Chapter 8 Outsourcing

Scope of Chapter 8 Nature of outsourcing Scale of outsourcing Outsourcing of manufacturing Outsourcing of services Attractions of outsourcing Problems with outsourcing Reaching a decision on outsourcing

Nature of Outsourcing Outsourcing is the contracting out of activities that need to be undertaken on a regular basis, and which otherwise would be conducted within an organization The term ‘outsourcing’ is also sometimes used to describe the hiving off of activities from one country to another. This is more precisely called ‘offshoring’ and does not necessarily involve contracting out activities to another organization

Two Main Categories of Outsourcing Outsourcing of core value-chain activities Supply chain, especially manufacturing Downstream activities such as distribution Outsourcing support activities HRM R&D Facilities management

Outsourcing changes organizational boundaries Larger companies are learning to ‘unbundle’ themselves into their constituent parts They can then outsource those activities falling outside the core of their business With a smaller body of core staff possessing key competencies, outsourcing leads to a compacting of the traditional organization A network of outsourced activities has be coordinated by the lead organization – in an advanced form and supported by modern communication technologies [ICTs], this approximates to a ‘virtual’ network (see Chapter 9)

Scale of Outsourcing Huge increase of outsourcing in the 1990s, continuing into the 21st century Outsourcing abroad to low wage economies is particularly significant - estimated that by 2005, c. 558,000 US jobs will have moved offshore

Globalization a Driver of Outsourcing Liberalization of trade exposes companies to greater competition and exerts pressure on them to cut costs through outsourcing Trade liberalization also facilitates outsourcing by providing easier access to contractors and suppliers across the world Improved ICTs are reducing the transaction costs of managing outsourcing

Outsourcing: Examples Parts of the value-chain: Today, DaimlerChrysler, Ford and GM mostly design and assemble vehicles and their suppliers mostly make what goes into them. About two-thirds of North American auto industry’s $750 billion in value now resides with suppliers. Support Functions: HRM: many aspects of HR have been outsourced: selection, payroll administration, development and career management, relocation

Focusing on Core Competence: Outsourcing and Dominant Partner Networks The dominant partner network Japanese Keiretsu e.g. Toyota’s supplier network. Core competence lies in design and assembly UK : Marks & Spencer - supplier network, with control over quality & supply in exchange for large annual order commitments and developmental help. Core competence lies in store management and customer service

Outsourcing of Manufacturing Major examples: Cisco Systems: - tightly coordinated value-chain network of manufacturers, subcontractors, resource planners, etc. General Electric: - has moved many manufacturing operations to countries like China - has outsourced important support activities, especially to India

Outsourcing of Services Call centers India the major destination Financial services Services: telecommunications, power, water Support services Accounting PR Computing HRM

Attractions of Outsourcing Permits concentration on what an organization does best Allows utilization of best expertise available in the market Can offer significant, often immediate, costs savings (overhead, possibly inventory) Gets rid of operational headaches Avoids problematic labor relations and managerial deficiencies Assists downsizing and delayering Can strengthen managerial control

Problems with Outsourcing Loss of key skills and competencies Unreliability of suppliers Writing a poor contract Loss of employee morale Communication problems Losing control over the outsourced activity Squeezing suppliers too hard Suppliers’ exploitation of dependency on them

Outsourcing: The Experience 1999 survey in USA: 40% of companies either dissatisfied or seeing no clear benefit from outsourcing arrangements Dun & Bradstreet survey 2000: Nearly 70% of companies said that suppliers “provided poor service”, “their cost was too high” and they “didn’t understand what they were supposed to do”.

Reaching a Decision on Outsourcing Need to consider outsourcing in terms of three performance criteria: Strategic - need to weigh up (1) relative strategic value of process, (2) capability and efficiency of external supply base Optimal operational arrangements – e.g. how difficult to integrate outsourced operations Capacity to make the major organizational changes associated with outsourcing [See Table 8.2, Chapter 8]