How Effective Outsourcing Allows Organizations to Focus on Their Core Business - Case Study Example

A Report: Effective outsourcing allows organizations to focus on their core business Name: Instructor: Course: Date: A Report: Effective outsourcing allows organizations to focus on their core business By Name: EXECUTIVE SUMMARY Outsourcing mainly involves companies contracting out to other companies their tasks to have them done. The quest for more cost efficiency processes and greater efficiency in carrying out their responsibilities has resulted into companies adopting state of the art outsourcing strategies in outsourcing processes in design, manufacturing, marketing and engineering; companies therefore progressively specialize in limited vital areas because of the benefit of accessing specialist capabilities of suppliers in the wide range of the organizational processes. The main advantage of outsourcing is that it allows businesses save on overhead costs because most of the outsourced processes are crucial to the competition benefit and sets in capabilities and comprehension over time to the business. To achieve the best results from outsourcing organizations should develop and adopt tailored strategies for all their processes by accessing their needs and those of their clientele this allows them to compete in the stiff global economy (McIvor. 2011) TABLE OF CONTENTS 1. INRODUCTION 4 2. OUTSOURCING DECISIONS 4 2.1 Relative capability position 4 2.2 Contributing to competitive advantage 4 2.3 Potential for opportunism 5 3. POTENTIAL FOR OPPORTUNISM 5 3.1 Vendor opportunism 5 3.2 Outsourcing strategies 5 3.3 Business process breakdown 5 4. RELATION STRATEGY APPROACHES 6 4.1 Non specific contracting 6 4.2 Recurrent contracting 6 4.3 Relational contracting 6 5. RECOMMENDATIONS 7 6. REFERENCES 8 INRODUCTION This report seeks to discuss outsourcing and looks in depth its three dimensions; as drawn from the article; Outsourcing Done Right by (McIvor. P 40), outsourcing frees a company’s from using its resources, reduces costs, enables access to specialized vendors, and focuses on core competence, improved services and flexibility. Outsourcing also introduces new challenges and risks such as operational, legal, strategic risks, loss of control and cultural-social problems. Effective outsourcing involves analyzing a number of key dimensions, including relative capability in outsourcing, contribution of outsourcing to competitive advantages and the potential for opportunism from outsourcing (Rashid, 00. Pp 763-770). It is analyzing these dimensions that provide outsourcing strategies. 1. OUTSOURCING DECISIONS. There are three dimensions that are considered when discussing outsourcing decision namely: 1.1 Relative Capability Position. A key issue in competitive strategy involves understanding the reasons as to why firms differ in performance, its from this that some firms gain advantage over others in the manner from which they conduct organizational processes, in outsourcing it is vital to determine how an organization performs relative to its competitors and suppliers. Relative capability position therefore identifies the performance difference between the organization and the external providers of the business processes (McIvor, 11. Pp 35-40). This analysis also determines how well an organization achieves sustainable competitive advantage by performing critical processes. 1.2 Contributing to competitive advantage This decision determines how a process contributes to competitive advantage, outsourced processes that are vital to competitive advantage possess a strong capability for the organization and thus remain internal, this is because they have a major impact upon the ability the company to gain better profits due to their lower cost position as well creating higher levels of differentiation, processes with lower competitive advantage on the other hand have limited impact on the organization’s ability to achieve higher cost position (Rashid, 00. Pp 763-770). 1.3 Potential for opportunism Potential of opportunism from vendors is considered when making outsourcing decisions, opportunism has indicators which companies look for; companies should adopt strategies that help them deal with supplier opportunism in outsourcing. This decision is discussed in the next chapter. 2. POTENTIAL FOR OPPORTUNISM Key considerations to put into place in potential for opportunism are; 2.1 Vendor opportunism There are several indicators for opportunism in vendors which are as follows: Presence of investments in human or physical assets. Complex interdependence between businesses processes as a result of the need for mutual adjustment and coordination The number of capable suppliers in the supply market. Uncertainty in the business environment and in the organization. 2.2 Outsourcing strategies Below are a number of strategies that help organizations to deal with supplier opportunism in outsourcing; Retaining the business process internally in the case of high potential for opportunism in an organization. Adopting a relationship strategy. 2.3 Business process breakdown Reducing the complexity of the business strategy by redesigning it into a number of more non specific processes that can be provided by several suppliers these processes become more standardized and could share some transaction characteristics. 3. RELATION STRATEGY APPROACHES A relation strategy is adopted when a business process is considered as suitable, a relationship strategy is primarily influenced by the potential for opportunism in the relationship. 3.1 Non specific contracting In this approach a process can be outsourced from a number of strategies, it is driven primarily by the contract and is brief; it involves bargaining interaction between autonomous suppliers and buyers. The supply market is extremely competitive with high rivalry between suppliers who aggressively compete for business from buyers sharing like sourcing requirements. 3.2 Recurrent contracting. This relation strategy is characterized by moderate levels of asset transaction-specific investments. Low potential for opportunism is indicated by the presence of a number of capable suppliers. Recurrent contracting strategy is applicable when an organization is sourcing a component that is technology-intensive and rapidly (McIvor, 11. Pp 35-40). Other than developing a long-term relationship it is more important to manage the relationship for as long as the supplier observes a strong position in the technology, this means that the buying organization switch to competing suppliers that are better placed in the technology; excessive dependence on a single supplier is thus avoided. 3.3 Relational contracting. This strategy involves adopting a long-term, collaborative relationship; relational contracting is appropriate when a business process is crucial to competitive advantage with a high potential for opportunism this is indicated by the minute quantity of suppliers as well as the inability to fully specify or dictate the elements of the transaction (Hendricks, 03. Pp 45-56). 4. RECOMMENDATION I would recommend relational contracting for an organization that wants to build relationships with their outsourcing suppliers and work with them on future projects because this strategy allows the organization to establish and build a mutually advantageous relationship with the suppliers, since all processes are critical to competitive advantage with high potential for opportunism. Relational contracting deals with relation-specific investments and the development of inter-organizational systems that are informative and which create a high level of mutual dependency between the sourcing organization and the suppliers (Hendricks, 03. Pp 45-56). The focus of this relational strategy is to develop a mutual relationship based on trust rather that a contractual mindset which is normally profit based. Through this build relations a long-term friendship is build and the mutual inter dependence ensure long lasting bond unlike the nonspecific contracting whose primary objective is to reduce costs or the recurrent contracting that only manages a contractor-supplier relationship if the supplier maintains a strong position in the technology. 5. References Gilley, M. and Jeffrey, E. (2004). “Perceived Environmental Dynamism: The moderating Effects of Firm Maturity” Journal of small Business Management 42, no.2. pp. 117-13 Hendricks, G. (2003). Economics and management of organizations. Texas: McGraw-Hill Publishers. Pp. 45-56 McIvor, R. (2011) ‘Outsourcing Done Right’, Industrial Engineer, vol 43, no.1, pp 30-35. Rashid, A. (2000). “Making more by doing less: An analysis of Outsourcing and its effect on Firm performance.” Journal of management v. 26 Pp 763-790 Read More