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Recently, increasingly rapid changes in all aspects of the environments, and in technology and international deregulation have challenged large corporations to compete on a global scale (Kanter, in Hendry, 1995, p.194). To meet this competition the giants had to learn to dance, to be flexible themselves, and to “do more with less”. Critically reviewing the sources of their value-added, many were beginning to contract out non-core functions and move towards to fast-moving, fashion-based industries (Hendry, 1995, p.194). Hendry also states that the forces of competition were greater by the effects of the recent recession, and cost-cutting in all forms became today essential. Companies were forced to look much harder than ever before at their efficiency. And among measures like downsizing, delayering, internal markets or reengineering, outsourcing also remained a key element of the cost-cutting mix (Kakabadse, A. & Kakabadse, N., 2002, p.193; Hendry, 1995, p.194). However, reducing costs is not a unique reason that companies begin outsourcing services (Lanz & Barr, 2000, p.2).
Sound reason could include improving service quality and management, focusing more on the core competencies of the organization as there is a change or expected change in the company’s markets. Gaining access to new technology and skills, reducing headcount, enhancing the organization’s capability to develop new products and services, are identified as reasons for outsourcing. Shortening cycle times for market delivery, customer response is also a reason for contracting out (Leavy, 2001, p.48; Lanz & Barr, 2000, p.2; Bailey, Masson & Raeside, 2002, p.88). The reasons why to outsource is certainly obvious; however, the most basic strategic choice is what to outsource (Leavy, 2001, p.48). Recently, companies seem to favor extensive outsourcing. More and more companies are being advised to concentrate on core activities and outsource as much as possible the rest. This approach has so much popular that it is sometimes hard for us to imagine why high levels of integration ever made commercial or strategic sense. For instance, back to the early 1980s, the IT industry was dominated by a small number of manufacturers, like IBM and Digital, which controlled the key technologies in both hardware and software.
These companies sold very high margin products directly to industrial and commercial customers. However, the situation, then, has changed dramatically. The IT industry has recorded rapid growth through the increasing convergence of computing and telecommunications, and has seen the emergence of a new mass-market segment following the arrival of the personal computer. This explosion resulted in the growing of the sub-supply sector, and gradually, contributed to the emergence of independent service providers in many non-core areas like construction, maintenance, and distribution. They are competitive in scales and reputation. As a result, today’s industry leaders, like Dell and Cisco, now use extensive outsourcing. Cisco outsources most of its manufacturing and much of its product development. All of Dell’s software and non-assembly hardware are provided by outsiders. Dell has no plants for making microchips, printed circuit boards, keyboards or monitors. It takes orders directly from customers and uses third parties for distribution and servicing.