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A compilation on Outsourcing – Halley Thokchom

1. OUTSOURCING - DEFINITION AND CONCEPT OF


OUTSOURCING
Outsourcing is, in simple words, giving the responsibility and the management of an activity
to an external supplier (manufacturing activities) or provider (service activities), instead of
doing it internally. It is different from subcontracting, which implies an obligation of means,
whereas outsourcing is based on an obligation of results.

It must also not be confused with downsizing, which consists in increasing productivity,
efficiency, and competitiveness by reducing the size of a company. (Freeman & Cameron,
1993). In this case, a group of activities is totally abandoned, which cannot be amalgamated
to an outsourcing strategy. To the contrary, an outsourcing strategy consists in a real transfer
of activities from the client outsourcing company to the providing outsourcing company (also
called provider or outsourcer). The downsizing strategy is a consequence of the redefinition
of a company’s core business, whereas the outsourcing strategy follows from a strong will to
refocus on its core business. It is nevertheless interesting to notice that 23% of downsizing
operations result from outsourcing operations. (American Management Association, 1997).

Another confusing practice is reengineering, which consists in the fundamental rethinking


and radical redesign of business processes to achieve dramatic improvements in critical,
contemporary measures of performance, such as cost, quality, service, and speed. (Hammer
& Champy, 2001). Reengineering must certainly not be assimilated to outsourcing, even if it
sometimes leads to it.

Even while all these related practices might be part of a whole outsourcing operation, they
cannot be assimilated to outsourcing strategies. The complexity of the issues that arise in
connection with outsourcing projects varies depending upon many different factors requiring
numerous areas of expertise to be tapped into, such as tax, insurance, risk management,
finance, project management, change management, information technology, and a perfect and
essential knowledge of the environment involved.

Levels of Outsourcing
There are three levels of outsourcings: tactical, strategic, and transformational.

Tactical Outsourcing
On the first level, tactical, the reasons for outsourcing are usually tied to specific problems
being experienced by the firm. Often the firm is already in trouble and outsourcing is seen as
a direct way to address problems. Typical examples of “trouble” are: the lack of financial
resources to make capital investments, inadequate internal managerial competence, an
absence of talent, or a desire to reduce headcount.

Not surprisingly, tactical outsourcing often accompanies large-scale corporate restructuring.


Thus, many tactical relationships are forged to:
• Generate immediate cost savings.
• Eliminate the need for future investments.
• Realize a cash infusion from the sale of assets.
• Relieve the burden of staffing.

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The focus of tactical outsourcing is the contract, specifically, constructing the right contract
and, subsequently, holding the vendor to the contract. Traditionally, the expertise for making
these arrangements came from the purchasing department. However, there is an emerging
expectation that every manager involved in the supply chain process understand and be
accountable for the aspects of outsourcing that affect their area of charge. Establishing and
maintaining tactical outsourcing relationships, specifically functional or comprehensively, is
the responsibility of the entire organizational team. Frequently, the contract was simply a fee
for services, with much of the value stemming from the discipline of spending dollars
externally. When managers formed successful tactical relationships, the value of using
outside providers was clear: better service for less investment of capital and management
time.

Strategic Outsourcing
Over time, as businesses sought greater value from outsourcing relationships, the goals of
these relationships changed. Executives realized that, rather than losing control over the
outsourced function, they gained broader control over all of the functions in their area of
responsibility, hence, were freer to direct their attention to the more strategic aspects of their
jobs. Facilities managers, for example, could focus more on infrastructure issues, instead of
worrying about staffing janitorial positions. Technology executives could hand over running
of the data centre to a service provider and turn their attention to serving the needs of internal
customers. This logic remains compelling.

To meet the requirement of earning greater value from outsourcing, How it was used and
where it was applied had to change. The scope of outsourcing relationships grew
significantly, as did the service provider’s involvement. By virtue of the increasing dollar
value of the relationships, the integrated scope of services, and the length of the new
relationships, outsourcing was no longer a tactical tool but a strategic tool. Most important,
the managerial mind-set regarding the nature of these relationships matured, from one
between buyer and supplier to one between business partners.

Strategic outsourcing relationships are about building long-term value. Instead of working
with a large number of vendors to get the job done, in a strategic model, corporations work
with a smaller number of best-in-class integrated service providers. These relationships thus
evolve from vendor supplier arrangements (which are often adversarial) to long-term
partnerships between equals, with the emphasis on mutual benefit.

Transformational Outsourcing
Transformational outsourcing is third-generation outsourcing. The first stage of outsourcing
involved doing the work under the existing rules; the second stage used outsourcing as part of
the process of redefining the corporation. This, the third stage, uses outsourcing for the
purpose of redefining the business. To survive economically today, organizations must
transform themselves and their markets in an ever more daunting challenge to redefine the
business world before it redefines them. To that end, outsourcing has emerged as the single
most powerful tool available to executives seeking this level of business change. Those who
take advantage of transformational outsourcing recognize that the real power of this tool lies
in the innovations that outside specialists bring to their customers’ businesses. No longer are
outsourcing service providers viewed only as tools for becoming more efficient or better
focused; rather, they are seen as powerful forces for change—allies in the battle for market
and mind share.

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Phases of the Outsourcing Process


The phases illustrated in Figure 1.1 are part of any outsourcing process:
1. Strategy phase. You define the objectives and scope of the outsourcing concept and
determine the feasibility of outsourcing before making the decision to proceed. Also, you
plan the total effort in terms of time, budget, and necessary resources.
2. Scope phase. You establish baselines and specify the service levels required of vendors.
You clarify relationships between the function(s) to be outsourced and those functions that
remain in house, to include proper interfaces. You develop the request for proposal (RFP);
collect and analyze responses from vendors; and, finally, choose a vendor.
3. Negotiation phase. Negotiations proceed with the chosen vendor until a contract is drawn
up and, ultimately, signed by both parties.
4. Implementation phase. This phase marks the transition from in-house provision of services
to outsourcing.
5. Management phase. Throughout this phase, you manage the outsourcing relationship with
the vendor. It includes the negotiation and implementation of any changes in the outsourcing
relationship seen as necessary to ensure a successful outcome.
6. Completion or termination phase. At the end of the contract period, you make the decision
either to negotiate another contract with the same vendor or to terminate that relationship and
align with a new vendor; and the cycle begins again. Alternatively, a decision is made to
bring the function back inside the organization.

There will always be some aspects of the outsourcing arrangement that will be unpredictable
and thus will evolve over the life of the contract.

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However, there are key deliverables and activities for a sound BPO relationship each step of
the way. These include the pre-request for proposals phase and post contract governance.
Without these, you and your colleagues may find yourselves saying, “Outsourcing didn’t
work for us.” To ensure you do not become one of the failure statistics, use the time wisely
before you sign a contract, to integrate your own best practices into the terms of your
outsourcing deal.

