OUTSOURCING STRATEGIES. HOW TO FORMALIZE AND NEGOTIATE
THE OUTSOURCING CONTRACT
Pellicelli Michela
Department of Business Administration “Riccardo Argenziano”
Faculty of Economics, University of Pavia.
Meo-Colombo Carlotta
Department of Business Administration “Riccardo Argenziano”
Faculty of Economics, University of Pavia.
In the globalized economy multinational firms have given ri to local firms able to produce at a low cost and at acceptable quality levels. A growing number of firms have outsourced production and manufacturing activities of all types to the firms, not only to reduce production costs but also to make their organizational structures more streamlined and flexible. Outsourcing decisions, which originally w
ere limited to production which had a modest technological content and was of marginal importance for the business in question, is increasingly adopted for activities which, requiring core competencies or belonging to the core business, were considered inparable from the organization and thus not outsourceable. Gradually an outsourcing strategy has developed which has found it convenient to outsource even core competencies and functions, such as specialized manufacturing, which require a particular technology, marketing, product design, and the arch for know-how (Prahalad and Hamel 1990: 79-91).
Such an outsourcing strategy has a number of advantages, among which quality improvement, a greater focus on managing other core competencies, a greater flexibility and leverage regarding resources, along with the possibility of entering new markets, even ones with a high rate of development.
This article analyzes the fundamental stages for an outsourcing strategy. It will demonstrate how, in order to achieve an outsourcing strategy, it is necessary to include outsourcing in the general strategy, gather suitable information for choosing the outsourcer, negotiate the contract with the supplier, choo the type of relationship to have with the supplier, and, finally, plan the transfer of activities and functions from the outsourcee to one or more outsourcers or providers.
Keywords: outsourcing, outsourcing decision, strategic perspective, outsourcing contract, contract negotiation, outside information, organizational culture.
JEL Codes: M10, M19, L20, L21, L24, L26
1. Introduction. The object of outsourcing
Outsourcing functions, process and activities, normally carried out inside the firm, through outsourcing contracts – by repurchasing through supply contracts the products or results of certain activities by firms delegated for such activities – is not a new phenomenon.
Starting from the early ’80s, the u of outside suppliers has taken on new features. In the global economy, in many countries still referred to as the “Third World”, multinational firms have t up local companies able to produce at low cost and at an acceptable level of quality “(1)”; the firms have been handed production and manufacturing activities of all kinds by a growing number of firms, who are motivated by the possibility of reducing manufacturing costs as well as of streamlining their organizational structure.
In recent years outsourcing strategies have undergone a profound evolution, moving from simple forms of production contracts involving third parties to agreements that entail veral
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strategically important functions: from technological innovation to logistics, customer relations to post-sales rvices.
The outsourcing decision is not limited to marginal production with a modest technological content but is increasingly extended to activities that require “core competencies” that are part of the “core business”, activities which, until that moment, were considered an inparable part of the firm and thus not outsourceable.
2. Outsourcing as a strategic perspective
北京动物园Today firms consider outsourcing from a long-term, and thus strategic, perspective, who aim is the outsourcing of functions and process through a network of stable agreements with specialized outsourcers who take on the role of providers, with or without exclusivity.客厅电视墙
Quinn and Hilmer have clearly summed up the four main advantages of outsourcing from a strategic perspective (Quinn and Hilmer 1994: 43-55):
1. maximizing the yield from internal resources by concentrating investments and effort on what the f
个人签名设计irm “does best”;
2. creating or protecting the competitive advantages by developing and strengthening the “core competencies” and building barriers against prent or future competitors who might try to enter the firm’s areas of interest;
3. providing incentives to investments in the outsourcers’ technology and know-how, their innovations and skills, and their specialized activities, which the outsourcee can maintain in-hou only through continual investments and innovation;
4. reducing the risks in rapidly changing markets and in the prence of fast-evolving technologies; an outsourcing strategy transfers outside the firm the risks from technological change and R&D costs, thereby shortening the production cycles and making the respon to customer needs faster and more flexible.
Today the tendency is to achieve global sourcing and offshoring; that is, outsourcing that involves outsourcers located in countries other than that of the outsourcer.
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With the decline in transport costs and the development of the merchant marine and container ships,
globalization has begun to parate the “geography of production” from the “geography of consumption” (Mella 2007: 12).
Global outsourcing and offshoring are process that best illustrate this tendency. Outsourcing is transforming production from a relationship involving the supply of materials, components and rvices into a network of competencies involving rearch and development and planning.
