Make Capital Funds Available

There is large amount of competition within most organizations for capital funds. The senior management is always in a fix to decide where to invest the capital funds. It is often difficult to justify non-core capital investments when core areas directly related to producing a product or providing a service compete for the same money. In this context outsourcing can reduce the need to invest capital funds in non-core business functions .Outsourcing can also improve certain financial measurements of the company by eliminating the need to show return on equity from capital investments in non core areas.

We shall see, when we come to the next reason for outsourcing, that a cash infusion into the organization may be desirable. This reason concentrates on the organization being able to concentrate its capital budgets on its core business, with the outsourced services being financed from the operating budget. Often, within a manufacturing organization, the business units have to compete with each other for a share of the capital budget, with the cases for new or enhanced computer systems and for new or replacement vehicles vying with the cases for new production plant.

Outsourcing may be seen as an answer to this problem, by reducing the competition for capital budgets. In the manufacturer, the outsourcing of computer systems and vehicle management could reduce the competition for capital budgets. The requirement for production plant would be able to make a better case for a larger proportion of the total capital budget. In addition, the problems caused by expansion of the core business to the detriment of the other demands upon the capital budget will be relieved. In the manufacturer, the situation before outsourcing may have been that the computer systems and vehicles were becoming increasingly outdated or expensive to operate because capital investment was always allocated to the production processes.

Outsourcing could allow the organization to replace computers and vehicles and to better maintain its buildings. It is difficult to visualize this reason being the sole reason for an organization choosing to outsource, but I have known this to be so.Often, outsourcing means transferring some of the organization's assets to the outsourcer. These assets can be buildings, machinery, computers, vehicles and other "solid" assets. They can also include contracts and licences capable of being assigned to the outsourcer. In some cases they can involve staff. The assets for which the organization will receive a cash infusion are likely to be the "solid" assets. The outsourcer will buy them and then use them to provide services back to the organization.