Remember, outsourcing providers are partners to whom you give significant managerial
discretion as to how to deliver the service they offer; it is they who will manage the day-to-
day delivery of that service. To generate the value you define, it is essential that these
partnerships become long-term relationships. You want your partners to understand your
business in depth, so that they can meet your requirements today and develop better ways to
service your firm in the future. In sum, managing the outsourcing relationship is one of the
most important tasks undertaken by executives today.

2. THE HUMAN RESOURCE OUTSOURCING

a. VALUE CHAIN ANALYSIS


Value chain analysis provides a framework for segmenting an organisation into a number of
activities and identifying organisational capability in these activities. A useful starting point
in segmenting the organisation into a number of activities is to identify the resources owned
by the organisation. In order to perform activities that create competitive advantage,
organisations need to access resources.

The resources of a typical organisation can be grouped into the following categories.

* Tangible resources – include resources that can be quantified and observed.


Examples of tangible resources include physical and financial resources. Physical resources
include plant, equipment, buildings, and location. It is unusual for the physical assets of an
organisation to be a source of sustainable competitive advantage. Most physical assets such
as factories and equipment can be readily purchased on the open market. Furthermore,
physical resources can rapidly become obsolete and a competitive burden for an organisation.
For example, in high technology industries there is considerable risk associated with having
obsolete technology in the form of expensive equipment that can become outdated and
uncompetitive. Financial resources can encompass obtaining capital, managing cash, debt and
credit control and the management of the relationships with the banks and other credit
agencies. Financial resources are rarely a source of competitive advantage due to the relative
ease with which organisations can acquire capital from credit agencies such as banks, stock
markets and venture capitalists. However, there are instances where financial resources can
be used as a source of competitive strength in an industry. For example, companies with large
cash reserves have an advantage in the event of a price war or a recession. Moreover,
organisations with considerable financial resources may be in a better position to attract high
calibre personnel in high profile industries where key individuals can have a major impact
upon organisation performance.

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* Intangible resources – include resources that are deeply embedded in an organisation’s


systems and have been developed over time.
Examples of intangible resources include brand names, reputation, and technological and
marketing know-how and human resources. These resources can be of considerable value.
For example, companies invest considerably in building a strong brand for their products that
will encourage customers to buy their product as an automatic choice. Reputation is another
intangible resource that can be of value to the organisation and its customers. For example,
organisations can create a reputation through the provision of reliable, well-designed products
and good customer service. Human resources encompass management skills, experience and
culture. In particular, the culture of people within an organisation can have significant
influence on organisational success. In industries where there is rapid change an adaptive and
dynamic culture can be a crucial source of competitive advantage. Furthermore, in
professional-service organisations human resources are critical to the success of the
organisation contributing directly to its performance and image. Increasingly, knowledge held
in human resources is seen as a significant differentiator for organisations. Organisations are
adopting a range of strategies to better leverage the knowledge capabilities of their staff
including the creation of mechanisms to facilitate the collection, recording and dissemination
of that knowledge. The creation of an intangible resource can depend upon cross-functional
integration and collaboration both internally and externally. In many circumstances, an
intangible resource such as reputation or brand can be a major source of competitive
advantage.

In the resource-based view literature there are various terms and definitions to explain the
concept of resources. Wernerfelt (1984) was one of the first authors to use the term resource
in the context of strategy. Firms should exploit their existing resource base and develop new
resources in order to establish a sustainable competitive position or ‘a differential resource
position’. Barney (2002) describes resources as all assets, capabilities, competencies,
organisational processes, firm attributes, information and knowledge that are controlled by
the firm. However, some authors distinguish between resources and capabilities. Amit and
Schoemaker (1993) define resources as stocks of available factors owned or controlled by the
firm. Capabilities are specific to the firm built up over time through the co-ordination and
integration of resources. Resources are deemed strategic if they can deliver competitive
advantage for the firm. Hamel and Prahalad (1994) talk in terms of core competencies that
are the skills, knowledge and technologies that an organisation possesses on which its success
depends. A summary of a number of these viewpoints in relation to resources is illustrated in
Table 5.1.

The proliferation of many different terms to explain similar concepts can create confusion.
For example, it could be argued that as well as being a capability, marketing know-how and
experience is also a resource that the organisation possesses. In the resource-based view
literature, the terms resources, activities and capabilities are also often used interchangeably.
However, in the context of the outsourcing framework, there is a clear distinction between
resources, activities and capabilities and relationship between them. In the context of the
outsourcing framework resources are what organisations deploy to perform activities.
Activities refer to the routines and processes that have to be co-ordinated and integrated that
enable an organisation to create and deliver products and services to their customers.

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These activities include the deployment of tangible and intangible resources. The term
capability refers to the ability of the organisation to deploy resources in order to perform
activities in relation to both competitors and suppliers. For example, an organisation may
possess a superior cost position relative to its competitors (a capability) in manufacturing (an
activity) which involves deploying equipment, people, technology etc. (resources). This
analogy is illustrated on the hierarchy in Figure 5.3.

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At the bottom of the hierarchy are the resources. The resources are the building blocks of the
activities necessary to deliver a product or service to the customer. Organisations must ensure
that resources are deployed in a way that delivers both values for the customer and profit for
the organisation.

Value chain analysis is a useful approach for identifying resources, activities and analysing
organisation capability. Many products or services are created through a series of vertical
business activities including raw material acquisition, sub-assembly manufacture, final
manufacture, distribution, sales and after-sales service. Organisations deploy various
resources in order to carry out business activities at each stage in the value chain. Referring
back to the personal computer industry chain in Figure 5.1, it can be seen that the sale of
personal computers involves a number of vertical activities including raw material
acquisition, component manufacture, sub-assembly manufacture, final assembly, distribution
and retailing. These activities are often referred to as an industry value chain. Each stage in
the value chain deploys a number of resources in order to carry out business activities in this
value chain. For example, participating in the retailing stage of the value chain involves
securing access to financial resources, physical resources and human resources. There are a
number of frameworks that can be used to analyse an organisation as a collection of activities
depending upon the type of organisation.

The value chain


The value chain represents an organisation as a chain of activities for transforming inputs into
outputs that customers value (Porter, 1985). The process of transforming these inputs into
outputs involves a number of primary and support activities. Primary activities are directly
involved in creating and adding value for the customer. The primary activities move from left
to right in the value chain representing the activities of physically creating the product or
service and transferring it to the customer. Porter (1985) has identified five primary activities
associated with the value chain including the following.
* Inbound logistics – activities relating to receiving, storing and distributing the inputs to the
product or service. They may include warehousing, inventory management and internal
transportation mechanisms.
* Operations – activities relating to the transformation of inputs into finished products and
services. Operations may include production, assembly, packaging, equipment maintenance,
facilities, operations, quality assurance and environmental protection.
* Outbound logistics – activities relating to the distribution of finished products and services
to customers. Outbound logistics may include finished goods warehousing, order processing,
order picking, shipping, delivery operations.
* Marketing and sales – activities related to sales force efforts, advertising and promotion,
market research and planning, and distributor support.
* Service – activities associated with providing service to enhance or maintain the value of
the product. Service may include providing customer services such as installation, spare parts
delivery, maintenance and repair, technical assistance, managing customer enquiries and
complaints.

