Effectiveness of Outsourcing as a Generic Global Strategy - Research Proposal Example

1. Introduction 1 Background Any strategy that a firm adopts is with the view of gaining competitive advantage. According to Michael Porter a firm’s strengths fall under two headings – cost advantage and differentiation. These in turn give rise to three generic strategies – cost leadership, differentiation and focus (Porter, n.d.). They are called generic strategies because they are not firm or industry dependent. Each of the generic strategy has attributes that helps it to defend against competitive forces. Hence, a firm has to take a decision about its processes, people and technology depending upon the market forces. Outsourcing is a decision that has been in the news recently because of the different viewpoints and the debates that it has given rise to. Outsourcing is difficult to define and has often been misunderstood. It is usually associated with jobs being moved overseas. The term ‘offshoring’ refers to relocation of jobs and production to a foreign country (Garner, 2004) while outsourcing refers to jobs and services irrespective of the location of the provider. Offshoring refers to the location of the work while outsourcing refers to who does the work (Scott, Ticoll & Murti, 2005). It is possible to offshore without outsourcing if the company has its own office or a captive unit in another country. 1.2 Rationale for research Although outsourcing initially started with manufacturing, today services in different forms are being outsourced. Examples of such services include facilities management, IT services, software development, human resource administration, payroll processing and call center services. Outsourcing decision have been taken based on the transaction cost theory, competency based theory or the relational theory (Mehta et al., 2006). Various benefits have been cited for outsourcing which include cost savings, reduced inflation, and interest rates, increase in consumer spending and increased productivity. Firms see outsourcing as a business strategy which allows them to focus on core competencies (Isern & Benedixen, 2007). It also gives them the flexibility to respond to market forces. However, it is increasingly being felt that firms lack an adequate decision framework to weigh the tradeoffs involved in outsourcing. The existing literature gives diverse opinions about the effects and effectiveness of outsourcing. Firms are realizing that the financial benefits to outsourcing firms may be much lower than expectations. This gives rise to the question whether outsourcing can be used as a generic global strategy. Does it really bring about efficiency and is it really effective? Whether outsourcing as a generic global strategy brings about efficiency is debatable and depends upon various factors. Efficiency is the hallmark of any delivered product or service (Anonymous, 1996). The service provider should be able to improve the function as a result of the outsourcing arrangement and not make things more complex or difficult for the company and the employees. The transition should bring about improvement and this is the success of the strategy to outsource any activity. Effectiveness relates generally to costs while efficacy refers to performance and other issues like service delivery and product quality. There are contradictory view of the effects and effectiveness of using outsourcing as a generic global strategy. 1.3 Aims and objectives of the study With the objective to determine the effectiveness or the effects of outsourcing as a generic global strategy the aims of the research would be as follows: 1. To determine the industries/services that typically outsource their functions. 2. To study the rationale and the theoretical framework behind their decision. 3. To study the outcome of their decision/outsource. 4. To determine the gap between the outcome and the expected outcome. 5. To determine the factors associated with the success or failure of outsourcing strategies. 1.4 Significance of research Today many firms and sectors think in terms of outsourcing without have deeper insights into the impact and the outcome. While the motive of every firm is to enhance productivity and profitability, outsourcing may not always be the right decision. The outcome of this research would add to the existing knowledge, clarify the stand and guide firms in the right direction. 2. Literature Review Outsourcing does not mean to outsource production or processes to another country but can be domestic as well. It is just that it is contracted out to a supplier or a service provider and this supplier could be overseas or within the national boundary. Location specific factors pertain to the locational advantages in the availability of technology and other resources while relational factors takes care of the relationships or the linkages between the activity being sourced and other activities in the value chain (Levy, 1995). In offshore outsourcing because of the geographical dispersion of the value chain there is a need for integration and coordination. Technological complexity, high transportation costs and product immaturity can make the outsourcing difficult. Costs of offshore outsourcing remains a barrier and such costs are undermined. As Murray et al (1995) point out in outsourcing if the hidden costs of outsourcing you undermined, it could have a negative impact on economic performance. This fear has been confirmed by Busi and McIvor (2008) who express familiarity with impact of confusion on business performance when outsourcing deals fail to deliver the promised benefits. To understand the theoretical underpinnings of outsourcing it is necessary to examine issues like vertical integration, vertical disintegration and “make or buy” decision (Harland et al, 2005). The motivations for outsourcing have to be assessed and it is equally important to understand what is being outsourced. Outsourcing need not always be non-core activities but can also be activities closer to core. There is evidence of the public sector outsourcing core activities in the UK. This thus challenges the belief that firms typically outsource non-core competencies. The transaction cost theory is helpful in arriving at the make-or-buy decision as it takes into account the asset specificity and uncertainty (Murray, Kotabe & Wildt, 1995). It helps to discriminate between those transactions that need to be internalized and those which do not. It is also essential to investigate