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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
1. Outsourcing of core value-chain activities
 Supply chain, especially manufacturing
 Downstream activities such as distribution
2. 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:
1. Cisco Systems:
- tightly coordinated value-chain network of
manufacturers, subcontractors, resource planners,
etc.
2. 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]