pricing pressures are expected to remain one of the biggest problems challenging businesses worldwide in the coming years. KPMG in its 2015 Global Manufacturing Outlook report said that 40% of respondents cited intense competition and pressure on prices as the biggest challenge for their firms. With technology-driven disruptions changing the rules of the game every year, the message is as simple as this – either be paranoid about controlling costs or be out of business.
Decide the right approach to reducing expenses for your company
Businesses often go wrong with cost reduction measures when they adopt an approach that is disconnected from reality. Companies that kill technology budgets to cut costs self-destruct as they are unable to meet customer demands for smart products and speedy services. Many companies implemented cost cuts by laying off thousands of jobs but the efforts improved neither their profitability nor their market value. As Matthew Bidwell, a Wharton management professor, pointed out, according to an April 2016 article on the university’s website, “After announcing that it would shed 4,000 jobs, American Express’s stock price took an immediate slide, and remains down by about 25% since that announcement. ”
There is one approach that not only guarantees cost reductions but also gives companies the benefits of knowledge acquisition, skilled resources, technological innovation and, resultantly, operational efficiency: outsourcing.
Outsourcing – essential for cost-efficiency, a prerequisite for sustained growth
Outsourcing has evolved from a mere cost cutting option to an indispensable element of sustained profitable growth. Companies that harnessed outsourcing to their advantage sailed through difficult market conditions and even global economic crises.
Ford jumped back to profits in 2009 and retained its profitability levels, thanks to outsourcing. Microsoft used outsourcing to turn into a “patent powerhouse,” as Intellectual Property Magazine puts it . In fact, a report published just after the 2008 global financial crisis of a 10-year study of 2000 companies by Bain & Co. revealed this: Only one in ten companies could sustain their profitability levels, and 85% of these achievers outsourced “broadly and strategically. ”
Not surprisingly, outsourcing is set to expand rapidly across verticals. Grand View Research Inc. predicts the global engineering services outsourcing market will reach US$415.74 billion by 2020, a growth forecast at 29.9% CAGR from 2014 to 2020 .
As the Washington Post has noted “some of the world’s largest companies and biggest employers are the product of (the) outsourcing trend,” while adding that offshoring has been a blessing to not only the investors of the firms who embraced it but also their customers, and a wider community of consumers who benefit from expanded product offerings and increased savings.
If you are not outsourcing, sustained business growth could become an unachievable dream.
Many decision makers, however, have a simplistic understanding of outsourcing, a view limited to transferring noncore business processes to an outside supplier. The decision about what to outsource and how to go about it make strategic sense. The matter needs to be discussed separately. I will talk about it in the next blog post in this series.
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