Original Business Model vs Outsourcing: What is The Best Strategy - Term Paper Example

?Introduction: Outsourcing as business strategy gained so much popularity that led it to became the ideology of businesses in early 1990’s (Handfield, 2006).Businesses in order to get more competitive by reducing costs and increasing focus on core operations started to get their business functions (other than core) performed by outsiders; the practice also termed as facilities management. With growth in outsourcing industry and benefits it brought to business, there raised questions about the long term effects this strategy was posing to businesses. Concerns rising from the outsourcing led businesses to get back to the original model of performing functions on their own; referred to as back sourcing. Another phenomenon of globalization grew parallel that supported to source functions and products from anywhere in the world providing most suitable option to business and led countries to take over other countries’ economy (Malarvannan, 2010), for instance, Goldman Sachs prediction of China to take over US economy by 2020 while India will take over US economy by 2043 (Malarvannan, 2010). (Malarvannan, 2010) Between two extremes of sourcing to the extent where businesses with outsourcing had to bear high cost as compared to benefits or moving back to basic model of performing all support services by itself; it is high time for businesses to decide the balance. Hence, this repeated theme of giving out and taking business function back has put emphasis on the in depth and critical assessment of the factors that shall be considered significantly upon on making sourcing decision (Williams, 2012). The scope of this report has been determined around the same assessment. It draws attention to potential problems and issues while making sourcing decision and developing supplier customer relationship. It will also try to suggest the balancing point between two extremes. SOURCING Sourcing in general term implies to practices and policies for identifying, evaluating and engaging suppliers of goods and services. There are large numbers of sourcing policies such as outsourcing, in-sourcing, strategic sourcing, global sourcing and so on and so forth. Pivotal point around which the entire sourcing mechanism revolves is mainly driven by the firms understanding of its core competency; much easier said than done (Prahalad and Hamel, 2006). Sourcing of supplier varies from industry to industry; within industry from firm to firm and even with firm for various functions. POTENTIAL PROBLEM Souring, mainly aimed to get operational efficiencies, is also being adapted to access skills and expertise that cannot be made part of the firm (Beaumont and Sohal, 2004). Firms, in order to conduct sourcing, need to clearly state sourcing issues encompassing what, why, which process of decision making to conduct, how to implement the decision of outsourcing and finally how to implement the decision (Dibbern, Goles, Hirschheim, and Jayatilaka, 2004). Moreover these questions are affected by associated costs, and discrepancies in defining the scope as well as requirement from outside supplier (Beaumont and Sohal, 2004). The other impediment to making an outsourcing decision is the resulting benefit to the firm. Sizeable literature is present discussing the impact of outsourcing on profitability. This factor must appear with more prominence with cost reduction being mentioned as the main motive behind this strategy employment (Gorg and Hanley, 2004). However, the results are not as predicted and empirical evidences showed that outsourcing does not always have positive impact on profitability. For instance, Kimura (2002) in Japanese context found no positive impact while Gorzig and Stephan (2002 ) found that outsourcing is beneficial for material element while outsourcing of services has negative relation in manufacturing of German manufacturing concerns. Hence, profitability is not always extracted by outsourcing business functions and the results vary based on receiving impact from many factors (Gilley and Rasheed, 2000). Another potential problems rising from sourcing is the transaction cost and agency theory as concluded in the study by Bahli and Rivard (2003) for the field of engineering. Artunian (2006) discussed the certain problems that can arise from the mishandling of outsourcing and highlighted seven deadly sins in this regard. The first sin is easy taking of overall outsourcing process and not addressing the details determining the entire process components. The second sin accounts for keeping high expectations from supplier; firms shall keep in mind aim of every business is to maximize their own profits and not their customers wealth. Another sin is the selection of supplier that does not comply with capacity to meet the customer demand as happened in case of Dell whose customers had problem with understanding the supplier’s accent. Such mistakes can result in increased administration cost by 20-25 percent from project aimed for saving. The biggest sin that can lead the business loses its core competency to supplier by sharing every detail of information regarding customer, supplier, processes etc for developing any related supply. Businesses, even