The primary activities are linked to a number of support activities that include the following.
* Procurement – refers to the activities performed in the purchasing of inputs that are used in
the value chain. Procurement may take place within defined policies or procedures and
involve a number of functional areas. Manufacturing and engineering have to be involved in
purchasing in order to ensure the specifications and quality standards are acceptable.

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* Technology development – includes product and process research and development,


equipment design, computer software development, computer-aided design and engineering.
* Human resource management – involves all the activities relating to the recruitment,
training, development and rewarding people throughout the organisation. Human resource
management ensures that the organisation has the appropriately skilled people to carry out the
activities of the value chain effectively.
* Firm infrastructure – includes the organisational structure, planning, financial controls, and
culture designed to support the value chain.
Support activities support and improve the performance of the primary activities. Each of the
primary and support activities incurs costs and should add value to the product or service in
excess of these costs. Due to the sequential nature of the value chain model it is most
appropriate for application in a manufacturing context where inputs are processed into
outputs right from new product development to after-sales service. Figure 5.4 illustrates the
value chain of a manufacturing-type organisation.

In order to deliver a low-cost or differentiated product a company must perform a series of


activities. The value chain of an organisation is also a part of a value system. For example,
suppliers have value chains that manufacture and deliver the inputs to the organisation’s
value chain. Many products pass through the value chains of channels on their way to the
customer. Specialisation occurs in the value system in terms of role and capability. For
example, Federal Express specialises in the distribution portion of the value system for many
industries. Gaining and sustaining competitive advantage depends upon understanding both
the organisation’s value chain and how the organisation fits within the overall value system.

The value chain can be applied in the context of service organisations including retailers,
fast-food restaurants and hotels. Haberberg and Rieple (2001) describe these as ‘service-
manufacturers’ where a standard product is provided along with high levels of service. In
these types of environments outputs are measured in volume terms while unit cost is an
important measure of efficiency. The value chain is more concerned with efficiency rather
than innovation-related activities such as new product development. The focus is on the
process of creating and delivering the product rather than the product itself. The value chain
outlines the activities that have to be performed once a product has been designed rather than
developing a series of innovations.

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b. OUTSOURCING V/S IN-SOURCING


Outsourcing is the delegation to another party – the in-sourcer – of the authority for the
provision of services. This is done under a contract that incorporates service level agreements
(SLA). While no two SLAs are exactly the same in scope and content, the way to bet is that
in their core will be included issues such as:
• Functionality
• Cost
• Quality
• Timeliness of deliverables.
Typically the definition of risks is not a part of SLAs because not every outsourcer or in-
sourcer appreciates that risks and responsibilities are integral part of any agreement even if
they cannot be delegated by the outsourcer to the in-sourcer. Yet, personal accountability is a
basic principle in enterprise management, and it should be fully respected in every contract.
The in-sourcer assumes risks which de facto also remain at the outsourcer’s side.
Accountability encompasses all four factors expressed in a nutshell by the above four bullets:
Functionality, quality, timeliness and cost. Innovative, high-quality products and services at
cost lower than that of our competitors is a fundamental pillar of enterprise. Entrepreneurship
is not a status to enjoy; it is an attitude to have; an attitude necessary to everyone who aspires
to be market leader. Therefore, solutions connected to outsourcing and to technology-centred
services discussed here should not be seen as a way to discharge responsibility, but rather as a
different means of doing a job, provided we are ready for it and we know-how to manage it.
Being ready and having the appropriate skills is centre point to enterprise management.

Down to basics: outsourcing and in-sourcing define the different aspects of a two-way
business. Until quite recently, the term ‘outsourcing’ was used to identify a process which
involves, under contractual terms, both parties in an agreement: The one farming out a
service and the other providing that service for a certain fee. This narrow sort of definition
has not been satisfactory because it led to confusion. As a result, a new term has come into
being: ‘in-sourcing’, to identify the party which accepts rendering a specific service or
services under certain conditions and responsibilities. The in-sourcer is faced with:
• the challenge of getting it right
• the cost of getting it wrong.

Outsourcing and in-sourcing is a bilateral agreement and it is not monolithic. Neither is it


necessarily the best policy for very entity. Figure 1.2 outlines the five most popular strategies
available today with outsourcing and in-sourcing. It is always good to have several options
for what we are doing. It is also wise not to forget that each option has its advantages and
disadvantages – operational risk being among the most important among the latter.

The ‘internal utility’ option in Figure 1.2 is a lone wolf strategy. For instance, the board may
decide to set up an independent business unit which acts as the in-sourcer of procurement
services of the company’s other operating units located anywhere in the world. Many
companies have done so, because the mass effect strengthens their negotiating power. The
same is true of an independent business unit which provides information technology services
to all other divisions and affiliates.

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Contrasted to the internal utility is the option of the ‘external utility’. It may be an
independent service bureau or a peer-level common infrastructure or alliance. In the late
1980s four major Wall Street investment banks joined forces to develop a common, time-
shared global network because of the costs involved in doing so alone. (This venture did not
last long.)

The third option presented in Figure 1.2 is that of a business service provider. We will see an
example with custody. The in-sourcer providing this facility is usually a competitor
institution which has the technology and know-how to support a specific service at lower cost
than other institutions do through internal sourcing.

There may also be a negotiated take-over of an internal service department, for instance IT,
by a third party which operates it at a fee. The premise (which is not always kept) is that
because of greater efficiency and less nepotism, this fee will be lower than what IT used to
cost the company as a fully integrated cost centre or internal utility.

The fifth option in Figure 1.2 is that of an application service provider (ASP). Classically,
this has been as independent service bureau with its own data centre(s), programming and
maintenance people. These are the black-and-white five options, but there exist also tonalities
of grey. For instance, an ASP which acts as business process operations (BPO) manager over
a given time-frame. Many companies steer away from hybrids because they often lead to
inefficiencies and confusion. In-sourcers are in this business for profits, but what is driving
the outsourcers? The main reasons stated by outsourcers are: possible cost savings,
capitalisation on a mass effect, and lack of internal skills. Procurement is a classical
outsourcing activity. Lack of raw materials and the need for specialised components has been
an age-old reason for outsourcing agreements.

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While in all likelihood materials have been at the origin of outsourcing, today many types of
what is considered as traditional type contracts involve services. Small companies hire a
lawyer, rather than employing internally a legal counsel. They also hire an accounting bureau
to do their general accounting job, or a certified public accountant (CPA) for their internal
auditing. The ‘virtual company’ in the new economy greatly expanded the outsourcing of
services. But:
• problems of internal controls and security exist when companies outsource and outskill
some of their core functions
• while at the same time the benefits in terms of lower costs and knowledge acquisition are
not always evident.

