A time for outsourcing reflection

Lately, we've been hearing a lot about the commoditization of the third-party logistics service business. One recent survey suggested that outsourcing customers were not totally satisfied with their providers. As for the source of that dissatisfaction, much of it came down to unmet expectations. What customers wanted from their service providers, they said, was more innovation (that is, new and creative ideas); what they were getting, by and large, were the standard transactional and operational services. All this has created a perception that the market is becoming commoditized, defined by Wikipedia as "the process by which goods that ... are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers." In other words, the market moves to undifferentiated price competition.

That certainly doesn't sound like the market that logistics service providers (LSPs) have worked to build for the past several decades. In the early days of outsourcing—say, prior to the 1990s—most clients did view it as a cost-cutting measure, and in fact, most LSPs encouraged that thinking. But it wasn't long before the more enlightened clients realized they could gain an edge in the marketplace by providing superior service to their own customers—and that outsourcing offered a way to accomplish that. Over the years, the industry has matured, particularly on the provider side, and today, many companies enjoy effective and mutually satisfactory outsourcing relationships. What, then, is changing? The research suggests that much of the fault lies with the LSPs and their failure to embrace new technology and bring innovative ideas to the table.

This is probably true in a number of cases. What some providers have considered to be value-added services have over time become expected offerings—the price of admission to the bidding process—thereby contributing to the perception of commoditization. Some simply haven't added enough value in such areas as visibility and analytical capabilities. Without question, it is time for LSPs to take a hard look at their contributions to the process and how they set themselves apart from the competition.

But what about their clients, the users of outsourcing services? These arrangements are supposed to be partnerships, which suggests to me that if there is a need for innovation or new technology, the parties should sit down and discuss how they can make this happen. Although some outsourcing customers make it a point to do that, an alarming number seem to have reverted back to the pre-1990 mentality. The outsourcing of logistics processes is not about cost savings. It's about adding value to the client company and its own customers. These services are not commodities and should not be treated as such.

The cost-cutting mindset, however, is spreading quickly and will be hard to deflect. Obviously, the recent downturn in the economy had much to do with that. Cost reductions have become the goal of every still-employed supply chain manager. Never mind that technology is expensive and many good providers have limited resources, particularly in the face of cutthroat price competition. Organizationally, we have contributed to the dilemma. With increasing frequency, corporations are turning the purchase of supply chain services over to procurement professionals who have little, if any, concept of what they're negotiating for, other than the lowest price.

There's no question that some providers must change their attitudes toward new technology, creativity, and innovation. This will be particularly difficult for companies like small LSPs with limited funds for technology upgrades, but it must be done. However, the clients also need to reflect on the impact their actions will have, not only on the providers, but longer term on their own supply chains.

An outsourcing arrangement based solely on price is doomed to failure.