Outsourcing has entered into new fields, from customer rvice to R&D to the study of new business models, even health care rvices.
Along the lines Champy writes, in his introduction to Koulopoulos and Roloff’s book: “The forces of globalization have finally kicked in. … Material and product sourcing move between multiple countries as a function of price, quality, and speed. And customers are everywhere expecting to be rved with consistent quality and price, independent of location. The Internet has made markets global, even for the smallest company. In fact, information technology is the great enabler of tho changes” (Koulopoulos and Roloff 2006: 1-5).
3. The phas of the outsourcing strategy
An initial interesting model for the outsourcing decision – developed with reference to the industrial rvices ctor, though of general validity – is prented by Kumar et al. (Kumar, Aquino and Anderson 2007: 323-342). After a preliminary brainstorming process on the fundamental internal and external variables that can influence the outsourcing decision – a
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process which involves all the organizational levels of the outsourcing firm – the risks of outsourcing are then considered (Pellicelli 2008).
Jennings propos a more general model according to which the outsourcing strategy can be outlined in the following phas (Jennings 1996: 393-405). (Table 1)
Table 1 – The phas of an outsourcing strategy.
P HASES P RINCIPAL A CTIONS
1. The objectives.
Allocate outsourcing as part of the general strategy.
Asss whether or not outsourcing is a feasible strategy for the organization, taking into account its current strategic objectives. •Define the long-term strategy for the function to be outsourced.
•Consider the impact of the outsourcing decision on the chances of achieving the organization’s mission and strategies, including costs, quality, flexibility and time frame.
Consider the changes in the business environment that would entail a change in strategy.
2. Which activities to outsource. Collecting information.
Collect and analyze information about the products/rvices to outsource and tho than can be produced in hou. •Identify the products/rvices to outsource and the expected performance levels.
•Give a clear definition of the products/rvices.
Identify the “core” competencies. Determine the current costs of the products/rvices to be outsourced and estimate the potential savings from outsourcing. •Obtain references about the supplier.
3. Choosing the outsourcer.
Set evaluation criteria to identify a group of potentially reliable candidates. Identify the number of suitable suppliers in order to have a vast and rational choice.
Document the technical and managerial capacities of the candidate firms, their organizational cultures, and the potential fit (degree of integration with the outsourcer).
4. Negotiating the contract.
Aim for a contract that strictly establishes the rvices required and at the same time is flexible enough to permit the addition of future rvices as a respon to unforeen events. •Negotiate a fair and equitable agreement.
•Specify the performances expected from each partner, how the should be measured and remunerated, and how any controversies that may ari are to be ttled. •Clearly specify contingency claus and how any subcontractors are to be managed.
5.Transfering the outsourcer’s activities and functions to the supplier.
Preparing a plan to transfer the outsourced activities to the supplier. •Set up a temporary working group to control and organize the transfer.
•Actively involve tho employees who activities may be affected by the transfer.
•Ensure that the managers of the functions or of tho parts of the organization outsourced are actively involved in the decision-making process
6.Choosing the appropriate outsourcer-supplier relationship •Buy the market, ongoing relationship, partnership, strategic alliances, upstream integration.
Source: adapted from Jennings 1996: 393-405
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取整数4. The objectives: what place in the general strategy?
Successful outsourcing starts with the clear definition of objectives and a clear asssment of how the can be satisfied by the outsourcer. Many failures are due to unrealistic or wrong expectations (Allen and Chandrashekar 2000: 5).
In general, there is more than one objective, and the first pha in the decision-making process involving whether or not and how to outsource starts by defining which process or functions should be kept inside the firm.
For example, one objective of outsourcing can be to support a pha of strong growth, and thus it may have a temporary horizon; or it can signal the start of a new strategy. In addition to investments, developing the necessary production capacity takes time. If the firm has entered a pha of fast growth then outsourcing will allow it not to lo the opportunity to gain market share, develop its own business, and increa supply without additional fixed costs.
Especially when we are dealing with the outsourcing of Information Technology, the “business recovery” objectives should be evaluated, thus considering what the impact could be on the firm’s activity if the supply of a particular strategically-relevant product/rvice were interrupted or did not respect the agreed-upon specifications.
5. Gathering internal information and the choice of activities to outsource
According to Prahalad, firms should outsource only tho process and activities they know well; he asrts that they should not outsource to resolve problems they are unable to solve internally (Prahalad 2004).
