Why Companies Outsource Services:

Opportunities and Challenges

Authored by Jeffrey T. Meyers
Technical Services Manager
Omron Electronics LLC
jeff.meyers@omron.com

Introduction
For years manufacturers have used OEMs, system integrators (SIs), and contractors to
complete control system and automation projects. Working primarily as subcontractors,
these providers have filled a vital need when in house resources and skills were not
available, when production schedules were tight, and time to market was critical. These
service providers continue to play a necessary role today.
The technology revolution of the mid and late 90s in the IT industry fueled a
tremendous new demand for the knowledge and skills necessary to bring companies up
to date with current technology such as internet, Email, intranet, and MES applications.
Companies began to look for service providers who could give them more than just
technology and basic business services. They wanted providers who could give them
value added advice and expertise in their respective disciplines. In exchange,
companies were willing to share their goals, strategies, and objectives with suppliers.
This refined definition of the relationship between the user and supplier is called
outsourcing.
With technology driving the integration and connectivity of the plant floor to the rest of
the enterprise, companies are now looking at expanding the concept of outsourcing
even further beyond IT, basic business activities, and control system projects. They are
looking at additional service opportunities related to the manufacturing process,
including control and automation systems, upgrading, maintenance, and training
activities. Many controls suppliers are also looking at these areas to expand their
service offerings, increase profitability, and sustain a competitive advantage by offering
a better value proposition to their customers.
Although the majority of the growth in outsourcing activity has arisen from areas outside
of automation and the plant floor, such as IT and basic business services, the
fundamental concept of outsourcing also applies to the manufacturing environment.
What Is Outsourcing And The Value Proposition For The Organization?
In simple terms, outsourcing can be defined as the strategic use of outside resources
to perform activities traditionally handled by internal staff and resources. It is a
management strategy by which an organization outsources major, non-core functions to
specialized, efficient service providers (The Outsourcing Institute, 2001).

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The value proposition that companies look to achieve from outsourcing activity can be
viewed from a number of different aspects. From the view of control and automation
services on the plant floor, Automation Research Corporation (ARC, 1998) defines the
value proposition (potential benefits) of outsourcing to an organization as being
expressed in four fundamental business concepts:
1.) Focus on Core Competencies, which define the organization itself, and are a
vital part of why it exists.
2.) Gain Access to World Class Expertise in designing, implementing, and
maintaining automation systems, and keeping up with the latest technologies
available.
3.) Improve Staffing Flexibility in order to respond quickly and inexpensively to
changes in market demand.
4.) Lower Total Cost of Ownership for Control and Automation Systems. The
ongoing operational costs are significant, up to 75% of the lifetime costs,
providing an opportunity to reduce Total Cost of Ownership (TCO) of these
systems.
Although companies have and will continue to use outside sources for automation
projects for years, they are now looking at ways to reduce operating costs on the plant
floor by outsourcing non-critical activities such as maintenance, upgrading, and training.
The outsourcing activity not only reduces costs, but exposes the company to additional
skills and expertise, and shifts their focus to strategic thinking and development of their
core competencies.
The most important step for a company considering outsourcing is to define what it
considers to be non-core functions. In terms of control and automation, the company
needs to define this line between systems and the knowledge and expertise that is the
core competency of their manufacturing business. According to ARC, most
manufacturers have defined that the design, implementation, and maintenance of
control and automation systems is a non-core activity in their business, and have or are
considering outsourcing to fill this activity on the plant floor.
Why Do Companies Outsource Services ?
There are a variety of reasons why companies consider outsourcing activity. A recent
survey by The Outsourcing Institute (IT Index 2001) identifies the top 3 reasons
companies gave most often for outsourcing services. Although cost reduction is
mentioned most often, companies are now looking for additional value from the
outsourcing relationship beyond just cost reduction. Improving focus and access to
world-class expertise are other examples of potential benefits companies seek from
outsourcing relationships.
Opportunities And Potential Benefits
There are a number of issues and opportunities in any business that can create value
for the organization by implementing an outsourcing strategy. As described by Michael
F. Corbett and Associates, a consulting firm who advises company executives on using
outsourcing as a strategic business tool, the specific issues and opportunities that

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companies address through outsourcing can be grouped into 3 general categories.