There may be plenty of reasons for using outside suppliers of services. Aside capitalising on
skill, outsourcing may help to extend the reach of a certain process, reduce fixed cost or (in
fewer cases) improve efficiency. These reasons, however, have to be factual and documented,
and this is not always the case. The pros say that outsourcing has emerged as a key technique
with the new economy, because too many demands are posed on available human resources.
It is wise to challenge this notion. Contrarians to the growing wave of outsourcing suggest
that few of the experiences so far available with outsourcing different business activities
justify the originally prevailing assumptions, which anyway tend to be too optimistic. There
are, however, ways to be in charge of outsourcing agreements. The basic problem are not of
being for or against outsourcing, but rather of:
• thoroughly researching the pros and cons
• refocusing attention on competitiveness
• forcing management to reconsider the best way to perform the work to be outsourced, prior
to doing so.

Part and parcel of the equation of prudent handling of outsourcing and in-sourcing agreement
should be the fact that it may prove most difficult and costly to reverse outsourcing.
Therefore, managers considering the wisdom of outsourcing some business functions will be
well advised to ask themselves some basic questions.
• Why are we outsourcing?
• What are we outsourcing?
• Which are the core activities we do not wish to outsource?
• Can we be in charge of the outsourcing process?
• What’s the projected cost/benefit? How sure are we of that projection?
• How can we get the most from an outsourcing arrangement?

There are some services like fleet vehicle management, healthcare processing, business office
rental and others, for which companies have tended to rely more on outsourcing solutions
than on internal ones. Custody is a classical example of outsourcing in banking. It is
outsourced because of lower cost made available through mass handling. ‘We don’t have the
critical mass of customers to do the proper software for custody and depreciate it. Not even to
cover the running cost,’ said a senior European banker during our meeting. International
banks which have the critical mass outsource custody for time window reasons. Prior to its
merger with JP Morgan, Chase Manhattan worked out of a DP Centre in England because its
time window is practically half-way between Tokyo and New York. This attracted several
American banks with correspondent institutions in Europe and Asia which decided to use
Chase as custodian.

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c. OUTSOURCING AND IN-SOURCING CONSIDERED AS A


CONTINUUM
Outsourcing is defined by Chase et al. (2004, 372) as an “act of moving some of a firm’s
internal activities and decision responsibilities to outside providers.” Lankford and Parsa
(1999) similarly state “outsourcing is defined as the procurement of products or services from
sources that are external to the organization.” These and other definitions agree that
outsourcing involves allocating or reallocating business activities (both service and/or
manufacturing activities) from an internal source to an external source. Conversely, in-
sourcing can be defined as internal sourcing of business activities. So, in-sourcing can be
viewed as an allocation or reallocation of resources internally within the same organization,
even if the allocation is in differing geographic locations.

For clarity, we will distinguish between the two basic organizations that make up an
outsourcing arrangement as follows: (1) the firm that seeks to outsource their internal
business activities will be referred to as the outsourcing client firm, and (2) the firm providing
the outsourcing services to the client firm will be referred to s the outsource provider. The
services or manufacturing activities, tasks, and jobs to be outsourced can vary substantially
with the firm, but generically will be referred to as business activities. Early in their life
cycle, most businesses in-source their activities. As businesses mature and grow, however,
they may find limitations on labour/services, materials, or other economic resources in a
particular geographic location. This can force them to subcontract services or procure
materials from external sources. Sometimes these are geographically distant sources. Those
labour/service or material procurements represent the act of outsourcing if they are acquired
from a source external to the organization (i.e., not owned by the outsource provider).

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As Figure 1.1 depicts, today’s modern organization has to balance the potential benefits of
outsourcing with its potential costs in order to determine the proportion of outsourcing to in-
sourcing that will best achieve the organization’s objectives. The wrong proportion of
outsourcing to in-sourcing can result in business failures. But planning outsourcing- in-
sourcing based on some calculated ideal proportion also involves risk because the benefits
and costs used in the calculation are potential and not certain; they may never materialize and
actually have only a probability of materializing. The idea of outsourcing-in-sourcing (O-I)
can become confusing as it applies to large organizations that operate plants in differing
locations. For example, if a corporation owns two plants, A and B, and they reallocate
production activity from Plant A to Plant B, are they outsourcing? The answer is no, if the
corporation considers itself one organization (i.e., they have simply in-sourced production
activity from Plant A to Plant B within the same corporation). In outsourcing, as we are
defining it here, the allocation must be “external” to the organization. All other transfers of
production activity (e.g., between departments, divisions, or companies within a single
corporation) can be viewed as in-sourcing.

What Is Outsourcing-In-sourcing in an International Context? Another potentially


confusing dimension of O-I is the fact that it is often conducted in an international context.
An international context means activity between nations or between the boundaries of two or
more countries. For example, moving production from a plant in Country A to a plant in
Country B can be either outsourcing or in-sourcing. It is outsourcing if the plants in the two
countries are owned by different organizations. It is in-sourcing if the plants in the two
countries are owned by the same organizations (i.e., just transferring the same organization’s
production activity but to a different country). What if a U.S. firm located in the United
States allocates production activity to a European firm located in the United States? Is that
outsourcing in an international context? It is outsourcing if the U.S. firm does not own the
European firm, but it will not be in an international context unless the production activity
crosses a border (because the production activity is staying within the U.S.). If the non-U.S.-
owned European firm does the work for the U.S. firm in a foreign country, however, it is
outsourcing in an international context. Outsourcing in an international context also includes
global outsourcing. While international outsourcing involves at least one foreign firm, global
outsourcing involves many international, external firms. Another source of confusion in
discussions of the international context relates to the term offshoring (i.e., the process of
moving business activities to a foreign country). A company can offshore some of its
business functions by starting its own business in a foreign country. This is an example of
offshoring, not outsourcing. Some companies prefer to offshore rather than outsource (“U.S.
Companies to Shift Jobs . . .” 2004). If a client company outsources some of its business
activities outside the country to a provider firm that the client firm does not own, it is
engaging in offshore outsourcing. Some client firms actually want their outsourcing partners
to possess offshore outsourcing capacity because partners with such capabilities may offer
those lower costs and other international context advantages (“Outsourcing Expectations
Surpass . . .” 2004). According to James and Weidenbaum (1993, 42), outsourcing is not a
new concept; it is simply another name for the longstanding practice of subcontracting
production activities. The use of external lawyers, accountants, and consultant provider firms
can be viewed as outsourced services. Purchasing manufactured parts and assemblies from
external organizations domestically or internationally can also be viewed as outsourcing.
Indeed, the classic “buy-or-make” decisions concerning products, processes, and facilities
that companies have been making for many decades are examples of the outsourcing-in-
sourcing decision (Russell and Taylor 2003, 126). O-I in an international context is a logical
evolution for business organizations that originates from the concept of subcontracting.

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That is, it is not a revolution but an evolution of the business organization, as depicted in
Figure 1.2.

Why has O-I in an international context recently become a major driving force in business the
world over? Partly it is due to the rapid development and deployment of technology,
particularly advancements in telecommunications and personal computers. The Internet and
World Wide Web permit firms anywhere in the world to provide services previously limited
geographically, supplying the connectivity necessary to support the growth of O-I in an
international context.

