Usually, companies decide to outsource some or all of their logistics functions in order to reduce costs and/or make more effective use of working capital. Most companies also believe that outsourcing is an efficient and effective way to perform “non core-competency” functions, allowing them to focus their energies creating differentiation and promoting revenue growth. In some cases, companies claim they can respond faster and more effectively to change when using a logistics service provider (LSP). Indeed, there are significant benefits to outsourcing logistics.

To maximize those benefits, you must implement an overarching process. The high-level steps are as follows:

• Evaluate whether outsourcing is right for your company.
• Determine exactly what functions to outsource and the performance expectations.
• Use a well-defined professional selection process to evaluate and select which provider(s) are right for the job.
• Create an agreement that will yield the best results over time.

Companies turn to outsourcing over in-house management of logistics for a variety of reasons. The most common driver is when companies find it financially desirable to redeploy capital assets and shift fixed and internal logistics costs to an expense. Physical assets and people are replaced by the provider and that capital can be used for other purposes. This process is usually considered more strategic to the company’s growth.

Companies’ supply chains may require particular process competencies and/or specialized supply chain expertise which are not available internally. These might be caused by the need to support a shift to a demand-driven supply strategy, to support increasingly complex global logistics requirements, and/or to support sophisticated network and inventory optimization strategies. Some believe that outside firms are simply better than internal management at achieving lower costs, increasing staff productivity, and managing labor.

In some cases, an outsourced firm is used for its technology as well as its physical capabilities. High technology is required to support the automation and optimization of today’s complex supply chains. When a provider has invested in these technologies and is proficient in their application, it can deliver these capabilities faster and at a lower cost.

Still others turn to outsourcing when trying to penetrate and grow in new markets. These opportunities might involve launching a new product line or category requiring specialized capabilities, or jump-starting expansion into a new geographic region where the provider already has a presence. Similarly, some companies use outsourcing to mitigate the difficulties associated with integrating mergers and acquisitions.

No matter which of these previous factors may be driving your company’s decision to outsource, these four essential questions must be answered.

1. Does our supply chain logistics proficiency play a big role in our competitive position in the industry? If so, the loss of control introduced by outsourcing and/or the lack of continuous process innovation may be too costly to your competitive position.
2. Have my supply chain logistics needs surpassed the capabilities of my company (core competency, technologies, infrastructure)? This is likely a clear signal to outsource unless the answer to Question 1 is yes.
3. Have the dynamics of my supply chain network changed such that our existing assets (facilities, people, physical assets, etc…) are too few? Too many? Too costly to be profitable? Lacking in needed flexibility? Again, these indicators signal that it may make sense to outsource.
4. Will our culture allow us to appropriately manage an outside party relationship? Even though the signs may clearly point to outsourcing, companies must realistically analyze themselves to see if outsourcing to a third party can really work.

Most companies are hesitant to outsource all of their supply chain activities. More often, companies focus on a particular function where the problems may be the most acute or the benefits may prove largest and work from there. (Exhibit 1 shows some of the most popular areas for logistics outsourcing.)

After determining what function or functions your company desires to outsource, you must clearly define your requirements for that function and design how the integrated process will work once outsourced.

In today’s supply chains, it is important to include the specific technology requirements and information flows that will be expected. Technology is used to automate functions, provide needed productivity levels, and optimize key parts of the supply chain. Without the proper use (not just the possession of) of the right technologies, your provider will most likely fall short of your performance expectations. You should also articulate what information you will be expecting at what intervals across all the outsourced functions. This will most likely take the form of systems integration with corporate back-office systems and will be key to the proper management of the provider post-implementation.

Furthermore, you must be clear about the service-level expectations. You must be able to express your performance expectations in terms of measurable metrics or key performance indicators (KPIs). Acceptable values or ranges should be incorporated into the evaluation process and more importantly, into post decision execution management.

To properly evaluate and decide on a provider, your company should follow a standard, professional selection process. That process starts with capturing all of the above determined requirements and expectations in the form of a Request For Information or Request for Proposal (RFI/ RFP).

The next step is to send this RFI/RFP to an initial set of providers with a specific timeframe for their response. One can search websites and trade publications, use a consulting firm such as Accenture, Capgemini, IBM, or Forte, or call on the advice of seasoned industry experts at research firm such as AMR Research to find a recommended provider.

Companies then must evaluate how closely provider capabilities match their requirements. We find that companies often show preference for providers that are very familiar with the processes found in their industry.

With each of the short list providers, the company should do reference calls, go on site visits, meet the actual teams that would be managing operations, hold strategy and design sessions, review the expectations and metrics, and negotiate fee structures and pricing. Be careful to assess the risks associated with providers especially as the pricing becomes more attractive—the lowest price isn’t always the best choice. The final decision will likely depend as much or more on the people, the cultural fit, and the future relationship as it will on price.

Outsourcing relationships are fundamentally based on certain assumptions that are in place at the time the selection and agreement are implemented. Outsourcing relationships commonly get strained once execution begins because the original agreement did not take into consideration the need for the business, and of course the provider’s services, to adjust to new business demands. An outsourcing agreement must provide a framework that lends itself to flexibility. In fact, the best agreements include incentives for the provider to identify opportunities for improvement.

With any relationship, problems may arise. Leading companies establish clear policies and procedures for problem resolution and pre-design solutions for avoidance or effective problem handling. And, as stated earlier, the agreement must specify a clear set of KPIs and systems to measure performance, monitor and communicate results. Information flows increase visibility into operations and performance to offset the feeling of lack of direct control. At the same time, the agreement should be flexible enough so that the KPIs can be adjusted over time as business conditions dictate.

Being a good partner means understanding that a successful relationship must be mutually advantageous. Reward systems should be in place for top performance just as if that performance were being provided by internal staff.