the nature of business environment before making strategy decisions. Business environments are dynamic in nature and the same strategy may not hold good at all times. Hence it is essential to review the strategy from time to time. A firms needs to be aware of the hidden costs of outsourcing so that profitability is maintained. Moses & Ahlstrom (2008) explain several models that help companies take the make-or-buy decisions. These include the strategic make-or-buy methodology, the six generic phases of the outsourcing process and the strategic positioning decision process. These models do not reflect the dynamic nature of the companies and the business environment. The models too are derived from theories that are static like the transaction cost economics. The strategic decisions cannot be a one-time decision and needs constant reviewing and changes as the situation demands. Kotabe and Omura (1989) studied the sourcing strategies of European and Japanese multinationals. They found that the location of the production was not an important factor in its performance. It is however positively related to the internal component sourcing. This study distinguishes between domestic and international sourcing and suggests the efficacy of outsourcing the assembly lines in manufacturing. Cost effectiveness in outsourcing may be limited – well below 20% as claimed by consultancies although efficiency in performance can be achieved (Roe, Smeelen & Hoefeld, 2005). However, outsourcing always does not achieve the objectives because there could be loss of control over service delivery and loss of property rights. This implies that a benchmarking procedure should be set up to evaluate the best practices in outsourcing (Franceschini et al., 2003). All the elements that can have an impact on the strategic decision should be integrated to achieve the best results. In the public sector services are outsourced with the intention of transferring the risks to the public sector. Such a contract or partnership can result in failure of the project or the outsourcing may be ineffective as has been determined by Edwards and Shaoul (2003) in the case of the UK Passport Agency that awarded two contracts. The authors clarify that the nature of the contractual agreements is important. Even in the case of the automobile industry the issues central to outsourcing would include the location, the source components and the configuration of products (Hong & Holweg, 2005). Global outsourcing is a strategy of redesigning, redefining, reshaping, and energizing organizations all over the world (Elmuti & Kathawala, 2000). It is generally used by firms to focus on core issues but there is little research on the problems and difficulties in outsourcing. They contend that if global outsourcing is implemented correctly it can improve an organization’s effectiveness. Outsourcing has certain drawbacks as it reduces control over service delivery. It can even lead to a decline in the morale of the employees of the outsourcing firm. The managers in charge of the outsourcing process should be aware of the differences in cultural and legal environment in which they propose to operate. This study found that while firms achieve organizational effectiveness they have not achieved the order of magnitude improvements associated with global outsourcing. Isern and Benedixen (2007) explore how and why firms opt for global outsourcing as a strategy. They concentrate on the financial service value chain and the outsourcing decision making process for the financial services providers. Outsourcing includes risks like performance risk, financial risk, information risk, regulatory risk, and strategic risk and firms must evaluate these risks against the perceived benefits. Each of these risks has been discussed in detail along with solution to mitigate these risks. Since there is mounting pressure on the financial service providers to maintain service quality evaluating the risks against the perceived benefits is essential. To ensure the effectiveness of the outsourcing arrangement in the finance and internal audit sector the process would involve assessing the core competencies, determining the pros and cons of outsourcing including the oppurtunities for improvement, reviewing the potential providers, specifying the process of transition and identifying the performance measures (Anonymous, 1996). Harland et al (2005) wanted to assess the risks and benefits of at different levels – organizational level, sector level and the national level. The study found that some organizations do not attain the desired benefit of outsourcing. According to a survey only 5 per cent of companies surveyed achieved significant benefits from outsourcing. The reasons cited were focus on short term benefits, lack of formal outsourcing decision making process, and increased complexity in the total supply network. The magnitude of benefits and risks in outsourcing depends upon the supplier and the selected type of outsourcing contract (Bertolini et al., 2004). The authors studied the outsourcing in the area of maintenance and contend that outsourcing of certain functions or services should not be considered as a synonym of granted success. Here too the authors advice of the same parameters to consider before deciding to outsource. Moller (2006) contends that offshoring financial services do not mean savings in cost and improving efficiency. In fact it can even cause the company to go off-track. Automating the processes can reduce the headcount so why should one offshore from UK? In the case of IT outsourcing the success depends not merely upon the service quality but also on the relationship between the client and the vendor and quality relationships can positively influence the success of the outsourcing arrangement (Chakrabarty, Whitten & Green, 2008). Chan (2007) studied the maintenance strategy of the hotels in Hong Kong and concluded that individual hotels would have to consider the maintenance cost distribution, obstacles of multi-skilling, maintenance performance and practices. These are essential because the effectiveness of the outsourcing contract would be determined by the level of customer satisfaction. A study on the outsourcing strategy by hospitals was conducted by Chandra (2007). This study was based on the financial data over 3-4 years period. The study revealed that amidst financial crunch, absenteeism, indiscipline, union problems and pilferage, outsourcing seems to be the best alternative. This was found in the