© Malmgren 2014, all rights reserved [email protected] Outsourcing from a Theoretical perspective Dr. Mike Malmgren & Docent Daniel Nordigården

© Malmgren 2014, all rights reserved [email protected]

Outsourcing from a Theoretical perspective

Dr. Mike Malmgren &Docent Daniel Nordigården

Ashridge Business School & Linköpings Universitet

© Malmgren 2014, all rights reserved

Dr. Mike Malmgren• PhD – Linköping• MBA – London Business School• MSc – Royal Institute of Technology

• 12 years experience as Managing Director of technology companies in the US, Australia and the UK

• 15 years at Ashridge Business School (75%) – Director of Executive MBA– Head of Strategy & Innovation department

• Associate Professor – Linköping (25%)



We increasingly live in a global world

• The international export has trippled since the 70s• Exports are growing faster than production• More and more companies and products can be seen as multinational• However, remember outsourcing does not always imply offshoring

World’s export as a share of the world’s GDP

Source: Ekonomifakta


What is outsourcing?

What does it imply?

What is outsourcing?

• Outsourcing can be defined as transferring an activity from internal to external control and is widely employed by firms in many different industries

• Here, outsourcing becomes a central tool for organisations’ business process reengineering to access world class techniques (Rothery and Robertson, 1995; Quinn, 2000)

• It has been comprehensively researched in, for instance, the automotive and high-tech industries

• Companies have embraced outsourcing as an important means to becoming more competitive in their business processes

• As a result of firms applying “me too” outsourcing strategies, new sub-sectors with new types of firms have even been developed

• Managed right, outsourcing will provide opportunities for companies to develop their core competencies while at the same time lower overall costs by transferring activities to suppliers who perform them at a lower cost (Quinn and Hilmer, 1994; McIvor, 2005).


Outsourcing is still reported heavily in media

Source: Financial times; New York Times;


Driving Forces for Outsourcing*Cost reduction

Financial leverage;

Operational quality,

Focus on core competencies

Accessing external competencies

Focus on fewer activities

Risk reduction

1990-

1997

1998-

2005

Adapted from Nordigården, 2007* More than one driving force per respondent


Driving Forces for Outsourcing*Cost reduction

Financial

leverage;

Operational quality,

Focus on core

competencies

Accessing

external

competencies

Focus on fewer activities

Risk

reduction

1990-

199783% 33 % 61% 11% 33 % 22 % 17 %

1998-

200580 % 53 % 60 % 60% 60% 7 % 33%

Adapted from Nordigården, 2007* More than one driving force per respondent


There are several challenges and risks when contemplating outsourcing

Geographical

Costs

Outsourcing the wrong things

Distance, localisation and availability

Staring Blind on Costs Reduction/ insuffienct cost analysis

Outsourcing Problematic or long-term critical activities

Accompanying outsourcing strategies are several intrinsic risks that need to be handled to ensure that expected benefits of outsourcing can be materialised

Supplier failure Supplier performance based on quality, delivery, service and ability to reduce costs and also culture aspects


Complexity & Asset SpecificityLOW - Asset Specificity HIGH – Asset Specificity

LOW

Product & Activity complexity

HIGH


Source: Vining & Globerman 1999



LOW


Standard productsSeveral possible suppliersDetailed contracts possible

Supplier holds the Asset• Supplier is vulnerable to

opportunistic behaviour by the Outsourcer

Outsourcer holds the Asset• Similar to LOW asset specificity

HIGH





LOW


Standard productsSeveral possible suppliersDetailed contracts possible

Supplier holds the Asset• Supplier is vulnerable to

opportunistic behaviour by the Outsourcer

Outsourcer holds the Asset• Similar to LOW asset specificity

HIGH


Often applies in outsourcing of professional services• High cost of contracts

negotiation due to difficulties in specifying the service outcome

Supplier holds the Asset• Opportunistic behaviour by the

supplier

Outsourcer holds the Asset• Costly arbitration when

performance is difficult to describe



Business Critical Outsourcing (1)

Complexity

Business Criticality

High

High

Low

Low


Business Critical Outsourcing (3)

© Malmgren 2014, all rights reserved [email protected]

Competence Trust-building• Information collection• Bench-marking

Goodwill trust-building• Establishing mutual interest• Individual & team level trust• Joint dispute resolution

Social control• Decision-making processes• Rituals & networking

Behaviour control• Policies & procedures• Reporting structure• Staffing & training

Output control• Setting objectives• Planning & budgeting

Performance Risk Mitigation Relational Risk Mitigation

Hi

Hi Hi

Hi

Hi

Lo


Hi

TSIC case

Hutchison case

Competence Trust-building• Information collection• Bench-marking

Goodwill trust-building• Establishing mutual interest• Individual & team level trust• Joint dispute resolution


Behaviour control• Policies & procedures• Reporting structure• Staffing & training

Output control• Setting objectives• Planning & budgeting

Performance Risk Mitigation Relational Risk Mitigation

Hi

Hi Hi

Hi

Hi

Lo


Hi

Lo

TSIC case

Hutchison case


Recommendations for practitioners• Managers considering outsourcing of

business critical activities and resources should recognise that there is limited risk mitigating possibilities to manage risks related to human asset specificity

• Actions taken using non-contractual actions such as single source negotiations using open book and a cooperative approach may offer risk mitigation for human asset specificity

• Managers should not forget the importance of human asset specificity and the lack of contractual safeguards in business critical outsourcing.


Q&A

Documents

© Malmgren 2014, all rights reserved [email protected] Outsourcing from a Theoretical perspective Dr. Mike Malmgren & Docent Daniel Nordigården