Thursday, October 21, 2010

Choosing the “Correct” Outsourcing Relationship

Now that the make or buy decision has come down on the buy side, its time to choose the type of outsourcing to best suits your needs. There are basically four different types of outsourcing relationships:

1. Wholly Owned Foreign Entity (WOFE)
2. Joint Venture (JV)
3. Strategic Partnership
4. Sourcing Company.

Wholly Owned Foreign Entity (WOFE). As you might guess from the title it is the largest of the four as far as commitment of resources (money and time) and poses the greatest risk for the owner. This is not to say that the WOFE doesn’t have its place. If you are planning to move a major portion of manufacturing this option allows for the greatest control. If you choose to go this route be prepared to spend a great deal of time and money on lawyers and consultants as this is the most complex means of outsourcing.

Joint Venture (JV). This method allows for expanded control through ownership and is a common practice. The upside with this option is that because you have part ownership you have control over product and process. The downside is that you have responsibility that comes with ownership in a foreign country but you don’t always have the authority to maintain control. Most JV’s fail because the partners can’t agree on the primary goals and the means to achieve them. The vast majority of JV’s end in failure because of the incompatibility of the partners because one or more of the partners was not honest regarding their expectations.

Strategic Partnership. This is much like a JV except that you are merely the customer with no rights or responsibilities of ownership. This method is used mostly to achieve preferred customer status in an industry with limited capacity or raw materials.

Sourcing Company. For every WOFE and JV there are scores of sourcing companies. The reason is simple - this option offers the lowest up front investment of resources and the greatest flexibility. If the right sourcing company is chosen, risk is drastically reduced. This is because an experienced sourcing company has all of the mechanisms in place to manage process, material, quality, security and logistics. This type of outsourcing relationship can also be used as a spring board into more committed relationships after the customer gains knowledge in their dealings with the sourcing country. A sourcing company is also the easiest relationship to extricate yourself from if you decide that the fit is not right.

In summary, it is best to start your outsourcing initiative with a Sourcing Company, and work your way up to the higher commitment relationships as the needs and value would dictate.