Figure 1

Tactical Reasons for Outsourcing Reduction or control of operating costs. The single most important tactical reason for outsourcing is to reduce or control operating costs. Access to the outside provider's lower cost structure is one of the most compelling short-term benefits of outsourcing. Increased availability of capital funds. Outsourcing reduces the need to invest capital funds in noncore business functions. Outsourcing can also improve certain financial measurements of the firm by eliminating the need to show return on equity from investments in noncore areas. Cash infusion. Outsourcing can involve a cash payment resulting from the transfer of assets from the customer to the provider. Equipment, facilities, vehicles, and licenses used in current operations all have a value and are, in effect, sold to the provider as part of the outsourcing transaction. Lack of internal resources. Companies outsource because they lack required resources. For example, if an organization is expanding its operations, especially into a new geographic area, outsourcing offers a practical and important alternative to building the needed capability from the ground up. Problematic functions. Outsourcing is certainly one option for addressing functions that are difficult to manage or out of control. Outsourcing does not, however, mean abdication of management responsibility, nor does it work well as a knee-jerk reaction by companies in trouble. .

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