Paralleling the growth of O-I is the growth of international business. With the passage of
landmark international trade agreements like the 1993 North American Free Trade
Agreement (NAFTA), and the work of the World Trade Organization, the European Union,
and other international trade zones established throughout the world, governments have been
setting the stage for the greatest expansion of international business in history. Combined
with the availability of inexpensive computer and communication technology, it has resulted
in enormous growth in international business. In the early 1990s, Cateora (1994, 419)
reported that “service operations” were the fastest growing sector in international trade, and
the international outsourcing of services has continued to grow at an increasing rate. It is not
just the parallel growth between O-I and international business that supports the combination
of these two areas of business planning.

Any O-I business decision must be considered in an international context if it is to be


optimized (because the economic advantages of outsourcing are chiefly available only in an
international context). We will refer to outsourcing-in-sourcing (O-I) as a “project” type of
management involving a discrete time period (i.e., start and end dates) and requiring a
decision to implement the balancing of resource allocation or reallocation.

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Types of Outsourcing-In-sourcing
A general contractor in the construction industry that subcontracts various construction
activities required to build a home is a perfect example of an outsourcer. Every component of
the building process, including the architect’s home design, a consultant’s site location
analysis, a lawyer’s work to obtain the building permits, plumbing, electrical work, dry
walling, painting, furnace installation, and landscaping, and the sales agent selling the home,
can be outsourced. Any business activity can be outsourced or in-sourced. All or part of any
business function (e.g., accounting, production and operations, administration, research and
development, purchasing, finance, marketing, information systems, etc.) which have been
historically in-sourced can be outsourced today. Unlike in-sourcing, however, outsourcing
requires an agreement with an external organization.

As Table 1.1 shows, there can be many different types of cooperative agreements between
client firms and outsource provider firm (Contractor and Lorange 1992, 203–215; Hayes et.
al. 2005, 23–25; Schniederjans 1998, 135–143).

Each of these types of outsourcing agreements require different degrees of inter-


organizational dependence between the client firm and the outsource provider. Indeed, if a
contract can be written to define any type of business activity between a client organization
and its potential outsource provider, then that business activity can be outsourced. There
continues to be a variety of emerging, differing types of outsourcing activities requiring
unique agreements. Some commonly used terms for outsourcing found in the literature are
listed in Table 1.2. Different types of outsourcing fall at different places along a continuum of
organizational change.

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On one end of the continuum, there is business transformation outsourcing (BTO), where a
client firm uses outsourcing only to make changes within its own structure, as when an in-
house training session helps educate a client firm’s executives on a particular topic
(“Transformational Outsourcing . . .” 2003, 4). At the other end of the change continuum is
business process outsourcing (BPO), one of the fastest growing sectors of the outsourcing
market. A report by IDA (a research firm) titled “Worldwide and U.S. Business Process
Outsourcing (BPO) 2004–2008 Forecast and Analysis” predicted that the outsourcing market
for the nine business process functions currently outsourced (viz., human resources,
procurement, finance and accounting, customer care, logistics, engineering/R&D, sales and
marketing, facilities operations and management, and training) will increase to almost $700
billion in 2008, representing a compound annual growth rate of 11 percent from 2004
(“Global BPO Market . . .” 2004).

BPO can involve some of the cooperative agreements listed in Table 1.1. For example, many
U.S. firms seeking to avoid the political backlash that results from outsourcing jobs to
outsource providers in foreign countries are now offshoring by setting up their own
development centres (solely owned or as an equity joint venture with a provider) in the same
foreign countries they might have outsourced to (“U.S. Firms Set Up . . .” 2004). In this way
they can reallocate the business activities to be performed in foreign locations without
removing their name from the business or suffering negative reactions from client firm
stakeholders.

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d. RELATIONSHIP OF OUTSOURCING TO CORE


COMPETENCIES
Beyond the legitimizing historical context of subcontracting, there are many reasons why
outsourcing has become an important planning activity in business. There are strategic and
economic reasons and important trends, which make outsourcing a critical factor for present
and future business success.

While outsourcing improves the performance of areas of the business that do not provide a
unique competitive differentiation, it also frees needed capital and resources for investment in
those areas that do. It reduces both direct costs and opportunity costs. The areas of the
business’s operation that provide its unique competitive differentiation—the areas where
none of its competitors nor the external marketplace of providers can deliver superior
results—are its core competencies.

The term core competencies were first introduced to a wide audience in 1990 by C.K.
Prahalad and Gary Hamel in their Harvard Business Review article, “The Core Competence
of the Corporation.” In that article, they referred to core competencies as the “collective
learning in the organization, especially how to coordinate diverse production skills and
integrate multiple streams of technology.” They predicted, quite accurately, that in the
coming years managers would be increasingly rewarded for their ability to identify, enhance,
and leverage their company’s core competencies.

In 1994 the MIT Sloan Management Review published an article titled “Strategic
Outsourcing” by James Brian Quinn and Fred Hilmer that further refined the term.7 Quinn
and Hilmer identified the seven characteristics of core competencies as: skills and knowledge
sets, not products or functions; flexible, long term platforms capable of adaptation or
evolution; limited in number with no more than two or three per organization; unique sources
of leverage in the value chain; areas where the company can dominate; elements important to
customers in the long run; and capabilities embedded in the organization’s systems.

The connection between core competencies and outsourcing was completed with Tom Peter’s
frequently cited quote “Do what you do best and outsource the rest,” advising executives to
focus on their core competencies and outsource every other part of their operation.

For example, Chrysler and Microsoft offer two very different but equally insightful cases of
how outsourcing enables companies to leverage the capabilities of outside companies and
simultaneously increase the focus on their core competencies, thereby gaining a distinct
competitive advantage.

In the late 1980s Chrysler was on the verge of failure, and only government-backed loans and
the leadership of Lee Iacocca saved it from bankruptcy. By 1997 Chrysler was the
automobile industry’s low-cost producer, made the highest profit per vehicle, and was named
Company of the Year by Forbes magazine.

How did Chrysler move to the head of the class in the auto industry? In part, by using
outsourcing to improve its noncore functions while concentrating the company’s internal
efforts on an emerging set of core competencies. Chrysler began by adopting the platform-
team model pioneered by Toyota.

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Platform teams bring together designers, engineers, manufacturing, and suppliers at the
moment of product inception. Instead of having each of these groups operate separately and
in series, with design completing its work and then handing it off to engineering, etc., they
work in parallel and as single team. As a result, the interior of one of Chrysler’s highly
successful LH-series was composed of just four ready-for assembly units, each designed,
engineered, and manufactured by separate suppliers working together as part of a single
platform team. Chrysler outsourced much of its services work as well. In its logistics
operations Chrysler introduced the concept of “lead logistics”—designating a single outside
logistics supplier to coordinate a production facility’s entire inbound logistics requirements.
One example was Chrysler’s Jefferson North Assembly Plant where the lead logistics firm,
Ryder, built a dedicated cross -docking facility, operated 65 tractors and 140 trailers, and
managed all inbound logistics from upstream suppliers in Michigan, Ohio, Indiana, and
Canada. For information technology, Chrysler contracted with MCI to provide and run its
worldwide telecommunications network. This information technology network linked 24
manufacturing plants, 16 assembly plants, 183 Chrysler Financial Corporation offices, 4
national distribution centres, 2,000 suppliers, and 4,700 dealers. Chrysler also learned how to
differentiate itself by leveraging three core competencies: product design, process design, and
marketing. At the time of its merger with Mercedes, Chrysler was generating more profit per
vehicle on a $20,000 car than Mercedes was on a $40,000 car. It had also reduced its new
vehicle development time from 243 weeks to 183 weeks, taking more than a full year off its
product cycle.

