1. Chapter 8 Outsourcing

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. 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”.

15. 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]