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
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.
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...
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