From its inception, outsourcing has been the “preferred option” at Microsoft. Its founder, Bill
Gates, has often been quoted as saying he would gladly take three programmers over five
support staff any time. Critical elements of product production, distribution, finance, and
customer support are outsourced. Microsoft does not even maintain its own desktop
environment at its headquarters, recognizing the skill and knowledge sets associated with
designing and writing great software are quite different than those required to run an
operational network. What are Microsoft’s core competencies? They are product design,
product development, and marketing.

Outsourcing is nothing more and nothing less than a management tool. It is used to move an
organization away from the traditional vertically integrated, self-sufficient structure; one that
is increasingly ineffective in today’s hyper-competitive, performance-driven environment.
Through outsourcing, the organization moves toward a business structure where it’s able to
make more focused investments in the areas that provide its unique competitive advantage.
Along the way, the organization creates interdependent relationships with specialized service
providers for many of its critical activities that must be performed extremely well, but where
the organization gains little competitive advantage by doing the work itself. This not only
enhances the business of the company, it creates exciting new business opportunities for other
companies to become providers of outsourcing services.

Strategic Planning of Core Competencies


One reason why outsourcing is a critical issue is its position in the organization’s decision
making structure (i.e., relationship of strategic, tactical and operational decision making) and
the trend toward international outsourcing. Structurally, outsourcing has changed from a
tactical decision (e.g., medium- term subcontracting of a small portion of a company’s unit
production) to a strategic decision (e.g., long-term subcontracting of a major portion of a
firm’s production, administration, and internal departmental services).

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While acknowledging that outsourcing is not a new concept, Yang and Huang (2000) point
out that strategic outsourcing is relatively recent. Research literature is only now starting to
identify its potential contribution to organizations.

All business organizations develop strategies by setting long-term goals as a general guide for
their business operations.
As Figure 1.3 shows, the strategic
planning process begins with an
examination or establishment of
the organization’s basic mission
statement, which sets general
goals for the organization, such as
making profit, providing quality
services or products, serving the
community, and so on. Once the
mission is set, strategic planners
next undertake an internal
analysis of the organization to
identify how much or little each
business activity contributes to
the achievement of the mission. It
is during this internal
organization analysis that firms
identify their strengths—what
they do well, or better than their
competitors. These strengths are
also known as core competencies
(King et al. 2001). Greaver (1999,
87) defines core competencies as
“innovative combinations of
knowledge, special skills,
proprietary technologies,
information, and unique operating
methods that provide the product
or service customers value and
want to buy.” Focusing on core
competencies has long been
recognized in the literature as a critical strategy for the success and long-term survival of any
firm (Prahalad and Hamel 1990). Core competencies can be any type of human, systems, or
technology resource. The internal organization analysis may identify core competencies
internally, based on the informed opinions of the firm’s executives, or externally through
market research involving the organization’s customers. Basically, it involves identifying
what the firm does better than anyone else. Common sense dictates those are the business
activities the firm should in-source and not permit others to perform. Selecting the wrong
core competency to outsource or sell can be costly. For example, Trans World Airlines used
to have the best reservation system (a technology core competency) in the airline industry.
Sadly, they were forced to sell the technology and have never regained the market position
they held at the time of that sale. By contrast, non-core activities, which can be a sizable
portion of any organization’s total business activities, are good candidates for outsourcing.

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Again, common sense dictates that if an outsource provider can do a job better than a client
organization, and then it makes economic sense to engage the outsourcing firm’s services and
utilize their competitive advantage. Consider a simple example to see the connection between
strategic planning, core competency, noncore competency, and outsourcing. Suppose a firm
has set a strategic goal of growth in market share (i.e., the strategic plan). To achieve this
goal, the organization will have to produce more products to meet the hoped-for increase in
demand. They have identified marketing, in any market they choose, as an organizational
strength (i.e., marketing is a core competency). So increasing demand for the organization’s
products to achieve the growth goal is not a problem. Unfortunately, they have also found an
organizational weakness in their production facilities. The organization does not have the
production capacity (a non-core competency) to meet the growth goal by producing
additional units of product over an extended period of time. By establishing a long-term
production agreement with an external outsourcing provider firm, the client firm can acquire
the additional production capacity they will need to achieve their strategic growth objective.
As this example demonstrates, outsourcing can become a strategy for success. The example
also illustrates why outsourcing is a logical component of any organization’s strategic
planning efforts.

e. ADVANTAGES OF OUTSOURCING FOR HRD


PRACTITIONER
Goldsmith’s (2003) survey found five main reasons why executives outsource business
activity. They are, in order of importance, cost savings, gaining outside expertise, improving
service, focusing on core competencies, and gaining outside technology These results are
presented in detail in Tables 2.1, 2.2 and 2.3 (Chorafas 2003; Cullen and Willcocks 2003;
Greaver 1999; Gouge 2003; Hayes et al. 2005; Lackow 2001; Lee et al. 2003; Minoli 1995;
Thibodeau 2003). Clearly, the number one reason driving outsourcing is the possibility of
significant cost savings, particularly on labour. While other kinds of cost savings are
mentioned in Table 2.1, the possibility of reducing labour costs, which traditionally represent
60 to 100 percent of total cost of products or services, by as much as 75 percent, has drawn
much attention to outsourcing. Yet the labour cost reduction obtainable by outsourcing is
more often 20 to 25 percent or perhaps 30 to 40 percent, according to Meisler (2004).

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According to Tyson (2004), a 10 to 30 percent reduction in the price of technology is also a


reasonable expectation. Domberger (1998) reported that outsourcing resulted in a 10 to 30
percent cost reduction for client firms, with 20 percent being the most commonly cited figure.
Firms that set too high a cost reduction goal will undoubtedly fail to achieve cost objectives,
as MacInnis (2003) has observed in his study of the information systems field. The range of
cost reductions reported above becomes interesting when compared with the estimates
needed to make an outsourcing project worth the effort. One article asserts that client firms
need at least a 35 percent cost reduction to make outsourcing projects successful (“Clients to
Blame . . .” 2003). When comparing the needed 35 percent to an average 20 percent, it
appears the likelihood of an outsourcing project being successful is small. The advantage of
gaining outside expertise is reasonable in situations where the client firm takes the time to get
to know and help the outsource provider grow in its abilities to provide service to the client.
Firms that simply pay contractual retainer fees to a provider without any integration and
alliance activities necessary for maintaining a healthy partnership are running significant
risks. It is not surprising that gaining access to outside expertise is the second highest rated
reason for outsourcing according to Goldsmith (2003).

