The document discusses several theories related to outsourcing including resource based view, transaction cost economics, total cost of outsourcing, agency theory, and a negative curvilinear model. It also reviews advantages like strategic focus, lower costs, flexibility, and disadvantages like interfaces, hollowing out, and opportunistic behavior. Theories, advantages, and disadvantages are supported with examples and literature. The document provides context for outsourcing decisions and considerations.

1. Outsourcing: What’s the Theory?
1
Gordon M. Groat
PhD (abd), MSc, BGS, ASc

2. Predominant Theory
2
 Resource Based View (RBV)
 Transaction Cost Economics (TCE)
 Total Cost of Outsourcing (TCO)
 Agency Theory
 Negative Curvilinear Model (Adjusting Outsourcing on the X and Y axis)
Theory Lit + Lit -

3. Lit Review: Outsourcing Advantages
3
 Strategic Focus / Reduction of Assets
 Complimentary Capabilities / Lower Production Costs
 Strategic Flexibility
 Avoiding Bureaucratic Costs
 Relational Rent
Theory Lit + Lit -

4. Lit Review: Outsourcing Disadvantages
4
 Interfaces / Economies of Scope
 Hollowing Out
 Opportunistic Behaviour
 Rising Transaction & Coordination Costs
 Limited Learning & Innovation
Theory Lit + Lit -

5. Strategic Focus & Reduction of Assets
5
 Shifting cost of production leveraging an outsourcing
model frees up assets that the outsourcer now
provides… i.e. the infrastructure costs, etc.
 Why is this a good thing?
 It allows the organization to redeploy freed up assets to other
strategic areas or the organization can redistribute savings to
shareholders – in either event, a win with the investing
community (share price)
Theory Lit + Lit -

6. Complimentary Capabilities & Lower Production Costs
6
 Outsourcing can remove a fixed cost from production
thus raising profitability
 Outsourcers often have more efficient production
processes – allowing them to produce at a cost
savings compared to internal production… enhanced
profitability PLUS core competency… i.e. it’s what
the Outsourcer does best.
Theory Lit + Lit -

7. Strategic Flexibility
7
 By using outsourcers – it’s easier to switch from one
outsourcer to another
 Organization can increase or decrease supplies from various
outsourcers (supply channels) in response to “external shock”
 Reduces the need to “retool” or “restructure” due to economic
changes and market changes
 European – flexibility reservoir
 Japanese – Inimitable supply chain where there is an obligation to
the well being of the supplier
Theory Lit + Lit -

8. Avoiding Bureaucratic Costs
8
 There is no competitive incentive associated with
internal production and thus – rising price base is
associated with internal production
 Lack of Price Mechanism
 Lack of Economic Incentives
Theory Lit + Lit -

9. Relational Rent
9
 Building Idiosyncratic and valuable relationships
with suppliers enables Innovation and Learning,
which in turn, produces efficiencies that reduce
transaction costs
 SEE TOYOTA PRODUCTION
Theory Lit + Lit -

10. Toyota Supplier Relations
10
 Toyota Supplier Relations are widely studied as a
model with a sustainable advantage where the
relationship is deep and extensive… often including
the following ties:
 Historical
 Social
 Interpersonal
Theory Lit + Lit -

11. Interfaces / Economies of Scope
11
 Sometimes there is a point in the value chain that
manifests at key strategic intersections, for example
R&D, Manufacturing, and Marketing
 If there are important interfaces adding to the Value Chain –
then splitting up these processes to Outsourcing may not be
the best course of action
Theory Lit + Lit -

12. Hollowing Out
12
 Firms that outsource many activities can sometimes
give up their competitive edge.
 Firms can loose bargaining power vis-à-vis suppliers
because the capabilities of suppliers increase relative
to those of the firm
Theory Lit + Lit -

13. Opportunistic Behaviour
13
 Opportunistic behaviour allows suppliers to extract
greater rents from a relationship than they would
normally do
 i.e. Gaming the Contract
Theory Lit + Lit -

14. Rising Transaction & Coordination Costs
14
 External Span of Control issues
 Managers have a limited amount of time to dedicate to
managing relationships with outsourcers
 Too much outsourcing throws this issue into a TCE/TCO
discussion as the value of outsourcing is chipped away by
managerial costs to run the business
Theory Lit + Lit -

15. Limited Learning & Innovation
15
 If the firm itself is not able to do the business
process, how is it able to derive learning from the
process?
Theory Lit + Lit -

16. Transaction Cost Economics (TCE)
16
 Production costs are lower in “markets” than in
organizations because of allocative efficiencies – this
leads to inter-firm division of labour
 Transaction Costs are the costs of “running” the
economy… in the case of BPO, the cost of monitoring
mechanisms to prevent opportunistic behaviour
Theory Lit + Lit -

17. Total Cost of Outsourcing
17
 Extrapolates TCE to include the perspective of
Williamson and then captures the costs of managing
the economy… this elevates the “Make or Buy”
decision to a different level apart from the basic
contractual “cost” of service items.
Theory Lit + Lit -

18. Resource Based View
18
 Competitive Advantage is present when controlling
resources that have certain characteristics:
 Valuable
 Rare
 Inimitable
 Hard to Substitute
Theory Lit + Lit -

19. Agency Theory
19
 Outsourcer commissions work from the supplier
(agent)
 Works well when there is strong alignment between both
parties
 Where alignment is not possible, Vertical Integration is
preferred
Theory Lit + Lit -

20. Negative Curvilinear Model
20
Activity A B C D E F G H I
Performance Gain
-4 -3 -2 -1 0 1 2 3 4
from Outsourcing
Negative Curvilinear xy Performance Graph
6
Number of Outsourced
5
4
Activities
3
2
1
0
0 2 4 6 8 10
Perform ance
Theory Lit + Lit -

21. Projections
21
 BPO market posting continued growth
 Shifting regional patterns
 Increased competition proliferates alternatives
 Value add shift from simple BPO to more complex
relationships (i.e. BPO to BTO)
Theory Lit + Lit -

22. World Class Partners
22
Asia Pacific Contact Center India’s Most Respected
Vendor of the Year 2007 BPO Company
Best in Show Awards for Best Offshore Solutions
Provider - 14th Annual International Call Center
Management Conference & Exposition
Best Outsourcer 14th Annual
International Call Center Management
Conference & Exposition
Theory Lit + Lit -

23. Outsoucing Costs // TCE
23
 Call Center Employee Cost
2006 Data Set (collected 2005)
 USA US$ 19,000 annually
 Australia US$ 17,000 annually
 Philippines US$ 9,050 annually
 India US$ 7,500 annually
Theory Lit + Lit -

24. What does it mean for ME?
24
 By enabling internal Core Competencies to shine we
set ourselves up to deliver a better product to market
more efficiently
 By managing our Outsourcing arrangements well, we
are able to enhance our profitability
 The more money the enterprise earns- the more
money there is to grow the business
Theory Lit + Lit -

25. Core Activities in an Outsourcing Decision Model
25
(1) the company core (all activities
which are necessarily connected
with a company's existence)
(2) core-close activities (directly
linked with core activities)
(3) core-distinct activities (supporting
activities)
(4) non core activities (activities with
general availability)
Theory Lit + Lit -

26. Questions
26
Theory Lit + Lit -

27. 27
Theory Lit + Lit -