A2 Micro: Outsourcing

Over a third of UK companies now do some of their production work abroad, whilst 10% have over half of their manufacturing offshore in lower cost locations. Dyson is a high profile example of a company that has relocated production abroad to Malaysia, whilst keeping their research and design operations in the UK. Most recently we are witnessing a trend for service sector businesses to follow suit. In recent times we have seen Norwich Union, Abbey National, Tesco, British Airways and National Rail Enquiries all transfer parts of their operation overseas.

There are three main drivers promoting outsourcing as a business strategy:

(1) Technological change – Information, communication and telecommunication costs are falling - this makes it easier to outsource service and manufacturing operations to sub-contractors in other countries. Technological advances now promote “Just in time delivery” inventory strategies for the delivery of components and finished products and encourage the development of “virtual manufacturing”. Communication costs are dropping sharply - the average price of a one minute international call was 74% lower in 2003 than in 1993.

(2) Increased competition in a low-inflation environment - which increases the pressure on businesses to achieve lower costs as a means of maintaining market share.

(3) Pressure from the financial markets for businesses to improve their profitability.

For many large businesses, there are cost advantages to be gained through doing business via a call centre located overseas. Outsourcing is not simply confined to service sector industries. Many manufacturing businesses are using outsourcing as a means of reducing their costs, providing greater flexibility of production levels at times of volatile demand and also in speeding up the time it takes to get their goods to market, especially new products.