The third most frequently cited reason for outsourcing according to Goldsmith (2003) is to
help the client firm improve services. Many of the advantages listed in Table 2.2 are related
to flexibility and promoting organizational change in the client firm.

A problem with this rationale for outsourcing is the impossibility of accurately predicting
how the change will affect the client firm. How, for example, can we measure the
psychological impact on morale, loyalty, trust, and dedication of seeing one’s co-workers’
jobs disappear because of outsourcing? Table 2.3 lists the lower-ranked reasons for
outsourcing. Focusing on core competencies is one of the main reasons justifying
outsourcing, yet it is the fourth most commonly cited reason in the Goldsmith (2003) survey
of executives, and other researchers have also found that it tends to be downplayed by
executives (Antonucci et al. 1998; Beaumont and Costa 2002; Lankford and Parsa 1999;
Yang and Huang 2000).

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One factor leading to its lower ranking is that it is a fairly intangible objective. Unlike many
of the measurable cost or service objectives, core competencies have to be identified, which
the literature indicates is not always an easy or accurate process (Milgate 2001, 27–44; Sen
2004). Sadly, many firms feel justified in outsourcing any activity at all (Lisle 2003; Rothery
and Robertson 1995, 123–124), which can lead to the loss of a core competency or a near-
core competency (i.e., a competency that may soon become a core competency if developed).

Particularly striking is the fact that risk mitigation (i.e., the process of reducing risk) is not
included in the top five reasons for outsourcing in Goldsmith’s (2003) survey and was
included by us in the “other” category of Table 2.3 due to its appearance in other outsourcing
literature (Antonucci et al. 1998; Beaumont and Costa 2002). Some books on outsourcing
devote a whole chapter to the outsourcing advantage of risk mitigation (Kern and Willcocks
2001), and others devote detailed “how-to” sections to this subject (Gouge 2003, 149–156).
The literature also has many case studies in which different types of risk are mitigated by
transferring activities to outsource providers. For example, an IT outsource provider, Johnson
Controls, was hired by another firm to operate and maintain their North American data centre
facilities (Sawyer 2003). Since system failure is commonly caused by overheating of IT
equipment, Johnson Controls conducted a temperature- mapping analysis (something the IT
client had not done) and determined two areas in the IT facilities ran a risk of overheating.

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The client suggested the purchase of two additional cooling units, but Johnson Controls
determined that existing cooling units, if repositioned, would protect the components from
overheating. The result was that the client saved $60,000 on the purchase of the unneeded
cooling systems and avoided the risk of computer failure due to overheating, all at a cost of
only $15,000 per year (Sawyer 2003). The fact that risk mitigation does not show on any
particular survey as being an advantageous factor in favour of outsourcing does not mean it is
not important. In an executive survey executives did not reveal mitigation as important. Their
reasoning may be flawed in not considering risk in outsourcing decisions. Perhaps executives
do so because of its perceived negative impact. Willcocks and Choi (1995) identified
management trends to downplay the risk-reward in outsourcing arrangements. As Aubert et
al. (2004) have observed, uncertainty or risk is a major deterrent to outsourcing, and if
outsourcing is a strategy that executives want to adopt, why give opponents the potential,
damaging risk information, which might prevent the adoption of the risk strategy?

Linking an International Context with Outsourcing Advantages


In addition to all the advantages of outsourcing that we have already mentioned, there are
several more, listed in Table 2.4 that are unique to outsourcing in an international context.

It is interesting to note that the reasons for outsourcing summarized in Tables 2.1 to 2.4
mirrors the reasons why firms internationalize operations, as shown in Table 2.5 (Rodrigues
1996, 80–84; Schniederjans 1998, 7–10). It is the commonality of the pro-outsourcing and
pro-internationalization reasons, which supports the view that: O-I in an international context
is an international business activity and deserves the same kind of detailed and careful
analysis that successful international business decision making has mandated for decades.
While Goldsmith (2003) reports that only 21 percent of the firms contacted for his survey
have undertaken international outsourcing, an additional 27 percent said they planned on
undertaking it in the next three years. This trend was confirmed by more recent research that
has looked back at actual economic behaviour in 2003 (“Offshore Outsourcing Boosts . . .”
2004).

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3. CASE STUDIES
The Outsourcing Advantage: Optimizing Sales and Marketing Performance

Fact: Over 90% of Fortune 500 companies have outsourced at least one major business
function. (source: Forbes, October 1995).

A recent research study showed that 85% of Fortune 500 sales and marketing executives are
outsourcing more key marketing services than ever before. When asked why they are
outsourcing more today, 90% of these companies reported that the more they outsource the
more competitive they become (source: Business Marketing, August 1994). A Bain Research
study demonstrated that a mere 5% increase in customer retention can increase revenues up to
125%. “Do what you do best and outsource the rest”. - Tom Peters Organizational
Management Expert

"Today, outsourcing is not just a trend; it is an integral part of how smart companies do
business. But this was not always true; as business has evolved - from the vertical
organizations of the '70s, to the horizontal organizations of the '80s and '90s, toward the
virtual organizations of the next century - the scope and focus of outsourcing has changed. It
can no longer be defined simply as a long-term contract with another company for
supplies/services. The concept has matured. It now connotes a strategic relationship between
partners, with shared risks and goals - a relationship in which a company concentrates on its
core business and relies on outsourcing partnerships to get the rest done. Unless managers
periodically reexamine how they make sourcing decisions - and how resources get allocated -
they can find themselves... starving what is core".- Harvard Business Review.

In a study examining why businesses choose to outsource, 70% of reporting firms cited
greater efficiency and economies of scale and 45% said it allows them to focus on core
business (source: Coopers & Lybrand). At the 1995 Conference on Strategic Outsourcing,
Arthur Slotkin, the worldwide manager of outsourcing for Unisys Corporation, outlined three
factors to consider when making an outsourcing decision:

• 1. Financial - Evaluate whether outsourcing will reduce expenses, control costs,


preserve capital and/or avoid additional investment expense
• 2. Business - Ask if this area is part of the core business, will outsourcing make the
company more competitive, how will outsourcing impact the company's business
transitions (e.g., mergers, downsizing)
• 3. Technological - Decide whether outsourcing will provide flexibility, improve the
level of service, give the company new talent, or help solve problems stemming from
the increased complexity of technology

"Whatever specific reasons a company may have for outsourcing, the underlying principle is
a conviction that astute companies share: To stay competitive they must outsource non-core
aspects of their business. Because each partner brings its "core competence" to the effort, it
may be possible to create a best of everything organization. Every function and process could
be world-class - something that no single company could achieve". Business Week

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In the sales and marketing arena, optimum profitability is realized through cost-effective
customer acquisition and improved customer retention. When reviewing methods for
acquiring and retaining customers, many companies have found that outsourced call centers
provide a marketing channel that is not only cost-effective but highly profitable. Following
are four case studies of major corporations who proved that outsourcing sales and marketing
services is good for business.

