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Friday, January 16, 2009

What's The Difference Between "Partnering" And "Outsourcing"?

The terms "partnering" and "outsourcing" are thrown about so frequently .... and in so many contexts .... that it's hard to nail down an exact definition for either.

These two practices are becoming ever so common among the business community, and although the distinction between them is becoming increasingly blurred, they do have distinguishing traits, which bear consequential benefits and risks.

It has been said that the practice of outsourcing should be looked upon not as a simple customer-vendor relationship, but rather as a partnership where the engaging parties mutually benefit from their agreement. While this may be a sound management practice, and while outsourcing shares many of the same characteristics with strategic alliances, outsourcing should be recognized as its own distinctive tactic.

Outsourcing is the contracting of services via monetary means in order to minimize or limit the resources that would normally be required to perform business functions internally, thus reducing costs.

A partnership, on the other hand, does not necessarily involve monetary payment from one firm to another, or a binding contractual agreement between two companies.

Rather, it is a partnership in which business entities collaborate with one another in order to bring about mutual benefits. This partnership can range from a loose and informal one, to more formal joint ventures, which involve legal measures to set parameters. Such alliances might include practices such as the partnering of manufacturers and retailers in order to reduce logistics costs, or the engagement of hardware and software development firms to create competitive advantage through synergy. Indeed, there are almost infinite ways in which strategic alliances can be formed.

The point here is that outsourcing and the formation of strategic alliances, while similar in some ways, are normally used to achieve different outcomes and involve different methods of binding between the participants.

Partnering will be used more and more in these hard times. If I outsource a job to you, then you are paid a fee to complete your services regardless of the outcome of the project under which your services were rendered. If on the other hand we partner on a project, while you are not a partner per se, I would expect you to provide your services contingent upon the success of our project. If the project failed, you would not get a fee, but if the project were a success, you would expect a much larger fee for your services than if you'd been hired as an outsource.

2 comments:

Quillan said...

Outsourcing is when you hire outside professionals or services to take on part of your business workload. You may want to outsource part of your work because you don't have the room, you need an expert, you have periodic busy periods, or you need more production to get orders out on time, etc. There are many ways outsourcing can save your business time and money. http://www.infysolutions.com

Debra Snider said...

I just posted this comment on LinkedIn, but thought I'd post it here as well. Glad to have discovered the Cafe - useful info!

I agree that outsourcing and partnering are not synonyms, but I've had excellent experience with incorporating partnering principles into outsourcing arrangements.

When I was the General Counsel at Heller Financial, we developed a strategic partnering program with our outside law firms and other legal services vendors. Instead of viewing these vendors solely as guns-for-hire, we set out to be "in business" with them so as to create true win-win business relationships.

And it worked. Over a 5-year period of significantly increasing corporate costs, our law department was the only unit at Heller (a $20B commercial finance company) with a negative compound annual growth rate in expenses. At the same time, our partnering outside law firms enjoyed material increases in revenues, profits and realization rates.

I wrote a book for the American Bar Association about these experiences, using Heller as a case study. The book, which is called "The Productive Culture Blueprint," has lots of checklists and other tools & tips for building partnering-style outsourcing arrangements. There's more info about the book and the partnering program on my website at: http://tinyurl.com/8bj6bp