Definition of total outsourcing

Total outsourcing can be defined as outsourcing an entire activity to a supplier.

Example

In the case of information technology (IT), for instance, total outsourcing means outsourcing all IT activities to a supplier. These activities include managing data centres, micro-computers, telecommunications networks, applications development, applications maintenance, systems design and integration.

Total outsourcing has three main advantages. First, there is cash generation for the client when the supplier buys the assets. Second, dealing with a single vendor - as is often the case with total outsourcing - entails lower vendor management costs. Third, it generally leads to larger economies of scale than selective outsourcing because of the sheer size of the contract.

Total outsourcing also has major disadvantages. When specific activities are outsourced, vendors may standardise these to the extent that the unique needs of the client are no longer met.  A classic example is that of IT applications. When the supplier standardises these, it reaps economies of scale. However, the benefits are lower for the client because the applications are no longer tailored to their needs. When activities are homogeneous, they may either be totally outsourced or not outsourced at all.

Outsourcing specific activities is also dangerous because it creates a dependence situation as companies that outsource an entire activity no longer have a sufficient level of expertise in-house to control or manage their supplier.

Source: Jérôme Barthélemy, professor of management, Essec Business School

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