with sharing the peripherals such as IT to supplier, must determine boundary line beyond which in every function begins the hard domain of company itself and outsiders are to stand on the other side. Another mishandling of outsourcing strategy arises when the businesses design contract with assumptions that supplier will self upgrade to provide more efficient services. Maintaining the re-negotiation, flexibility and benchmarking clauses to remain with capacity to get things upgraded is very important otherwise aim to save can set back company with considerable financial penalties in case of contract cancellation. Sixth sin is that the results are not specifying the quality of service combined with the otherwise clause. Outsourcing often leads to savings on quality than on cost which can hamper the business to survival in the long run. Ending of the contract term with the supplier also needs to be well defined in case if organization aims to relocate services or bring back them in-house. Abrupt attempts to begin and close the contract can result in panic, also translating grave impact to other functions as well. These seven factors, defined as deadly sins associated with outsourcing, claim to be the lifeline handling of outsourcing strategy on the firm level and maltreatment to the strategy can claim the survival of the business. On the broader note, the strategy of sourcing has been growingly held responsible for the slow economic recovery. Bardhan and Kroll (2003) discussed the vulnerability of large number of people at risk for the reason of off- shore out sourcing from US to India. Bardhan and Kroll (2003) points that outsourcing from developed to developing countries with the transportation of blue collar jobs was then followed by white collar ones due to tight labour market in US. However current down turn has started posing question about less job creation in US because of outsourcing of services around the world. Blue colour jobs mainly associated with manufacturing had less impact, however, the transportation of white collar jobs had influential impact on middle class occupations and jobs (image below). (Bardhan and Kroll, 2003) In debate on the loss of job in US, US firms have also been questioned for moving from the main objective of outsourcing and adopting the strategy for the sake of trend going on (Weidenbaum, 2005). Though US job losses blame being attributed to somewhat blind outsourcing has been well discussed and but is has also been a developed fact that US affiliated job in developing countries have also contributed positively in US as well (Mankiw and Swagel, 2006). Despite this clarifying evidence, out sourced jobs in countries like India will remain vulnerable to in case any law tabled or protectionist rise to back source out-sourced job and generate jobs inland (Dash, 2005). RELATIONSHIP WITH KEY SUPPLIER Sound relationship with key supplier is crucial to maintain healthy business in highly competitive world and firms are growingly realizing the fact that strategic level partnerships are lifeline for business. Firm that adopted outsourcing strategy without nailing down every detail are feared to be caught in the dwindling state of indecisiveness. The relationship with supplier shall always be determined in detail with respect to the business needs today and mainly the need of rapidly changing dynamics of business world for tomorrow. These relationships characterize high level of differentiation across board; however, there are certain characteristic presence of which in contract, ensures it to posses due weight to be bring benefits aimed. The organizations who have adopted sourcing strategies with the vision to gain access to skills that lack availability in-house and to respond to changing business needs competitively should undertake sound strategic relationships. Sustainability is an important characteristic for every strategy including sourcing. Hee (2008) present mechanism to sustain strategy specifically for Knowledge Process Outsourcing (KPO); nevertheless, it is also applicable on operations with alignment to the respective domain. The suggestion states to extend the processes beyond the basics outsourced ones. It further suggests to work for deepen the knowledge of performance that requires more efforts than simply developing system for the business process. Outsourcing can be maintained as sustainable strategy with increasing the level of adoption specifically for the off shore teams. Adoption is more important with consistent contact and upgrades being provided as well as receiving feedback. Though Hee (2008) suggests this mainly for KPO; however, application of these in every sourcing aspect would provide business with more effective and improved services from supplier. Another point suggested in presentation from Hee (2008) is to retain the staff of the out sourced office and also provide them with career growth opportunities; the pillar that forms the basis of loyalty from employer irrespective of its direct or indirect connection with business firm. All these suggestions fall in key to developing the sustainable outsourcing mechanism, they are also pioneer contributor in developing successful outsourcing strategy. Moreover, since the recent past, sustainability with respect to environment especially in global outsourcing strategy is also gaining popularity as main deciding factor (Babin and Nicholson, 2011). Supplier relationship management (SRM) has been developed as a domain of study due to importance this management branch is taking up. Three pillar characteristics for the SRM include following (Monczka, Choi, Kim, and McDowell, 2011 ): 1. Transparent and clear information sharing between the buyer and supplier with respect to the each component of the product or service bought. 