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As managerial understanding of outsourcing's values proposition advances then the number of applications for outsourcing multiply. As they multiply, the applications mature from tactical and short-term to strategic and long-term, and eventually transformational and evolutionary.

Since 1990 there has been an explosive growth in the use of outsourcing. From near zero when outsourcing first emerged in the late 1980's to $100 Billion in 1996 (according to Harvard Business Review) to an estimated $318 Billion by 2001.

Along the way outsourcing has matured into an indispensable management tool. As famed management writer Peter Drucker notes, of all the powerful management tools to emerge in the last half of the 20^th century outsourcing uniquely compels managers to ask "what to do," increasingly the central management challenge.

Drucker's thoughts appeared in a 1994 Harvard Business Review article. In the preceding years outsourcing's value and role were seen as tactical and immediate. The U.S. business environment of the late 1980's and early 1990's was in transition, and many organizations needed serious change. There was economic uncertainty and pressure. Corporate America was emerging from a period of significant corporate restructuring and large-scale downsizings. Japanese management theories were influencing American business and a quality revolution was underway.

Outsourcing the term and the concept emerged from its application in three places. For manufacturing many firms used foreign labor to make components and products. Outsourcing was also first used to describe relationships between firms and their providers of support services like payroll, security, groundskeeping, maintenance, janitorial, and food services. These services were taken on by companies like ADP, Aramark, and Servicemaster. Often outsourcing was used to describe longstanding relationships. At the same time large firms, especially Fortune 500 Firms like Kodak, were working with traditional hardware and software providers such as EDS, IBM, AT&T, CSC, and others to provide a full array of technology services. It was through these relationships that outsourcing as a managerial practice grew and flourished.

Tactical Outsourcing

In the first stage, tactical relationships, the reasons for outsourcing were usually tied to specific problems the firm was having. Often the firm was "in trouble" to begin with and outsourcing was a direct way to address the lack of financial resources to make capital investments, inadequate internal managerial competence, an absence of talent, and a desire to reduce headcount. Outsourcing often accompanied large-scale corporate restructuring. Many tactical relationships were forged to create immediate cost savings, eliminate the need for future investments, to realize a cash infusion from the sale of assets and to relieve the burden of staffing.

The focus of tactical outsourcing is the contract, constructing the right contract, and holding the vendor to the contract. The expertise for constructing these arrangements emerged from purchasing. Frequently the contract was simply a fee for services. Much of the value stemmed from the discipline of spending dollars externally. When managers created successful tactical relationships the value of using outside providers was clear: better service for less investment of capital and management time.

Strategic Outsourcing

As some pushed for more value from outsourcing relationships the goals of these relationships changed. Executives realized that instead of losing control over the outsourced function they gained wider control over all of the functions in their area of responsibility, and they were better able to direct their attention to the more strategic aspects of their jobs. Instead of facilities managers worrying about staffing janitorial positions, they were more focused on infrastructure issues. Technology executives handed the running of the data center to a service provider and turned their attention to serving the needs of internal customers. The logic remains compelling.

How outsourcing was used and where it was applied changed. The size of outsourcing relationships jumped and the scope of the service provider's involvement grew. Outsourcing changed from being a tactical tool to becoming a strategic tool by virtue of the dollar value of the relationships, the integrated scope of services, and the length of the new relationships. Most importantly, the managerial mindset about the nature of the relationships matured from one between buyer and supplier to one between business partners. Strategic outsourcing relationships are about building long-term value.

The phrase strategic outsourcing was coined by Professors Quinn and Hilmer in 1994. But it was being practiced earlier by forward thinking executives. And, that year Eastman Kodak executive Katherine Hudson signed one of the first 'strategic' outsourcing deals with IBM. The Kodak-IBM deal was about identifying the core competencies of the firm, partnering with a provider to deliver the non-core activities, while focusing the firm's resources on the core competencies of the firm. For the IT operations at Kodak it was a matter of focus, IT's role, and the direction IT would take for the next decade. The decision to outsource was very much strategic, and the role the provider (IBM) took on was critical. The rationale for outsourcing was focusing on core competencies, or as Katherine Hudson said, "our mission doesn't say `be the world leader in computing'".

Instead of working with a host of vendors to get the job done, in a more strategic model corporations work with a smaller number of best-in-class service providers and integrate the operations across themselves and all of their providers. The working relationships with providers evolves from adversarial vendor-supplier relationships to long-term partnerships between equals where the emphasis is on mutual benefit. Michael Corbett, IAOP Executive Director, defined strategic outsourcing as, "the redefinition of the corporation around it's core competencies and strategic, long-term, results-oriented relationships with service providers." It is fundamentally redefining the business and separating the core from non-core activities and making decisions about how to get the work done.

Transformational Outsourcing

Transformational outsourcing is the term used to describe third generation outsourcing. If the first stage of outsourcing was about doing the work with the existing rules, then the second stage is about using outsourcing as the corporation is redefined. The third stage is using outsourcing to redefine the business.

To survive today, organizations must transform themselves and their markets in an ever more daunting challenge to redefine the world before it redefines them. And outsourcing has, once again, emerged as the single most powerful tool available to executives seeking this level of business change. This new transformational outsourcing recognizes that the real power of outsourcing is in the innovations that outside specialists bring to their customers' businesses. No longer are outsourcing service providers simply viewed as tools for getting more efficient or better focused, they are seen as powerful forces for change — allies in the battle for market- and mind-share.

Outsourcing can be used to radically change the definition of the business—open new markets, deliver new customers, and create new products. Outsourcing is leverage. Here outsourcing is a vehicle for changing the firm's relationships with customers, employees, and business partners by working with best in world partners. It's enabling growth. It's the way to grow by alliance. When managers realize that outsourcing relationships are a way to invest in the future of the firm they are thinking differently. Transformation outsourcing is not about creating dependence, it's about actively creating interdependencies that serve the interests of all parties. Mission Foods uses Ryder Logistics to deliver it's products to new markets in ways the company could never have done alone. Where once firms kept outsourcing in the background, never letting their customers know part of the work was delivered by a third party, now firms co-brand products/services and firms march out their outsourcing providers to instill confidence in customers and business partners. "No longer are outsourcing service providers simply viewed as tools for becoming more efficient or better focused, they are seen as powerful forces for change, allies in the battle for market and mindshare," says Michael Corbett. Outsourcing relationships have the power to thoroughly redefine how business is done.

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