TDC Seminar on the Pros & Cons of Outsourcing Dr. Gilbert Wong Executive Director Poon Kam Kai Institute of Management University of Hong Kong The University of Hong Kong Poon Kam Kai Institute of Management

HKU-PKKI Reasons for outsourcing zExamples of outsourcing yA credit card company outsource it data capture and customers expenditure reporting IT function yA hotel outsource its laundry services yThe university outsource its catering service zReasons y‘Contain’ cost because of the lack of ‘competence’ & sharing the vendor’ economies of scale yAvoid specific investments yImprove service yRefocus resource strategically

HKU-PKKI The context for outsourcing zIntensified competition leading to yNeed for building distinctive competence yOrganizational downsizing yNeed for flexibility  The need for diverse inputs in businesses in the ‘ new economy ’ e.g. delivery health care service on the net  But are these ‘ alliances/partnering ’ or ‘ outsourcing ’ ?

HKU-PKKI Why ‘ in-sourcing ’ in the first place?  Theory of the ‘ firm ’ as resource coordinator – but why not the ‘ market ’ e.g why do hotels have an ‘ Engineering ’ department?  Transaction cost theory – organizations ‘ in-source ’ to minimize transaction cost arising out of: yUncertainty in the demand  Possible ‘ opportunistic ’ behavior of supplier yThe cost of writing a detailed contract and the cost of enforcing the contract  Developing the distinctive competence of the organization – in specific activities e.g. software development or the coordination of activities e.g. sales and IT team  >> what to ‘ outsource ’ and the nature of the ‘ outsourcing ’ relationships

HKU-PKKI What to outsource? Two dimensions: xUseful vs. critical function xCommodity vs. differentiator Two dimensions: xUseful vs. critical function xCommodity vs. differentiator zUseful commodity - activities that do not distinguish the company from its competitors e.g. payroll, accounting system - outsource  Critical commodity - activities that are important but does not ‘ differentiate ’ e.g. aircraft maintenance – outsource or in-source depending on strategy  Useful differentiator - differentiate the company but not in a critical way – good IT team developing special application outside the company ’ s main business – migrate or integrate  Critical differentiator e.g. research in an investment bank – keep in house

HKU-PKKI What to outsource? Internal or External provider Internal or External provider Internal provider Internal provider External provider External provider Migrate or integrate Migrate or integrate Critical Useful Commodity Differentiate

HKU-PKKI The transition to outsourcing zContractual issues yhow to draft the contracts ywho should be involved, transition process zPeople issues yWhat will happen to existing staff,  how the ‘ insiders ’ relate to the ‘ outsider ’ zOrganizational adjustment

HKU-PKKI Types of inter-firm relationships

HKU-PKKI From outsourcing to partnering zFrom outsourcing contracts on a one-off basis to relationship management zFrom exchange of interest to mutual learning zFrom hard to hard AND soft benefits zFrom close ended to open ended relationships zFrom legalist rights to honor & obligations zFrom having control to sharing control  From ‘ contractual deliveries ’ to organizational adjustments zFrom dealing at the strategic level to partnering at all levels ¤Its all about managing a network of relationships

HKU-PKKI Dimensions of a successful outsourcing relationship zRelationship structure  where the parties define the goals of the relationship – What they hope to accomplish, and most importantly, how they will measure success zThe management structure ydefines how both organizations will work together to ensure success and, when necessary, take corrective actions on less- than-desired outcomes zRef:

HKU-PKKI Relationship structure 1.Define relationship strategically – creating a basis for LT cooperation 2.Capturing the intent, not just the terms of the relationship 3.Manage expectation carefully – chances of repeated business? 4.Defined scorecard 5.Differentiate between the client and the Customers 6.Match pricing & contractual terms to the goals and culture of the partners 7.Create incentives for improvements 8.Define management structure in advance

HKU-PKKI Management structure 1.Keep strategic responsibilities close to the top, but create multilevel organizational links 2.Conduct regular goal oriented meetings 3.Encourage lateral, multi-channel communications 4.Define escalation process 5.Use scorecard to keep track of performance 6.Reward providers employees 7.Implement a change process 8.Treat the relationship as a valuable organizational asset

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