Strategic Procurement 502

Lesson Eight
Chapter 10
Outsourcing
 Outsourcing Defined

Subcontracting a service
(that you could have done
in-house) to a third party
who can perform the service
more efficiently than you.
 Outsourcing &
Make or Buy

• Strategic against tactical nature

• Outsourcing of services
• Make or Buy (items or
products)
 Types of Outsourcing
• Off-shore
• Near-shore
• Domestic

1. BPO – business process

2. ITO – information technology
3. KPO – knowledge process
 Outsourcing Strategic Decision

• Not (as commonly considered) just a mean

to reduce cost.
• What is it (processes, technology, skill…)
that the company already excel in and
wants to focus on and making it better?
• What is the future direction of the
company, market, competition….?
• What is it that the suppliers can do better
than you?
 Core Competency

• Defined as certain things (design,

manufacturing, people or technology..)
that you have that are better than the
competitors.
• How do you maximize the use of these
strength?
• What do you do with those that you are
not good at?
 Organizational Design &
Outsourcing
• Vertical Integration:
= try to do everything in-house
= better control of processes
= anti-outsourcing
= responsiveness to customers
may be slow
 Organizational Design &
Outsourcing
• Horizontal Integration
– Creation of ‘virtual corporation’
– Retain only the core business
functions
– Reduce the overhead of big
corporation
– More responsive to customers
 Other Strategic Considerations

Towards lean manufacturing?

– Critical items?
– Required special skill to
produce?
– Within the firm’s core
competency?
 Tactical Decisions
(Favor Outsourcing)
• Cost consideration
• Insufficient facilities
• Do not have economy of scale
• Suppliers have better know how
• Inconsistent demands
• Avoid investment on assets
• Create alternative source of supply
 Tactical Decisions
(Doing In-house)
• Excess capacities
• Confidentiality
• No capable supplier
• Predictable demands
• Want to maintain direct control
 Why Outsourcing Fails?

• Lack of internal supports (fear of job

lost)
• Conflict of interest (you & your partner)
• Rushing into outsourcing without a
well planned business case
• The country you outsourced to : how
much do you know about its law,
culture, skill, infrastructure…..
• Unclear scope of project
 Why Outsourcing Fails? (cont)

• Frequent turn over of staff of partner

• Attitude : once outsourced, the baby is
out of my hand!!!
• Selecting wrong vendor
• Motive of outsource is to solve a problem
• Failure to seek expert advice
• Wrong negotiation approach for
outsourcing contract
 Why Outsourcing Fails? (cont)
• Implementation : rushing into full
outsourcing instead of by phases.
• Losing control over outsourced
activities.
• Overlooking hidden cost.
• Communication barriers – offshore
outsourcing.
• Lack of effective and periodic
measurement of vendor performance.
 Critical Success Factors -
Outsourcing
• Understand the objectives of outsourcing.
• If outsource to another country, be aware of
other associated costs.
• Selection of right partner.
• A well written SOW.
• Any new or additional services not in the
SOW has to be discussed and agreed upon.
• Build relationship and trust.
• A jointly prepared KPIs.