This document outlines three perspectives on outsourcing using matrix models. Perspective I uses a matrix to show that outsourcing makes most sense for non-core activities that are complex, not critical to the business, and involve costs and risks. Perspective II looks at requirements for outsourcing providers using a matrix of flexibility, efficiency, knowledge, and reliability. Perspective III outlines a path for providers to develop competitive advantages through improving business processes, knowledge bases, economics, and investments.

1. Outsourcing Matrix
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2. Customer’s view
(service system choice criteria)
We do only things that give us competitive
advantage – all the rest we outsource
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Perspective I

3. Perspective I
Any company, explicitly or implicitly, distinguish the main
business (the “CORE COMPETENCE” in the Matrix I),
and supporting activity.
In theory, any supporting activity may be outsourced.
In practice, though, functions most important for the main
business will always be kept inside the organization
(“CRITICALITY” axis of the Matrix I)
At the opposite end of priorities there are activities so
unessential that outsourcing services for them become
commodities (lower left corner of the Matrix I with the minimal
values along all four axes).
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4. Matrix I
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CORE
COMPETENCE
OUTSOURCING PARTNERSHIP
VERTICAL
INTEGRATION
– CRITICALITY +
– COSTS +
–UNCERTAINTY+
+COMPLEXITY–
COMMODITY

5. Perspective I
So there are three reasons to outsource:
- a wish to unload part of commercial risks onto the
service provider
(axis “UNCERTAINTY” of the Matrix I)
- a wish to unload part of costs onto the
service provider (axis “COSTS” of the Matrix I)
- lack of the own employees’ competence
(axis “COMPLEXITY” of the Matrix I)
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6. Perspective I
As such, the outsourcing of some activity
(upper left corner of the Matrix I) makes sense when
the following conditions are met:
- the activity is not on the list of your company core
competencies
- the activity is too complex
(i.e. it needs special knowledge and skills)
- The costs of the activity account for a minor part of overall
operational costs
- the activity is not critical for the main business
- there are risks associated with uncertainty
(business scale fluctuations, change of environment,
customer preferences shift, etc.)
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7. Requirements to the supplier
(maturity level)
The set of competitive advantages needed
by a company entering the outsourcing
market is a mirror reflection of your
requirements to this supplier
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Perspective II

8. Perspective II
Relevant tool for selection and evaluation of
needed characteristics is Matrix II
(let’s call it the Outsourcer’s Matrix):
- high degree of operating flexibility (axis “FLEXIBILITY”)
to cope with the uncertainty
- large economy of scale and/or firm control of operating
expenses (axis “EFFICIENCY”) to absorb part of the
customer’s costs
- specific knowledge (axis “KNOWLEDGE”) to cover the
complexity of outsourced activity
- extra resources to assure quality and terms of service
(axis “RELIABILITY”) that may be replaced by the reputation
along with the development of partnership
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9. Matrix II
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OUTSOURCING PARTNERSHIP
VERTICAL
INTEGRATION
– RELIABILITY +
+ EFFICIENCY –
–FLEXIBILITY+
+KNOWLEDGE–
COMMODITY

10. Provider’s view
(market entry conditions)
To enter the outsourcing market one
should choose the following path for
gradual development of competitive
advantages:
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Perspective III

11. Matrix III
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OUTSOURCING PARTNERSHIP
– INVESTMENTS +
– ECONOMICS +
–BUSINESSPROCESSES+
+KNOWLEDGEBASE–
COMMODITY

12. Perspective III
1. Business processes description and tuning to provide
necessary flexibility (axis “BUSINESS PROCESSES”)
2. Employees teaching and training; transforming human
capital into organizational capital trough creating and
maintaining the corporate Knowledge Base
(axis “KNOWLEDGE BASE”)
3. Managing the economic efficiency
(axis “ECONOMICS”)
4. Upfront capital investment to assure service quality and
to realize the economy of scale (axis “INVESTMENTS”)
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13. Thank you!
© 2003
Сергей Хромов-Борисов
khromov@sensecraft.ru
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