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- 3. Motives for outsourcing
2. Outsourcing definition
Gilley and Rasheed (2000) refer to the confusion that persists regarding the definition of outsourcing. They differentiate between procurement of goods which all firms carry out and outsourcing, which is seen as a conscious choice of not internalizing an activity which a firm could have, given its existing capabilities and resource base. While this distinction distinguishes between procurement and outsourcing at a point in time, the dynamic nature of capabilities makes the distinction problematic, for one could never fully fathom or predict the future capabilities of the firm. What a firm is incapable of today might be well within its reach tomorrow. Furthermore, because my conceptual framework refers to processes are candidates for outsourcing, I find resonance with Wasner’s(1999) conceptualization of outsourcing as externalization of an activity which was formerly being carried out within the firm. I also find it useful to append two qualifiers to Wasner’s definition, namely, “in part or in its entirety” to indicate the very distinct possibility of retaining part of the capability in-house ( Berggren and Bengtsson, 2004 ) and “to one or more suppliers”, again a very practical possibility of contracting out to more than one supplier for the same product or service ( Kim, 2003 ). The composite definition of outsourcing which guides me in the paper then becomes “External provision of a process, in part or in its entirety, which was earlier being carried out within the firm, by contracting out to one or more suppliers”. 3. Motives for outsourcing At times, organizations have resorted to outsourcing to solve industrial disputes. The example of Schwinn, the US bicycle industry leader in early 1980s, shifting its production to Giant Cycles in Taiwan following labour problems in its factories ( Dess et al., 1995 ) and Benson (1998 , 1999 ) studies of Australian manufacturers outsourcing activities to circumvent labour problems are notable. Outsourcing can also be a political act in an attempt to upstage rivals within the organization. Moving beyond such episodic events, I review literature around three specific motivations that find recurrent mention in the outsourcing literature. In the process, I find cleavages in opinions around outsourcing and its benefits. 3.1 Cost benefits Dissatisfaction with costs metrics has been cited as one of the primary reasons a firm contemplates outsourcing ( Kakabadse and Kakabadse, 2000 ). In the 1980s and 1990s, the dual forces of intense competition and recession goaded organizations towards abandoning the luxury of presence in all parts of value chain ( Hendry, 1995 ). Solutions like de-layering, business process reengineering and outsourcing became part of corporate vocabulary, especially in large traditional organizations. SO 7,3 228 The move towards diversification in the West is well-documented ( Ramanujam and Varadarajan, 1989 ). Acquisitions into unrelated areas led to creation of conglomerates where the corporate headquarter had very little understanding of the individual businesses. The associated management style, termed variously as “Strategic Control” or “Financial Control”, had its attention on efficient allocation of capital and budgetary compliance ( Chandler, 1991 ). This was a distinct departure from the traditional M-Form style of “Strategic Planning”, where the corporate headquarter was actively involved with the business units in framing of growth plans and compliance to targets was but a matter of discussion (ibid.). With the headquarter’s focus trained on control and budgetary compliance, options like outsourcing which could pare costs instantly gained currency ( Bettis et al., 1992 ). Furthermore, outsourcing to reduce costs was a self-perpetuating decision. With plant overheads now allocated to a narrower manufacturing base, the attractiveness of outsourcing, now for other products, continued to increase as the economies of scale and scope got increasingly loaded in the favour of the suppliers ( Bettis et al., 1992 ). While some of the outsourcing decisions for “cost benefits” could have been self-perpetuating, the drag of bureaucratic costs in is not unreal in large organizations. In a study of performance data of 3,185 lines of business across 200 industries in the period 1975-1977, D’Aveni and Ravenscraft (1994) found that for the vertically integrated businesses, the coordination benefits coupled with lower transaction and overhead costs were significantly eroded by higher production costs of those businesses. These higher production costs were hypothesized to be on account of bureaucratic costs that arose out of upstream department’s protection from direct competitive pressures and various norms of reciprocity that result in inefficient purchasing decisions among departments. On the other hand, continued direct exposure to market pressures keeps the ills of bureaucracy at bay for the vendors ( McFarlan and Nolan, 1995 ). At the same time, vendors acquire critical scale for their chosen activity which helps them negotiate hard bargains with their suppliers. The advantages of scale ( Belcourt, 2006 ) coupled with other ways of cost reduction that they use, for example transferring operations to low-cost geographies helps them keep costs low ( Belcourt, 2006 ). Some scholars have argued that the cost advantages of outsourcing should not be treated as an axiom. Larsen et al. (2013) attribute various kinds of cost estimation errors to configuration and task complexity in outsourcing decisions. In a study of over 100 organizations which had outsourced their information technology processes, it was found that managers instinctively believed that vendors would be able to provide services at a lower cost because of scale economies ( Lacity et al., 1994 ). Over time, these managers found that cost reduction was not an obvious outcome; that there were multiple hidden costs revealed after lock-in ( Mathew, 2011 ), and unanticipated cost overrides on account of system incompatibilities ( Albertson, 2000 ). In a comparative study of outsourcing decision of manufacturing of Radio Base Stations for the mobile networks at Nokia and Ericsson ( Berggren and Bengtsson, 2004 ), the advantages of scale economies of the vendor were found to be eroded by other costs like transferring knowledge of a new product. Another neglected aspect in a comparison of costs is the effect of learning curve. If the vendor’s learning curve is relatively flat, the decision to outsource based on current cost advantages of the vendor might be wiped off in a matter of few years ( Kim, 2003 ). 229 Framework for performing outsourcing capability |
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