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June 26, 2014

What are the Implications of Strategic Outsourcing

Outsourcing is a decision for the management of the company; the company is continuing to make the activity itself, or it uses a service provider. However, outsourcing is too often associated with outsourcing volume or the purchase of services from specialist suppliers. Strategic Outsourcing is different from traditional outsourcing. In fact, it relates to activities that contribute substantially to the creation of a portion of the value added by the company. These are activities such as computer support, transportation, logistics, telecommunications, property management, or activities that contribute significantly to the quality of service or product, and thus creating value for the customer (Parry & Roehrich, 2009). However, these activities are not the core business activities of the organization because in this case it would be a mere restructuring of the portfolio.
Risks associated with Strategic Outsourcing
There are many risks associated with outsourcing. On the one hand, the company may lose its ability to innovate and transform. On the other hand, it is often difficult to determine the strategic value of skills because it can change over time or under the influence of the environment (i.e. new technology, innovation, new forms of business organization etc.) (Mann, 2003). This paper discusses the risks of outsourcing from company’s perspective.
Outsourcing involves risks due to market concentration providers. Indeed, many large companies show willingness to contract with providers of international stature and may assist them in the development of their activities. This leads them to rely on a small number of providers. In telecommunications, there are very few global operators and may accompany corporate clients. In addition, seven to eight companies currently share approximately 60% of the market for outsourcing in the United States (Bardham & Kroll, 2003). In fact, two main factors contribute to explain the low number of providers, the relative newness of the phenomenon and the need to return assets that are often expensive, which makes the service outsourcing industry capital. This concentration of supply exposes companies to the risk of commoditization of services offered and poor response to specific needs. A situation may arise that cartelization induce the development of proprietary solutions that prevent both the possible reinstatement of the function that the transition to another provider.
The risk that the provider disclose confidential information of the company for which he works is more theoretical than real. Indeed, the technical standards used by providers are often more severe than those of their clients. In addition, the reputation of the provider could soon suffer. The risk of loss of control of the activity is, however, particularly sensitive in the case of outsourcing the IT function. Indeed, the services underlying the functions of marketing, management control, inventory management, etc. Issues of confidentiality and security of information are sensitive points to monitor. More generally, the risk of loss of control of the activity is often considered important, especially with regard to the monitoring of the implementation time of delivery, but also the control of price and quality of service (Lawrence, 1996). The client company must develop specific skills and project management of sensitive functions outsourced. This entails maintaining a good technical skill in the field, and the development of appropriate management tools (definition of roles, responsibilities monitoring and evaluation of the service, defining and tracking drifts penalty system, dashboards control and audit function).
Outsourcing transactions are frequently accompanied by personnel transfers and layoffs. It is therefore not surprising that the mere announcement of an outsourcing operation sufficient to cause social unrest. In fact, the success of an outsourcing operation depends largely on good governance and human aspects of a communication plan. The first aspect concerns the anticipation of "human resources" dimension, including its contractual dimension. It is imperative to work with the provider of the social risk management in dealing with the redeployment of employees, development of activity in the contract and off contract. In addition, the customer and the operator have a clear interest in establishing a precise management of key personal skills (technical skills, quality of customer interface / service, knowledge of the functioning and organization of the customer, etc.).The safety precautions and efforts on the "human resources" will help enormously to the quality of the communication plan (project presentation, illustration supply, calendar, comparative tables of benefits, defining the future, etc.). Finally, these two components should contribute not divest a negotiating stance. Individual interviews and the establishment of an exchange point and answer questions from staff involved in a communication action taken and knowledge of both the project and the host company. A successful communication plan is a plan that can avoid the negative spiral: shock of the announcement, misunderstanding, resistance. However, experience has shown the crucial role of legal risk.
Managerial implications
Outsourcing does not mean that business is totally off activity. In fact, it continues to draw on the resources outsourced through the provider. Outsourcing can be understood as a "transfer of resources" to a provider, followed by hiring of means and resources to the same provider, for a long time. The outsourcing contract and monitoring structure play a role even more central that outsourcing is strategic. In the context of outsourcing activities such as general services, restaurants, or gardening, the situation is manageable. In case of disagreement with the provider, simply dispose of it and replace it with one of its many competitors. Providers seem completely substitutable and their market is highly competitive. Contracts are short-term (18 months to two years) and a provider can be replaced after a short notice.
By cons, when specific resources are transferred to the service provider, outsourcing is strategic because the company is exposed to risk, especially for its customers. In this case, a dependency relationship is established and it became necessary for the company to protect opportunism potential of its service. Managers are generally well aware of the risks of strategic outsourcing. The outsourcing of production would not be sufficient for control systems are difficult. If the provider goes bankrupt tomorrow, I'm stuck. The only solution would be to provide attractive offers to its staff to reinstate. Indeed, reversibility through replenishment internally complex and costly operation that passes through the repatriation of outsourced staff and equipment. In addition, when the activity is finally seen as central, the need for a smooth operation is even more necessary.


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