The Portable MBA in Finance and Accounting, 4th Edition

18

Outsourcing

Theodore Grossman

 

 

 

The 2008 financial crisis underscored the fragility of the economy. This event was not just domestic, but also global. Because of both the wild swings in the price of oil and the financial credit crisis, companies saw their bottom lines erode dramatically. It is especially during times of declining profits that companies look to shed costs and find more efficient ways of conducting business.

Outsourcing is not new. Outsourcing dates back to biblical times when the production of materials was outsourced to other tribes. Outsourcing as a business strategy, however, was first mentioned in 1979. Prior to that date, many companies “farmed out” a number of their needs. In the 1960s, many companies outsourced their data processing. Small companies utilized accounting firms to perform many of the functions that would normally be handled in-house. Publishing companies rarely performed their own composition, printing, and distribution. Yet, in the 1970s and 1980s, vertical integration became the trend. More and more companies believed that there were efficiencies in controlling all of the functions involved in producing and supporting their products. The recession in 1990, however, prompted businesses to closely evaluate what services should be performed in-house. Companies reviewed their organizations to determine their core competencies. Those functions that did not fit the model were considered for outsourcing. Thus, many companies eliminated departments ...