Outsourcing

Organizations are increasingly turning into outsourcing. The changes in the business environment and new management concepts have caused the risen attention towards outsourcing. (Van Weele, 2010, p. 160) According to Prahalad & Hamel (1990) the business development of a firm is based on a corporation’s ability to identify and culti-vate and to use its core competencies. Essentially, outsourcing is the contracting of non-core activities. For many companies, it is no longer considered as a trend but more like a business strategy. Outsourcing has its own benefits but there are also pitfalls to avoid.

(Baily et al. 2008, p. 115-117)

In the literature, there are many different definitions and related concepts to outsourc-ing. The outsourcing institute (2015) defines it as the strategic use of outside resources to perform activities which are traditionally handled by internal staff and resources. The difference with subcontracting is the divestment of infrastructure, people and

competen-cies. (NEVI) According to Van Weele, (2010, p. 162) there are four major characteris-tics related to outsourcing:

 Activities originally performed in-house are transferred to an external supplier,

 Assets, knowledge and people go over to the external supplier,

 A relationship between the firm and to supplier will be for long period of time,

 Buying company is exposed to cost and risk profile, both which are new to the organizations involved.

Outsourcing of services has different forms. Various authors have differentiated be-tween turnkey and partial outsourcing (E.g. Van Weele, 2010, Sells 2006). Partial sourcing refers to the case in which only a part of an integrated function is being out-sourced. The buyer is responsible for the co-ordination of the function and the activities.

On the contrary, turnkey outsourcing applies when the responsibility is entirely on the external provider. The execution of the outsourced function or a set of functions or ac-tivities and the co-ordination lies with the external provider. (Van Weele, 2010, p. 162) Furthermore, Allen & Chandrashekar (2000) divide partial to two sub-categories, labour outsouring and mixed outsourcing. In labour outsourcing the contractor provides only some employees and the rest of the service is handled by the host firm. Whereas in mixed outsourcing the service provider might offer for example facilities, management and materials in addition to employees. In Table 2, the forms of outsourcing services are described.

Table 2: Forms of outsourcing services (combined from Allen & Chandrashekar (2000) and Van Weele (2010, p. 163))

There are various reasons why firms are engaging in outsourcing. Monczka, Carter-Markham, Blascovich & Slaight ( 2005, p. 22) outlined operational cost reduction, core business focus improvement and increased flexibility and responsiveness as being the

most significant reasons for supplying from external source. By the same token, Baily et al. (2009, p. 118) mentioned reduction in costs, external supplier’s better capability, desire to focus on core know-how, reducing risk and freeing resources for other purpos-es. Quinn (1999) adds innovation as a major benefit of outsourcing. Companies can decrease their innovation cycles and enhance the value of their innovations when out-sourcing certain services. Van Weele (2010, p. 164) divides the rationales for outsourc-ing to two categories, tactical and strategic. Tactical reasons are related to for example cost reduction and to receive an important cash infusion. Strategic reasons indicate to improvement of focus, risk sharing, acceleration of reengineering benefits and im-provement of customer satisfaction. To conclude, all the reasons aim for improving the overall performance of the firm and increasing the revenue of the outsourcing company.

(Van Weele, 2010, p. 16)

Outsourcing also has its risks and pitfalls. According to Baily et al. (2008, p. 125) re-search shows that large part of companies underestimate the effort involved in manag-ing the supplier relationship and the time invested in determinmanag-ing the specifications of the service they need. They also state that only 21 % of suppliers felt that customers communicated their objectives well. Van Weele (2010, p. 174) claims that outsourcing contracts have four kinds of risks: technical, commercial, contractual and performance risks. Technical risks refer to question of how to maintain crucial knowledge in the company that is needed to manage the outsourced activity effectively and how to make sure that the service is being supplied applying leading edge technology and solutions.

Commercial risk is related to the uncertainty with the price the buying company pays and the costs that will incur when having outsourced the activity. Contract and perfor-mance risk concern the fact that the contract may not have enough detailed description of the expected performance from the supplier and the chance that the supplier is not capable of doing the job it was hired for. (Van Weele, 2010, p. 174-175) The risks and the success factors are illustrated in Table 3.

Table 3: Risks and success factors of outsourcing (modified from Van Weele (2010) and Baily et al. (2008))

Avoiding these risks can be easier said than done. Detailed contracts can be helpful but they will not solve the problem. The details of the contract may be depending on the maturity of the relationship between parties. If the buyer and the supplier have been dealing with each other for a long time in other business areas, the less they need to put in writing in the contract. It is considered that the best chance for a successful outsourc-ing relationship is with already familiar suppliers. The outsourcoutsourc-ing Institute (2015) sug-gests few factors that are important when implementing an outsourcing process; Under-standing company goals and objectives, strategic vision and plan, selecting the right vendor, properly structured contract, open communication with supplier, ongoing man-agement of the relationship, senior executive support and careful attention to personnel issues. (Van Weele, p. 176-177) Baily et al. (2008, p. 118) also names well defined ac-tivities, relationship with the supplier, high quality of the supplier and effective contract management and monitoring as the most important contributors to successful outsourc-ing.