case of outsourcing of man services, of machines as well as materials. The effectiveness of outsourcing was measured by measuring the efficiency, the qualitative improvement, cost containment/money saving and discipline of the worker including continuity of service. The hospital achieved the maximum effectiveness when both man and materials were outsourced. Outsourcing not only promises efficiency and effectiveness, it carries risks like currency devaluation and political unrest. These issues can affect the performance or profitability of the outsourcing firm and can cause major disruption (Hemphill, 2004). Enforcing intellectual property rights, such as patents, copyrights and trade marks can be expensive and time consuming as the legal systems overseas differ from those in US. Thus on the basis of the above literature reviewed, the framework for the study can be made. Firms from different sectors have been outsourcing and outsourcing has taken place both domestically and overseas. Outsourcing of services from organizations like hotels and hospitals fall under Facilities Management. Public sector has been entering into service contracts with private firms to leverage benefits of internal outsourcing. Outsourcing need not be international in nature as can be seen from the above examples. Sourcing can be done domestically and internationally and studies suggest that the product performance is not affected by the location of the sourcing. Most studies suggest the parameters that need to be taken into account before the outsourcing strategy is determined. Various risks are associated with outsourcing and these cannot be ignored at the time of taking the decision to make-or-buy the product or service. The above literature suggests that high asset specificity and uncertainty cause internalization while trust is necessary in building relations. Different models have been suggested by different researchers but most models are static in nature and do not take into account the volatility in the business environment. While studies have been mostly conducted in the United States, investigations have also been conducted in other regions but not to the same proportion. This is because till date most outsourcing has been taking place from the United States. Hence no generalization is possible. Again, studies have not focused on determining the effects and effectiveness of the strategies that companies apply. It thus becomes necessary to devise a framework to determine whether outsourcing can be a generic global strategy or it needs to be dynamic in nature. 3. Research methodology For this research the qualitative or the inductive method would be applied and justification for the chosen method is explained. By applying the appropriate methodology and the research method the right results can be obtained. Research means differently to different people and there is no consensus on how what should be the right approach. Research methodology is the procedural framework within which the research is conducted. It relies on various factors like data, facts, experience, constructs, hypotheses, conjectures and principles (Amaratunga, Baldry, Sarshar, & Newton, 2002). Deductive and inductive methods There are two different schools of thought on how research should be conducted. Arguments have different roles and purposes and most often people evaluate based on the purpose in their mind. One set of arguments cannot hold good for another situation as environment keeps changing. This is also the case with the volatile business environment. Hence arguments need to be evaluated in two different ways – in terms of deductive correctness or in terms of their inductive strength (Rips, 2001). Qualitative or the inductive method allows the researcher to view the world from the point of an actor and this means close involvement. It describes people in natural situations and the contextual understanding has to be perfect (Amaratunga et al., 2002). This method is more fluid and flexible and can be altered if the situation demands. There are high chances of discovering novel or unexpected findings. This is possible because the researcher views the events from outside and is not involved in the research process. The data collected is rich and holistic and has the potential to reveal complexity. Qualitative data covers a range of material collected from previous research, literature review, case studies and unstructured interviews (Jones, 2004). Some researchers argue that the qualitative approach is better as it provides greater depth. The explanations in this method are reduced to the simplest possible elements in order to facilitate analysis. Quantitative investigations look for distinguishing characteristics, tend to quantify and allow flexibility in the treatment of data. This is not desirable for this study because the data has to be analyzed as collected. A qualitative approach allows changing the data collection times and method as the research evolves. Quantitative research is more descriptive and description depends on perception, inclination, sensibility and the sensitivity of the describer (Sandelowski, 2000). The description could vary across individuals and hence cannot be relied upon. Qualitative data is based on facts and hence can be relied upon. Qualitative research presents facts in common everyday language while quantitative research re-presents events in other terms. Qualitative description is more interpretive while quantitative description uses surveys or other means to obtain a common data set on pre-selected variables. In qualitative research it is possible to collect as much data as desirable but in quantitative research the amount of data that can be collected is limited. Research model Based on the literature that has been reviewed, the effects and effectiveness of outsourcing in both manufacturing and service firms would be studied. Both forms of outsourcing would be taken into the study – onshore and offshore. The economic performance would give an idea of the cost and other effectiveness that firms have achieved through outsourcing and the strategic performance can be ascertained through enhancement in process, employee motivation, technology and process improvement. Hence the research model would be as follows: Fig: The research model with two variables Research design and data collection Literature review would be used as plenty of literature is available in the subject. Literature review would enable to understand the totality of the situation. A