We must also consider differences in the application market for strategic outsourcing based on the size of companies that outsource.
(1) Large Companies
As explained earlier, when a large company tries to outsource in a new area, it meets great internal resistance. Moreover, the scarcity of qualified vendors in terms of expertise and size further complicates the problem. Thus for large companies, the strategic value of outsourcing will grow in their traditional outsourcing areas such as logistics (physical distribution) and facility management. In fact, the quality of vendors in these areas has also improved remarkably.
1.Physical Distribution
Physical distribution is an area that companies have had extensive outsourcing experience. While conventional outsourcing has mostly consisted of simple shipping and storage operations, recently more companies are outsourcing their entire physical distribution function (Table 1).
This is occurring against the backdrop of advances in information technology, which enables specialized vendors equipped with order handling systems, operational management systems, and computer controlled warehouses to use their information networks and enhance their capabilities. In addition, specialist vendors are getting better than the inhouse capabilities of large companies at handling smaller lots of many products more frequently and quickly.
2.Facility Management
Almost all the facility maintenance and management work of companies has been outsourced to building maintenance, property management, and security companies. In the past, this area consisted mainly of cleaning, equipment maintenance, and security services. However, in the 1980s, a comprehensive approach to facility management that grew substantially in the west is now challenging the traditional approach in Japan. The new approach goes beyond the objective of simply maintaining the status quo, and aims to provide comprehensive and company-wide support by linking together corporate management efficiency with facility management. For example, one service examines the optimal placement of facilities to enhance a company's organizational and sales strategies. Judging from developments in the west, this area will develop in stages toward higher value added content by encompassing not only space management, but also peripheral areas such as environmental control, real estate acquisition and management, consulting, and project management (Figure 3).
(2) Small, Medium and Second-Tier Companies
On the other hand, due to underdeveloped administrative systems and difficulties in hiring specialists for specific duties, second tier and smaller companies are expected to make considerable advances in strategic outsourcing for administration, accounting, personnel, and welfare functions. These companies, by fully using the expertise and networks of vendors, will be able to obtain a higher quality of services from the outside than they could provide on their own.
Vendors in this area are growing rapidly. Unlike the traditional outsourcing areas of logistics and facility management, many new businesses are emerging. The strong outsourcing demand fueling this growth comes mainly from second tier and smaller companies.
For example, the outside resources available to companies seeking personnel services used to consist of employment agencies and training and development services. But recently, a number of vendors have emerged that integrate all personnel matters including personnel systems, employee information systems, and hiring. More companies are outsourcing administrative functions such as compiling monthly account settlements and purchasing, as well as employee welfare functions such as health management, company cafeterias, and management of company housing and employee welfare facilities.
New entrants into these areas include large companies as well as venture businesses, many of which are growing rapidly. Large employment agencies are moving beyond simply providing temporary workers and providing integrated solutions including the calculation of payrolls and operation of company day care centers. Ventures with unique names such as "administration," "accounting," and "employee welfare" are marketing their proprietary systems and expertise to serve the administrative needs of smaller companies.