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Topic2 make buyoutsourcing

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This is topic one of a short open course on outsourcing this first session covers the basic ground of the rationale and history of outsourcing. It is accompanied by a guide and course notes on the …

This is topic one of a short open course on outsourcing this first session covers the basic ground of the rationale and history of outsourcing. It is accompanied by a guide and course notes on the www.1stoutsource.com website.

Published in: Business, Technology

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  • 1. Slide: 1 Slide 1 Defining Outsourcing Topic 2 In this Topic we will understand  Some of the key economic issues in the make or buy decision to outsource.  Some of the key risk issues in managing the selection of outsource processes.  The process of identification of services and products that can be sourced from the market
  • 2. Slide: 2 Slide 2 Recap: the outsourcing decision is basically a make or buy choice Reasons to buy  Cost efficiencies  Technology uncertainty  Non core process (or declining)  Access to expertise Reasons to make  Core competency  Competitive edge  Asset specificity high  Critical process  Dependent on core or critical process  Risk  Difficult to measure
  • 3. Slide: 3 Slide 3 Outsourcing is about setting the Boundary of the Organisation In House Service Offshore Outsource Internal Governance Vendor Organisationalboundary In source External Division Back source Market Governance
  • 4. Slide: 4 Slide 4 The make or buy decision driven by cost of doing something externally or internally  Transaction cost economics – (offers an) Explanation of the boundary choice  Model – Hierarchical decomposition (form of governance) – Asset specificity – Externality  Behavioural assumptions – Bounded rationality – Opportunism  Point of departure from classical economics – Economic agents under classical model act to maximise profit – Economic agents from a TC perspective act to minimise cost
  • 5. Slide: 5 Slide 5 Boundary where the costs internally and the costs of the market just balance  Costs are all aspects of the control and monitoring of the performance of the activity  Make – Training – Management Time – Direct cost – Facilities – Payroll etc.  Buy – Negotiating – Monitoring – Writing agreements Accounting Distribution Customer Service Information Systems Manufacturing $ $ $ Purchasing Quality Assurance Research & Development Warehouse Sales Board of Directors Shipping Organisation Boundary
  • 6. Slide: 6 Slide 6 These core aspects define the boundary Hierarchical Decom- position Asset Specificity Externality Frequency Uncertainty or risk Specific investments Quality compliance IPR Confidential ity Measurement risk Organisation Structure Bounded Rationality Opportunism Agents act to serve own interests Agents a rationale but in a limited way can’t do everything!
  • 7. Slide: 7 Slide 7 Basic principles of market sourcing  Market is favoured if relative demand client is less that of the market – Vendors can aggregate all the clients demands – Offering wider scale… … and wider scope – Can specialise in the delivered service (competence)  The advantage of the market dissipates if the service becomes (too) specific to the client – The more specific a service is the less a vendor is able to ‘pool’ demand
  • 8. Slide: 8 Slide 8 Specialisation and learning drive specificity  Specificity arises when specialisation of an asset means it cannot be used outside the context of the service. – Vendor cannot realise scale effects as will need services to be generic and spread across several clients – Can reduce room for cost reduction (so left with just labour cost arbitrage) – This process inhibits switching of the client and locks the supplier in  The process of service delivery acts to increase specificity – knowledge transfer and … …Learning by doing locks out competition
  • 9. Slide: 9 Slide 9 Summary  Value of market sourcing reduces as human and physical assets become more specialised  Specialism leads to single use – Which is less transferable to other clients – Can drive re-integration as economies of scale cannot be realised (and client can do just as well)
  • 10. Slide: 10 Slide 10 Reflection  Research has shown that clients prefer to have service that is customised to their needs.  What is the consequence of this for the outsource deal?  How might a vendor respond to this?
  • 11. Slide: 11 Slide 11 Evidence from the field  Large outsource deals typically tailored (100% according to Deloittes survey)  Corollary – Vendors find it difficult to standardise services – As need to tailor a solution increases the ability to deliver savings decreases ‘if a project needs customising, it should not be the subject to outsourcing’ (Deloittes (2005) survey quote)
  • 12. Slide: 12 Slide 12 The High Level Make or Buy Choice Project type services (legal, consulting) Specific investments needed that makes transfer to other clients difficult Joint governance or partner models to manage complex services Commodity type Services (desktop, payroll, transport) Mixed ‘basket’ of services - selective sourcing may be favoured Unified management (highly embedded services) OccasionalFrequent Generic Mixed Highly Specific ServiceFrequency Need to sustain relationship Service Characteristics
  • 13. Slide: 13 Slide 13 The High Level Make or Buy Choice Project type services Specific investment transfer difficult Joint governance Partner models Joint ventures Commodity type Services (desktop, payroll, transport) Selective sourcing may be favourable Unified management (highly embedded services) OccasionalFrequent Generic Mixed Highly Specific ServiceFrequency Need to sustain relationship Service Characteristics Marketsourcing NormalcontractingRules StandardSLA Relational contracting continuous interaction and evaluation of value created Independent oversight extends formal contracting Demands integrated approach supplier/buyer
  • 14. Slide: 14 Slide 14 Reflection  Suggest what circumstances might lead to insourcing?  Review the advantages and disadvantages of Outsourcing
  • 15. Slide: 15 Slide 15 Just some of the problems with outsourcing relationships  Breakdown of relationships  Failure to meet service levels  Constant contractual wrangles  Unforeseen charges  Poor contracting  Losing control  Selecting the wrong vendor  Overlooking hidden cost  No exit strategy  Forgetting about personnel issues
  • 16. Slide: 16 Slide 16 “...there's the unmeasurable aspect of what happens when a company is no longer a culture but an amalgamation of outsourcing partners. They may add great efficiency into the business, but they generally add nothing to the long-term vision. As most companies that have been around awhile are aware, great ideas don't always come from the people at the top. Outsourcing can eliminate an entire interaction layer that is impossible to measure with objective tools. Cultures are inextricably linked to innovation and quality, and the less there is of the former the more the latter two will suffer in the long term.” What about outsourcing everything?
  • 17. Slide: 17 Slide 17 We will review in future topics why these problems occur and hopefully how we might tackle them! Management Preparation NegotiationTransition Scoping Relationship Formation Relationship Maturity Relationship Engagement The Outsource Lifecycle Definition Interpretation Renegotiation Terminate Selection Reconnaissance