Case I. Increasing Productivity and Efficiency


The RBOC Case Study This case study illustrates how efficiency and productivity can be
negatively affected when a company - working outside the scope of its core competencies -
does not fully understand the requirements of a successful call center operation.

A Regional Bell Operating Center (RBOC) set up a call center to sell and service its voice
mail products. Staffed with employees hired from seven different temporary agencies, the
center was plagued with problems, including lengthy calls, high abandon rates, high staff
absentee rates, and a lack of service continuity. At the same time the center was projected to
increase both its customer base and range of services. Realizing the strength of the
technology already in place at the center, company management decided to approach the
problem as an outsourcing opportunity.

Working together, they developed a training program for both the staff already at the center
as well as new hires. After three weeks of instruction, they assigned each newly trained
employee to one of three skill-based groups: the priority group, who serve the largest
customers; the regular customer service group, who handle the majority of existing
customers; and the telemarketing group, who field inbound sales calls. "Outsourcing is a
strategic tool that can react faster to the demands of the marketplace and their customers. It
allows companies to shift gears quickly while not losing their emphasis on maintaining the
core business". - Business Weeks. - Business Week

The call center made significant improvement in all areas, including: Improved the sales
close ratio by 19% Reduced the length of business calls by 20% Reduced the length of
residential customer calls by 40% Decreased the wait time - with 80% of the calls answered
within 20 seconds - resulting in a significant reduction in the abandon rate

Case II. Maximizing Revenue


The Sun Microsystems Case Study
Service/maintenance contract sales are highly profitable for many high-tech businesses. In
order to reap the financial rewards however, a company must have in place a focused channel
strategy for implementing and managing maintenance contract sales. It is well documented
that an expertly run contract sales program can net a corporation millions in incremental
revenue. Without such a program much of that income is lost.

Sun Microsystems is a case in point. When they discovered that this important revenue
stream was eroding, they quickly identified the cause: Because their field sales force did not
have the "bandwidth" to provide cost- effective service contract sales to small-to-mid-size
customers, they were not adequately covering those accounts. This opened the door to third-
party vendors and also resulted in customers who were out of warranty or whose contracts
had expired. When they needed assistance, those customers would have to renew before they
could get service. Needless to say, these were not satisfied customers.

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Sun decided to outsource the development of a dedicated TeleServices Center - in essence


creating a new distribution channel for this product. Working closely together, they designed
and installed an on-site TeleSales Center whose charge is to thwart third-party vendors and to
comprehensively target contract renewals in small-to-mid-size accounts.

Selling maintenance contracts requires TSRs who understand the service requirements of
each customer. The right TSR has a background in both inside sales and customer service and
can identify decision makers and close a sale. In addition, they must be "specialists" in Sun's
service products. The typical sales cycle for a renewal contract is 90 days, involves two
decision makers, and six-to-twelve conversations with the customer. Each TSR can contact
and service 25-30 customers per day, far more than possible with field staff alone.

They developed a Renewal Program based on a 90/60/30-day strategy: Quotes are sent out 90
days prior to the contract expiration date, a phone call is made 60 days prior to the expire
date, and the contract is renewed at 30 days.
Results of this program speak for themselves:

• Increased the contract renewal rate 24.6%


• Reduced the cost to retain customers 34.5%
• Lowered the cost of new customer contracts more than 33%
• Freed field staff to focus on major accounts
• Developed a renewal management database to efficiently handle the contract renewal
process
• Designed an instructional curriculum that reduced TSR training time by 40%

Case III: Focusing on Core Competencies


The IBM Case Study
In 1992 IBM encountered a different set of problems. Facing fierce competition, they realized
the need to re-engineer their go-to-market strategy to dramatically reduce both sales and
service costs - to move away from a "blue suit," field sales business model. Looking for the
best solution, IBM decided a call center would provide the best blend of quality and cost-
efficiency as a channel for both sales and customer service.

They also recognized they had no experience designing, much less managing, a call center.
And, as if this weren't enough of a challenge, the center needed to be up and running
"yesterday." "Outsourcing enables executives to focus their energies on the "what" of their
business and less on the "how." Executives believe this is often the most compelling reason
for outsourcing".- The Outsource Institute

IBM outsourced the design, staffing, and management of a Tele Services Center capable of
supporting customers in all phases of their life cycle. Within 90 days, the first Tele Services
Center was up and running - a third of the time IBM estimated it would take to accomplish
internally. Working in partnership, they set up a strategically located call center at an IBM
facility in California.
The call center was charged with all facets of customer acquisition and retention - from lead
generation to assuring customer satisfaction to inbound customer service and support.

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To provide truly integrated and comprehensive marketing, the IBM Tele Services Center was
carefully organized into three groups: The Customer Service Group handles simple inquiries
as well as provides customers with technical support and assistance solving complex
problems. The Telesales Group handles account management and sales of IBM products and
services that do not require field sales support. The Direct Marketing Group is responsible for
generating new product leads, upgrades, service contracts and seminar attendance.

The successful integration of the Tele Services Center within IBM's corporate structure
requires that TSRs receive training to develop the required product knowledge and customer
skills to act as an agent of IBM. As one would expect from such thorough planning and
implementation, the results have been dramatic:

• Reduced the cost of customer contact 97% - from $500 for field contact to $15 for
telesales contact
• Shortened the field sales cycles up to 80%
• Generated 125% of goal for leads
• Exceeded customer expectations 78% of the time - based on a customer service
satisfaction survey
• Built a marketing database - with customer information that improves targeting,
responsiveness, relationships, and retention.

Case IV: Turning a Cost Center into a Profit Center


The Siemens ROLM Case Study
There are many aftermarket sales that cannot be handled cost- effectively by field sales staff -
their cost-of-sales-to-revenue ratio is too high. Yet the sale of these products offers
significant income possibilities and can serve as a relationship bridge that helps identify
future big-dollar sales. Siemens ROLM was faced with just such a dilemma; they needed to
devise a strategic and cost-effective program for aftermarket sales. They required a solution
that allowed field staff to focus on strategic clients while developing a low-cost distribution
channel to support mid-tier clients.

Siemens ROLM working in conjunction with an outsource agency, designed and


implemented an on-site Client Call Center. With performance goals jointly set by field staff,
management, and the agency, the center's three pronged mission is to manage leads, stop
third-party encroachment, and extend client relationships and contracts.

The call center, which provides a cost-efficient alternate sales and marketing channel for
Siemens ROLM's move/add/change (MAC) product lines, has more than proved its worth.
Both leads and sales generated far exceeded goals, the center reversed a projected MAC
revenue decline, and more than 2,800 customers are contacted each month. In the first six
months of operation, the center:

• Generated 116% of goal for sales leads


• Grossed over $4.2 million in MAC sales
• Produced leads valued as high as $1M
The center allows field staff to concentrate on what they do best: develop face-to-face client
relationships and sales; and the outsource agency to focus on what it does best; provide tele-
services for lead generation and sales.

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"If you do not outsource any of the activities where you are not best in world, and your
competitor does, you have just lost the competitive edge. Simple as that"- Professor James
Brian Quinn Tuck School, Dartmouth

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