2. There shall be high level of trust regarding the truthfulness of both the parties. Any confusion in this aspect can have detrimental impact on both as it would divert efficiencies to conspiracies from work effectiveness. 3. Each party shall contribute to its maximum for the best result hence sharing the cost, risks and so the resulting fruits. Sourcing from outside supplier either the product or service is very critical decision and shall be addressed with all efforts from both parties at each level. SOURCES TO MITIGATE PROBLEMS OF SOURCING Interdependency of humans on each other is natural phenomenon. On employing these interdependencies in business process, profit maximization aim shall be shared as key to mitigate potential discrepancies. Incorporating sourcing strategy is among the strategic level stratagem having capacity of defining the future fate of business and followed with addressing all possible fragile aspects (Monczka, Carter, Markham, Blascovich, and Slaight, 2005). (Monczka, Carter, Markham, Blascovich, and Slaight, 2005) This process is also defined in the work of Linder, Cole, and Jacobson (2002) in five levels that are: key top-level management has capacity to provide leadership to maintain balance, premeditated agenda, capacity to actually translate the benefits in financial structure, outsourcing shall not be aimed to get the ready-made work done and shall be adopted as opportunity to transform the critical or supporting component of critical process, and finally decision shall be focused with outcome for the enterprise specifically, mainly and only. To mitigate any potential discrepancies, firms must critically assess the sourcing option. Mclvor (2008) developed model based on the critical evaluation of processes for each quadrant and suggested sourcing strategy for each quadrant (model provided below). (Mclvor, 2008) It further suggests that though outsourcing is an important and workable solution to many issues but there are certain other implications to be addressed such as: 1. Indentifying the potential weakness of the processes not performing well and inputting possible efforts to get resolved in-house before than just handing them to an outsider for solution 2. Before handing process to an outsider, detailed assessment of the impact of decision on other interrelated processes. 3. Firms must also look for opportunism and consequences before stepping out of their domain. Activities once get out of business also brings in negative implications along with benefits. 4. On adopting outsourcing the firms needs to focus on contractual terms that do not lead on dependency on the supplier. Alongside, it also requires maintaining relationship management. Hence, striking the balance between two extremes requires balanced trade- off; an additional job that firm acquires to get its own job done by outsider. Benefits of outsourcing once became the prime domain of study and extensive adoption of this strategy explored issues associated with it. On the other extreme lies the in-sourcing referring to doing all by own. Firms, in order to remain successful and competitive had to look beyond both these strategies and must land to right sourcing (Miano and Hegarty, 2012). Right sourcing refers to adoption of the best fit between the in house resources and the external resources (Miano and Hegarty, 2012). This best fit provides the right balance to gain the aimed increased efficiency, reduced cost and finally the profit maximization aim of business. 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Available from http://www.xduonline.net/video/XplorNEPS121411/XplorNEPS121411.html [Accessed 4 November 2012] Monczka, R., Carter, J., Markham, W., Blascovich, J., and Slaight, T. (2005). Outsourcing strategically for sustainable competitive advantage. Available from https://www.google.com.pk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CB8QFjAA&url=https%3A%2F%2Fwww.atkearney.de%2Fcontent%2Fmisc%2Fwrapper.php%2Fname%2Ffile_study_strategic-outsourcing_11289424446b07.pdf&ei=j-6cUMKHHYO4hAfO0YCgBA&usg=AFQjCNFUDVxrzw2YQap8RApPfBcXAKE0aw [Accessed 5 November 2012] Monczka, R., Choi, T., Kim, Y., and McDowell, C. (2011). Supplier Relationship management: an implementation framework. Available from http://www.capsresearch.org/publications/pdfs-public/monczka2011srmEs.pdf [Accessed 4 November 2012] Prahalad, C., and Hamel, G. (2006). The core competence of the corporation. Straegische Unternehmungsplanung, pp. 275-292. Weidenbaum, M. (2005). Outsourcing: Pros and cons. Business Horizons, vol. 48, no. 4, pp. 311-315 Williams, A. (2012). Back to Reality. Supply Management. Available from http://www.supplymanagement.com/analysis/features/back-to-reality/ [Accessed 2 November 2012] Read More