Outsourcing has been with us now for about 10 years and shows no sign of abating. As this is one of the most powerful worldwide trends in modern industry, it may be worth revisiting the issue to see how it could develop.

The fundamental principle behind business success is competitive advantage, which lies in the achievement of a distinctive competence. Put simply, a distinctive competence is something that an organisation is better at than its competitors. In terms of outsourcing, the areas where an organisation has no distinctive competence should be outsourced.

If these are outsourced to organisations that do have a distinctive competence in them, purchasers should, in principle, be able to “hijack” their distinctive competence, build it into their own and improve their competitive advantage. But the “cardinal sin”, according to Andrew Cox in Supply Chain Management, is to outsource something where they do have a distinctive competence.

This approach to outsourcing, based on core and non-core activities, has led to a list of typical candidates for outsourcing, such as catering, security, facilities management and logistics. Outsourcing these activities allows managers to focus on more strategically important issues and improve performance and profitability. To this extent, outsourcing conforms to the best principles of lean enterprise.

It is interesting to speculate how outsourcing may develop. We loosely defined distinctive competence as something we do better than anyone else, or something that sets us apart from others. This is closely allied, of course, to the concept of mission, which should clarify what the organisation is about.

There are indications that the emerging trend is towards outsourcing manufacturing itself. If we take any well-known brand and ask what its nature is, we can often conclude that manufacturing activity is not an essential component of that brand.

Consider a car manufacturer such as Ford - what really gives it competitive advantage? It is probably the ability to bring out new, highly innovative designs quickly and to market them effectively. So is it necessary to be involved in their manufacture? The answer to this question is probably “no”. In fact, a view could be taken that being involved in manufacturing merely slows the organisation down and makes it less adaptable and innovative.

Engine stopped

We can already see this happening. Several years ago, Ford ceased the production of engine blocks at Dagenham, and there are plans to give suppliers and contractors a greater role in the assembly of its cars at its new Brazilian plant. Volkswagen has already introduced limited assembly outsourcing at its plants in Brazil, and DaimlerChrysler has increased the use of contractors in the production of its two-seater Smart cars in Europe. The move towards the outsourcing of final assembly is naturally one that is highly contentious with the labour force.

The same trend is evident in electronics, where large-scale manufacturers, known as electronic manufacturing services, make products to a performance specification and badge the product accordingly. For example, Microsoft came up with the concept and performance requirements for its X-Box and left the production to its supplier in Hungary.

A similar trend towards the outsourcing of manufacturing is emerging in the pharmaceuticals industry.

The distinction between core and non-core activity may, however, not always be that simple. What is non-core today may be core tomorrow and vice versa. For example, US airport security workers were non-core on 9 September, while on 12 September they were core to national security.

The advice given by R C Insinga and M J Werle in Linking Outsourcing to Business Strategy in The Academy of Management Executive is that companies should monitor the situation constantly and adjust accordingly. They quote Coca-Cola, which decided to stay out of bottling in the early 1900s until the 1980s, when bottling became a key competitive element in the market.

From a practical contract negotiation standpoint, it is probably advisable therefore to ensure that an escape clause is incorporated into any long-term contract for outsourced activity.

Neil Fuller is chief examiner of the CIPS professional stage tactics and operations paper

Outsourcing overview

• Organisations should outsource areas in which they have no distinctive competence (non-core activities).

• Manufacturing is increasingly being outsourced by organisations.

• Core and non-core activity can change, as with US security workers pre and post-11 September.

• It is worth building an escape clause into long-term outsourcing agreements.