2. Objectives Today
• Definition
• Decision making
• Consideration in make-or-buy decision
• Drivers of outsourcing
• Type of outsourcing
• Benefits of outsourcing
• Problems of outsourcing
• Implementing outsourcing
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3. Definition
• “Outsourcing is not simply another word of
buying. It is the process of taking a whole
section or function of a company and giving
the responsibility for the relevant activities to
an outside contractor.”
• This will lead to a long-term and mutually
dependent relationships.
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4. Definition
• In construction industry, engaging sub-
contractor is an outsource activity.
• Subcontracting is generally outsource on
project based term.
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6. Decision Making
• Outsourcing is concerned with make-or-buy
decisions.
• There are different levels of make-or-buy decision
(Probert, 1995). The general levels are:-
(a) Strategic make-or-buy decisions
(b) Tactical make-or- buy decisions
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7. Decision Making
• Strategic make-or-buy decisions determine
the shape and capability of the organization’s
manufacturing operation by influencing:-
- What products to make.
- What investment to make in machines
and labor to make the products.
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8. Decision Making
- ability to develop new products and
processes as the knowledge and skills
gained by manufacturing in-house may be
critical for future applications.
- the selection of suppliers / sub-con as
they may need to be involved in design
and production processes.
**New product – e.g. Green Building
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9. Decision Making
• Tactical make-or-buy decisions deal with the
issue of a temporary imbalance of
manufacturing of capacity:-
- Changes in demand may make it impossible
to make everything in-house.
- A fall in demand may cause the enterprise
to bring in-house work that was previously
bought-out.
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10. Decision Making
• In such situations, managers require criteria
for choosing between the available options.
• Such criteria may be quantitative, qualitative
or both.
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11. Considerations in Make-or-buy
Decisions
• Quantitative factors:-
- Chance to use up idle capacity and resources
- Potential lead time reduction
- Greater purchasing power within larger orders
of a particular material
- Large overhead recovery base
- Transfer risks
- Costs of work is known in advance
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12. Considerations in Make-or-buy
Decisions
• Quantitative factors:-
- Quantities required too small for economic
production
- Avoidance of costs of specialist machinery or
labor
- Reduction in inventory
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13. Considerations in Make-or-buy
Decisions
• Qualitative factors:-
- Ability to manage resources
- Commercial and contractual advantages
- Worries are eliminated regarding such
matters as the stability and continuing
viability of suppliers
- Maintaining secrecy/privacy
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14. Considerations in Make-or-buy
Decisions
• Qualitative factors:-
- Ability to control quality when purchased
from outside
- Availability of vendor’s specialist expertise,
machine and / or patents
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15. Drivers of Outsourcing
• There are FIVE main drivers for considering
outsourcing:-
(a) Quality
(b) Cost of outsourcing
(c) Finance
(d) Core business
(e) Cooperation
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16. Drivers of Outsourcing
(a) Quality
- Actual capacity is temporary insufficient to
comply with demand.
- The quality motive can be subdivided into
three aspects:- increased quality demands,
shortage of qualified personnel, outsourcing
as a transition period.
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17. Drivers of Outsourcing
(b) Cost of Outsourcing
-Outsourcing is a possible solution to decrease
costs and is compatible with a cost leadership
strategy.
-By controlling and decreasing costs, a company
can increase its competitive position.
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18. Drivers of Outsourcing
(c) Finance
-A company has a limited investment budget.
-The funds must be used for investments in core
business activities (long-term decisions).
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19. Drivers of Outsourcing
(d) Core business
-A core business is a primary activity that
enables an organization to generate revenues.
-To concentrate on core business activities is a
strategic decision.
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20. (e) Cooperation
-Cooperation between companies can lead to
conflict.
-In order to avoid such conflict, those activities
that are produced by both organizations should
be subject to total outsourcing.
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Drivers of Outsourcing
21. Type of Outsourcing
• Outsourcing options can be categorized as:-
(a)Body Shop Outsourcing
- Is a situation where management uses
outsourcing as a means of meeting short-term
requirements, such as a shortage of in-house
skills to meet a temporary demand.
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22. Type of Outsourcing
(b) Project Management Outsourcing
-Is employed for all or part of a particular
project, such as developing a new IT project,
training in new skills (New system, new
machine).
(c) Total outsourcing
- Is where the outsourcing supplier is given full
responsibility for a selected area.
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24. Benefits of Outsourcing
• Frees management time
• Reduced staff costs
• Increased flexibility
• Cost certainty
• Reduction in staff management problems
• Improved consistency of service
• Reduced capital requirement
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25. Benefits of Outsourcing
• Reduced risk (transfer risk)
• Gain access to world class capabilities
(expertise/specialization)
• Improve organization focus (core business)
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26. Possible Problems of Outsourcing
• High staff turnover
• Poor project management skills
• Lack of commitment to the client or industry
• Shallow expertise
• Insufficient documentation
• Lack of control
• Overdependence on suppliers
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27. Possible Problems of Outsourcing
• Over-promising at the negotiation stage
• Lack of flexibility (control by sub-contractor)
• Divergent/different interests of the customer
and provider
• Cultural mismatches between customer and
provider organizations
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28. Implementing Outsourcing
1. Consider the alternatives.
2. Set up working party to consider
- What to outsource
- Why (strategic reasons)
- Cost comparisons of internal and external
provision
- Anticipated benefits and problems
- Possible effects on staff, capital, finance and
competitiveness
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29. Implementing Outsourcing
3. Prepare, as appropriate, a technical performance,
specification and Service Level Agreement (SLA).
4. Consider possible supplier
5. Invite tender
6. Evaluate tender
7. Post-tender negotiation
8. Award contract
9. Set up management control and monitoring
processes
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30. Discussions
• How can a construction company reduced the
costs by using outsourcing?
• How to minimize the problems of outsourcing
in construction industry?
• List out the tasks can be outsourcing to
outsider in order to minimize costs and
increase efficiency in construction project.
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