lot of changes have taken place since the concept of outsourcing started. It would be possible to track the changes that have taken place. Besides, it would be possible to collect data from the MNCs as well as from smaller firms. This method has been found to be the best for discovering, exploring an idea or developing hypothesis. To support the findings from available literature, another qualitative data collection method that would be employed is interviews. Interviews have the potential to capture certain complexities that can be missed by large-scale statistical analyses (Herod, 1993). In-depth interview allows the interviewer to delve deeply into social and personal matters (DiCicco-Bloom & Crabtree, 2006) and it unveils a person’s emotions, beliefs, problems, experience and actions (Eggenberger & Nelms, 2007). Individual in-depth interviews are not considered necessary for this study because this is based on facts and figures. Semi-structured interviews would be conducted over phone after prior appointment through email. This has to be done due to time and budget constraints. Emails will be sent out to approximately managers of MNCs within UK and Europe, as well as to smaller firms. The firms would again be from different sectors as this would give an overall view of the outsourcing strategy. It would help to distinguish the sector in which outsourcing is more beneficial. The emails and the following interviews would include only the outsourcing firms and not the service providers as this warrants a separate research. Telephonic interviews lasting about 10-15 minutes would be conducted and it is expected that out of 50 emails at least 15 responses would come through. Interviews would be kept simple and open-ended so that the interview gives out whatever information he/she considers relevant. This would eliminate the possibility of influencing the responses of the interviewee. In other words the social interaction would be kept to the minimum. This method thus ensures detachment and objectivity. Interviews would be conducted at various levels in the organization as opinions could differ across levels. Post outsourcing reactions and performance need to be measured and this requires opinions from different perspectives. The responses would help to determine if the outsourcing firm had focused on cost benefit or performance efficiency at the time of the contract. It would also reveal if the interviewees were trying to conceal facts from the interviewer. The data thus collected will be supported by literature review. Previous literature sets the framework for research and allows the researcher to ascertain what has been done from what needs to be done. It provides a meaningful context of the project (Obenzinger, 2005). The previous perspectives can then be synthesized and a new one gained. This is the purpose of any research. Vast amount of literature is available on the subject of outsourcing and even on the success and failures of such contracts. Only the most significant texts will be selected both on onshore and offshore outsourcing. Data obtained from secondary sources generate new understand through reflection or knowledge integration (Feurer & Chaharbaghi, 1995). It helps the researcher to get a deeper insight because different perspectives are available through assimilation of the data collected. 4. Ethical issues The purpose of the research would be communicated in the initial communication via email itself. Secrecy would be maintained at all times during and after the interview. The names of the company and the managers would not be disclosed. No audio recoding would be taken and all notes made during the interview would be destroyed as soon as the data has been interpreted and entered. Coercion would not be exercised on the respondents and nor would any incentives be offered. 5. Data analysis A large amount of unstructured data would be available analysis of which is tedious and tends to get monotonous as well. A three-stage process would be employed to ensure that no relevant data is lost - data reduction, data display and conclusion drawing and verification (Amaratunga et al., 2002). Selection of literature is a part of the data reduction process. Data reduction is another word for data analysis and occurs through out the process of a qualitatively oriented project. Data displays are a major avenue to valid qualitative analysis. This is a visual format that displays the data systematically so that valid conclusions can be drawn and decision taken accordingly. Display should have the sequence of building the format, entering data, drawing conclusions, writing analytical text, and cycling onward to revised or new displays (Weerd-Nederhof, 2001). Conclusion will be drawn after extensive literature search. For this patterns have to be formed and contrasts have to be considered. This would help to clarify relationships and make the understanding coherent. Computer software would be used to analyze data collected through interviews. 6. Limitations So fat there is no unique research method and besides each method has its own difficulties and problems. While two variables have been listed in the research model, during the course of the research it may need to be changed. The categories listed for research may not be comprehensive or may require further sub-categories although efforts will be made not to include too many variable or sub-categories. It is difficult to predict how many participants would be willing to respond and hence more number of emails will be sent out initially. Firms may not be willing to comply with some research. It is also difficult to ascertain how many would register true opinions. Attempts will be made to ensure the reliability and validity of the data collected. Very often, firms tend to conceal the true picture especially when their strategies fail. Besides, the existing personnel may not have been present at the time when the firms took the outsourcing decisions and hence may tend to give a biased opinion. People may not want to disagree with the top management and want to be seen as a part of the team so responses from the lower level employees could be biased. Plenty of literature is available and attempts would be made to extract literature from academic databases like Emerald, PROQUEST and EBSCO. Attempts will be made to submit a chronological assessment of literature. Data analysis may also be difficult although software will be used for it. 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