What Is the Right Outsourcing Strategy for Your Process?

Topics: Case study, Management, Outsourcing Pages: 30 (9847 words) Published: September 11, 2013
European Management Journal (2008) 26, 24– 34

journal homepage: www.elsevier.com/locate/emj

What is the right outsourcing strategy for your process?
Ronan McIvor *
University of Ulster, Northern Ireland

KEYWORDS Outsourcing; Performance; Opportunism; Competitive advantage

Summary

Outsourcing has become a critical strategic decision that can allow organisations to develop and leverage the capabilities required to compete in today’s global business environment. This paper provides a practical framework that managers can use to identify suitable outsourcing strategies for their processes. In particular, the framework provides a mechanism for understanding, which processes should be kept internal and which should be outsourced based on both organisational capability and opportunism considerations. The logic of the framework and the sourcing strategies is illustrated through providing real case examples from organisations that participated in the research. Ó 2007 Elsevier Ltd. All rights reserved.

Introduction
The trend towards outsourcing both locally and offshore has been increasing dramatically throughout the developed economies of the world. The drive for greater efficiencies and cost reductions has forced many organisations to increasingly specialise in a limited number of key areas. Outsourcing is increasingly being employed to achieve performance improvements across the entire business. Leading firms have been adopting more sophisticated outsourcing strategies and have been outsourcing core processes such as design, engineering, manufacturing, and marketing. These organisations have been benefiting greatly from accessing the specialist capabilities of suppliers in a range of business processes (Aron and Singh, 2005). Many specialist suppliers can develop a greater depth of knowledge, * Tel.: +44 28 71375275; fax: +44 28 71375323. E-mail address: [email protected]

invest more in systems and processes, and achieve efficiencies through economies of scale and experience. Leveraging the capabilities of more capable suppliers allows organisations to outsource more critical business processes and enhance their own internal core capabilities that drive competitive advantage. However, many organisations are failing to capitalise on the opportunities offered by outsourcing. Many organisations continue to make outsourcing decisions on a piecemeal basis and fail to develop outsourcing strategies for their processes that allow them to compete in the global economy (Gottfredson et al., 2005). In many cases, the choice of which parts of the business to outsource is based on ascertaining what will save most on overhead costs, rather than how the decision impacts upon the long-term capabilities of the organisation. In some instances, organisations are outsourcing processes that are critical to competitive advantage and over time are relinquishing important knowledge sets and capabilities.

0263-2373/$ - see front matter Ó 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.emj.2007.08.008

What is the right outsourcing strategy for your process? Two influential theories in the study of outsourcing have been transaction cost economics (TCE) and the resourcebased view (RBV) of the firm. Transaction cost economics specifies the conditions under which an organisation should manage an economic exchange internally within its boundaries i.e. hierarchies and the conditions suitable for managing an economic exchange externally i.e. markets (Williamson, 1975, 1985). Hierarchies involve performing processes inside the firm, using management authority to make and execute decisions. Markets involve relatively short-term, bargaining relationships between independent buyers and suppliers. The needs of the buyer are non-specific, which enables the supply market to achieve economies of scale. According to transaction cost economics, a company will make the outsourcing decision on the basis of reducing production and transaction...

References: Aron, R. and Singh, J. V. (2005) Getting offshoring right. Harvard Business Review(December), 135–143. Arthur, W. B. (1989) Competing technologies, increasing returns, and lock-in by historical events. Economic Journal 99, 116–131. Baden-Fuller, C., Targett, D. and Hunt, B. (2000) Outsourcing to outmanoeuvre: Outsourcing re-defines competitive strategy and structure. European Management Journal 18(3), 285–295. Barney, J. B. (1991) Firm resources and sustained competitive advantage. Journal of Management 17(1), 99–120. Cox, A. (1996) Relational competence analysis and strategic procurement management: Towards an entrepreneurial and contractual theory of the firm. European Journal of Purchasing & Supply Management 2(1), 57–70. Culliton, J.W. (1956) Make or Buy: A Consideration of the Problems Fundamental to a Decision Whether to Manufacture or Buy Materials, Accessory Equipment, Fabricating Parts and Suppliers, Harvard Business Research. Dedrick, J. and Kraemer, K. L. (2005) The impacts of it on firm and industry structure: The personal computer industry. California Management Review 47(3), 122–142. Eisenhardt, K. M. (1989) Building theories from case study research. The Academy of Management Review 14, 532–550. Gottfredson, M., Puryear, R. and Phillips, S. (2005) Strategic sourcing: From periphery to the core. Harvard Business Review(February), 132–139. Higgins, C. (1955) Make-or-buy re-examined. Harvard Business Review 33(3), 109–119. Holcomb, T. R. and Hitt, M. A. (2007) Toward a model of strategic outsourcing. Journal of Operations Management 25(2), 464–481.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Strategies for Business Process Outsourcing Essay
  • Whats your strategy Research Paper
  • Essay about What Is Strategy
  • What Is Strategy? Essay
  • Outsourcing the Recruitment Process Essay
  • What Is Strategy Essay
  • Essay on Strategy
  • Strategy Essay

Become a StudyMode Member

Sign Up - It's Free