This report discuses issues related to effective outsourcing. It bases its arguments mainly from the article by McIvor entitled, ‘outsourcing done right’.
Outsourcing is a widespread issue that occurs both nationally and internationally. Outsourcing decisions are usually made by an organization when they want to engage more effective methods of operations. This is done mainly to reduce costs even as effectiveness and efficiency is increased. The framework for implementing a successful outsourcing operation is mainly composed of three strategies. The strategies are relative capability position, contributing to competitive advantage and potential for opportunism. These factors have been discussed in-depth in this report.
Outsourcing strategies vary from one kind of business to another and it also depends with the type of service the organization wants from the supplier. The recommendations for a typical hypothetical organization are also given at the end of the discussion.
Outsourcing is the engagement of an outside organization to supply or perform particular functions in the organization. The organization that contracts another company for outsourcing usually does so in order to get more specialized services at more competitive rates.
Many organizations globally have been adopting more sophisticated outsourcing strategies and have been outsourcing core processes such as design, engineering, manufacturing and marketing. The framework for strategic outsourcing is relative capability position, contributing to competitive advantage and potential for opportunism. Relationship strategy includes nonspecific contracting, recurrent contracting and relational contracting. They are all discussed in this work.
Successful outsourcing usually requires a framework which can also be applied to many different business processes. Analysis of a number of key dimensions is required for any successful outsourcing procedure.
The dimensions include relative capability in the process, contribution of the process to competitive advantage and the potential for opportunism from outsourcing the process. This part analyses the three dimensions in some details (McIvor 2011). Relative capability position involves understanding why a firm differs in performance from another. Some firms can conduct better organizational processes in a superior manner relative to their competitors. This means that they gain competitive advantage over the other companies. It is therefore important to identify the performance disparity between the organization and potential external providers of the process.
This will subsequently allow the organization to focus on whether it will be detrimental to its competitive position to outsource certain organizational processes. Contributing to competitive advantage is also another dimension that aids in determining how an outsourcing process contributes to business operation. This is a critical factor in outsourcing decision and such a process should remain internal and receive a considerable level of strategic attention to maintain such a position (Bragg 2006). Another factor to consider when discussing outsourcing decisions is the potential for opportunism.
This dimension relies on a number of indicators for opportunism which also includes presence of investments in physical or human assets dedicated to a particular relationship. There are also three considerations available to organizations about outsourcing. These three strategies are discussed in the following paragraph under the sub heading potential for opportunism.
Potential for opportunism
There are three strategies that can be used by an organization to deal with supplier opportunism in outsourcing. First, the high potential for opportunism may lead the organization to retain the process internally. Sometimes, it may not be possible to draft a strong contract to deal with potential for opportunism.
Secondly, it is possible to deal with the potential for opportunism by adopting an appropriate relationship strategy. A short term contract can be established in an outsourcing situation where there is low level of investment in specific assets and relative certainty in requirements (Bragg 2006). However, if the needs of the organization are highly specific and there is uncertainty surrounding the transaction, it becomes more appropriate to use a relational contracting arrangement. Lastly, a good sourcing strategy involves reducing the complexity of the process by redesigning it into a number of more nonspecific processes that can be provided by more than one supplier.
As a result, this will reduce the level of uncertainty in the transaction. In addition, the outsourced processes could share some of the transaction characteristics of a short term market contract (McIvor 2011).
Approaches for adopting a relationship strategy
An appropriate relationship is deemed necessary for any process that is viewed as suitable for an outsourcing project.
There are three ways in which an organization can consider for outsourcing. Non specific contracting is one of the ways whereby the sourcing of the process is done mainly from suppliers. It is important to note that the supply market is usually so competitive especially if the suppliers deal with similar sourcing requirements (Backhaus 2005). This kind of outsourcing is generally done on contract basis which is usually short term. The main reason for using this method of outsourcing is to reduce the costs of operation in the business. The second method used in outsourcing is called recurrent contracting.
Recurrent contracting is usually done when the needs of the organization are more specific. Recurrent contracting is an appropriate relationship strategy because there is low potential of opportunism indicated by the presence of a number of capable suppliers. Contracts that specify future contingencies and limit the impacts of unforeseeable events can be employed. Recurrent contracting is also suitable when an organization is sourcing a component that is technology-intensive and rapidly changing. This method also avoids the overdependence on a single supplier because the buyer employs more asset-specific investments to coordinate complex and nonstandard processes between buyers. Relational contracting is the third method of relationship strategy a business can use for outsourcing.
It involves adopting a longer- term, collaborative relationship. The method is appropriate especially in case of a process that is critical for competitive advantage with a potential of opportunism. The opportunism can be indicated by the small number of suppliers. This approach enables the organization to establish and build a mutually advantageous relationship with the buyer.
Conclusion and Recommendation
For an organization that wants to build relationships for the future with their outsourcing the best relationship strategy will be to employ relational contracting. This is because the strategy is most appropriate when an organization wants to establish a longer-term collaborative relationship. Even for a process that is critical for competitive advantage, the strategy will allow the organization to establish and build a mutually advantageous relationship with the supplier. Relation- specific investment in areas such as collaboration in new product development and the development of inter-organizational information system can help the organization create a high level of mutual dependency between the sourcing organization and the supplier.
Backhaus, J., 2005, The Elgar companion to law and economics. Cheltenham: Edward Elgar Publishing Ltd. Bragg, S., 2006, Outsourcing: a guide to selecting the correct business unit, negotiating the contract, maintaining the control of the process. Ed.
2. Hoboken: John Wiley & Sons, Inc. McIvor, R., 2011.
Outsourcing done right. Industrial engineer.