Moreover, they should not hand over entire functions, which constitutes the “brute-force approach”. For example, a firm could hand over a sales activity but should maintain data analysis activities in-ho
u (Prahalad 2004). It is not always necessary to transfer an entire function. Maintaining part of the activities of a function in-hou reduces the risk of choosing the wrong supplier and allows the firm to transfer at a later date the entire function if expected performance is below expectations. For example, a firm can transfer the active invoicing cycle and wait to transfer the passive cycle, which in general is more complex.
The decision as to which functions to transfer is always the result of a comparison between advantages and disadvantages, many of which are common to the various functions and activities, while others are specific.
Bragg offers veral general suggestions regarding specific functions and activities, such as tho which are listed below (Bragg 2006: 160-180).
A. Credit collection. The risk is that the supplier may be too aggressive in his approach to the debtor and the creditor firm can lo the customer.
B. Salaries and contributions. This is the function which, more than any other, is outsourced. If the firm has veral operational units spread out over veral geographic areas in which the outsourcer is prent, then the latter can assure the necessary rvices with greater uniformity and timeliness.
C. Computer rvices. The main advantage of outsourcing this rvice is the reduction in capital investments in computers, investments which will have to be made by the supplier, who may even buy the computers from the outsourcee, thereby freeing up liquidity. Outsourcing this function can also lead to disadvantages that cannot be ignored. Bragg prents some of the in detail (Bragg 2006: 164-166). In particular, Espino-Rodriguez et al. have examined the outsourcing strategy in computer systems in the hotel ctor by constructing a theoretical model which, when applied to that ctor, shows how outsourcing does not lead to an effective
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strengthening of the capacity to manage the resources ud in computer systems and in information technology (Espino-Rodríguez and Gil-Padilla 2007: 757-777).
D. Customer rvice. The main advantage derives from the outsourcer’s experience in responding to the customer requests and in managing complaints; if the outsourcee is a prestigious firm it can contribute to the outsourcer’s reputation.
E. Planning and R&D. Transferring the personnel to an outsourcer with high qualifications (higher than tho of the outsourcee) would streamline the function and, if this is carried out by a highly spec
ialized team with great potential, could provide better results in terms of innovation and patents. The advantage of turning to a supplier is decisive when the firm has a request from a customer which it cannot meet in the short term due to a lack of resources (human and financial).
Nevertheless, even this form of outsourcing entails rious risks. The idea of the “outsourcing-offshore” is “synonymous to cost cutting”, but firms who go this route often forget to do so in a way that increas their capacity to compete.
Wrong outsourcing choices have also caud a diminishing of the firm’s capacity to compete and led to their decline (Bettis, Bradley and Hamel 1992: 7-22; Brown and Wilson 2005: 30-34). This means that the firm must be able to identify which activities to outsource without risking negative effects on their capacity to compete. Quinn and Hilmer have listed three class of strategic risks firms can face when they outsource: 1) the loss of critical capacities or competencies; 2) the weakening of their capacity to coordinate more than one function; 3) the loss of control over the supplier (Quinn and Hilmer 1994: 43-55).
Kearney’s study on the reasons that make outsourcing a problematic choice highlights that the main fear of the outsourcee is the loss of control over the outsourcer, in particular the risk it will be less able to protect its intellectual capital (Kearney 2005: 1-97).
智者见智6. The gathering of outside information and the choice of outsourcer
Gathering information on the potential outsourcer can start by contacting firms that have had dealings with the outsourcers: individual firms or associations of firms that can rve as references for the outsourcing candidates.
The technical possibilities of producing the product/rvice and management’s capacities are the most important criteria for choosing among the outsourcers. There is a clear relation between the risks faced by the outsourcee and the supplier’s capacities: the greater the latter, the fewer the risks for the outsourcee.查看电脑使用记录
According to Stacey, during the implementation of the outsourcing this information must be shared and periodically discusd with the outsourcer (Stacey 1998: 24-27).
A particular aspect to consider is the size of the outsourcer: whether the outsourcer is a large or small firm. The answer depends fundamentally on the type of activities and the volume of rvices to outsource. In general a large outsourcer, one who can guarantee the desired volumes and quality, is preferred to a small firm, which must be the object of constant and costly controls on the part of the outsourcee.
It must be pointed out (Bragg 2006: 30-34) that the supplier can also be a large firm that produces for its own market but, since it has excess production capacity, is willing to also produce for other customers; it may be a good idea to make u of this willingness in order to outsource modest volumes of activities.
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