Tactical issues deal with the short term, and can generate immediate benefits. These
are related primarily to monetary and resource issues, which can be more easily
manipulated and provide more immediate benefits. From a controls and automation
viewpoint, these potential benefits are significant as ongoing operational costs for plant
floor equipment and systems are a large portion as much as 75% - of the total
lifecycle costs (ARC, 1998). Strategic issues are more long term, have far reaching
consequences for the organization, and are more difficult to measure. The third
category of issues, Transformational, deals with issues related to the fundamental
change and transformation of the business. These are driven primarily from the
company strategy, guidance, and direction provided by upper management. Each
company will see different results in these areas based on their priorities and how they
implement a strategy for outsourcing services.
User And Supplier Concerns
A key aspect of outsourcing that is a concern to both user and supplier is identifying the
differences between IT and other business functions, and the control and automation
systems aspect of their businesses. Business functions tend to be relatively standard
across companies. They are defined in many ways by practices, laws, and standards.
Manufacturing practices and controls and automation, on the other hand, according to
ARC, can be unique between industries, companies, and even in some cases between
plant locations. Each has developed their own expertise and practices that they apply to
their processes on the plant floor. This makes it much more difficult when trying to
outsource these services without compromising the expertise and knowledge that has
been gained by the organization. ARC also defines several additional concerns of both
users and suppliers when entering into an outsourcing relationship. Notice that these
concerns are much more focused on building mutual trust in the relationship and core
knowledge rather than who will win the next project. Outsourcing relationships are much
more strategic, emphasizing the partnership between user and supplier and the
resulting value gained by both parties.
Key Elements Of A Successful Outsourcing Experience
One way to help ensure the success of an outsourcing relationship is to understand the
key issues that make for a good sound partnership between user and supplier. In a
survey done by The Outsourcing Institute, they identify the 3 most important factors
mentioned by companies most often for successful outsourcing relationships. The
reasons are very broad, but each is a critical part of the outsourcing relationship.
According to the Outsourcing Institute, the ongoing management of the relationship is a
critical factor for success, which is often neglected and its importance often
underestimated. In an effort to improve resource utilization, many time companies will
assign managers from other disciplines to manage the outsourcing process. This can be
a critical mistake, as many managers do not have the special knowledge or skills
required to properly monitor and manage the relationship. Many companies today are
even advocating the creation of a special position in the company called a CRO (Chief

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Resource Officer) whose focus is on managing the outsourcing strategy, process, and
relationships for the company.
SUMMARY
Although IT has led the way in recent years when it comes to outsourcing services,
companies have begun to seriously look at other business functions which can provide
the same benefits as possible candidates for outsourcing. The IT and technology
revolution of the 90s, along with the surge in MES implementations have provided a
very visible link between the office and the plant floor. This growth has opened a new
opportunity for companies to take advantage of a different area of the company for
outsourcing services.
Automation suppliers have been quick to respond to this new opportunity, forming
strategic relationships, reorganizing, and looking at methods to provide additional
services and increase the value added proposition they provide to their customers.
Omron and other suppliers have focused on the outsourcing services aspect of their
businesses to reinforce product sales and help boost profitability.
Companies look to outsource basic operations in order to focus on strategic thinking,
and tasks which are vital in defining themselves, their core competencies, and their
competitive position in the marketplace. These are the potential value added benefits of
outsourcing activity.
While outsourcing these routine activities is a relatively new concept as it relates to
control and automation systems, it is the same companies who currently outsource IT
and other business services who will be the first to reap the benefits from applying the
same business strategy directly to the factory floor. Understanding the basic differences
between IT and IA will be a critical step towards successful application of outsourcing to
automation and plant floor services in the future.

REFERENCES
Automation Outsourcing Strategies, 1998, Automation Research Corporation (ARC) Deadham, MA 02026
www.arcweb.com
Getting Started with Outsourcings Value Proposition, 2001, Michael F. Corbett and Associates, Ltd.,
LaGrangeville, NY 12540 www.firmbuilder.com
IT Index 2001,The Outsourcing Institute (OI), Jericho, NY 11753. www.outsourcing.com
Michael F. Corbett and Associates, Ltd., LaGrangeville, NY 12540 Website: www.firmbuilder.com
The Outsourcing Institute, Jericho, NY 11753. website: www.outsourcing.com.
Why Companies Outsource, 2001, Michael F. Corbett and Associates, Ltd., LaGrangeville, NY 12540
www.firmbuilder.com

ABOUT THE AUTHOR

Jeffrey T. Meyers is the Technical Services Manager of the Omron Electronics LLC Industrial Automation
Division. He has more than 20 years of application engineering, sales, and marketing experience in the
controls industry, working for end user, distributor, and supplier companies. He holds a BA from St.
Marys University of Minnesota, and an MBA from Aurora University, Aurora, IL.

A publication of Omron Electronics, LLC

2002 All Rights Reserved

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