Industry insight
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Week 5 framework
5.2 The performance of outsourcing capability
Firms use multiple criteria before appointing vendors ( Beasley et al., 2004 ; Brooks, 2006 ; Lin et al., 2007 ), but far more crucial is the need to create monitoring systems to record, analyse and incentivise the vendor’s performance ( Figg, 2000 ; Quelin and Duhamel, 2003 ). Outsourcing risks can be mitigated by using multiple suppliers for different parts of an outsourced project instead of depending on a single supplier and at times also hiring a “sleeping vendor” as a backup ( Shi, 2007 ). Many outsourcing arrangements run into conflict because they cannot handle new demands made by environmental uncertainties. Tan and Sia (2006) conceptualized flexibility in outsourcing arrangements to allow changes in scale of operations, to develop new capabilities in line with changing needs, to be modifiable and to allow ease of exit. A study of Singaporean firms confirmed that outsourcing success indeed depended on flexibility thus conceptualized ( Sia et al., 2008 ). While monitoring and flexibility can protect the client from inept performance of vendors, they do not insulate clients from the risk of loss of valuable technology when outsourcing knowledge intensive processes like R&D ( Grimpe and Kaiser, 2010 ). On account of threat of appropriability hazards, firms find outsourcing non-core processes more beneficial than outsourcing core processes ( Mudambi, 2008 ). While legal contracts are an essential part of outsourcing arrangements, they cannot anticipate all uncertainties ( Handley and Benton, 2009 ), making mutual trust and informal agreements important. Cooperative client–vendor relationship is known to have significant positive effect on outsourcing performance ( Handley and Benton, 2009 ; Handley, 2012 ; Chen and Paulraj, 2004 ), making a case for supplier selection based less on functional considerations and more on assessment of strategic orientation and cooperation goals of the supplier ( Li et al., 2010 ). Outsourcing arrangements are also learning platforms and the more overlapping the goal and expectations of the client and vendor, the more they will be willing to learn from each other ( Unal and Donthu, 2014 ). It is for these reasons that careful assessment of cultural match should guide vendor selection, and the relationship with the vendor should be actively cultivated ( Caruth and Caruth, 2010 ). Shared values, codes and narratives are also known to positively impact the client’s absorptive capacity ( Unal and Donthu, 2014 ). Client’s absorptive capacity is particularly important during new technology development projects as they require a balance between efficiency gains of outsourcing and the focal firm’s ability to adapt to the new knowledge ( Weigelt and Sarkar, 2012 ). Offshore outsourcing of R&D allows client firms to access to vastly different bases of knowledge, but it is only when they have maintained high internal R&D intensity that this knowledge base be converted to innovation at market place ( Bertrand and Mol, 2013 ). In summary, I identify the ability to monitor outsourcing contracts, to recognize the need for and ensure flexibility in the arrangements, to identify like-minded vendors and cultivate positively collaborative relationships with them, and finally maintain high levels of absorptive capacity as the four key pillars of the “Outsourcing Capability”. 235 Framework for performing outsourcing capability |
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