TDC Seminar on the Pros & Cons of Outsourcing

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TDC Seminar on the Pros & Cons of Outsourcing. Dr. Gilbert Wong Executive Director Poon Kam Kai Institute of Management University of Hong Kong. The University of Hong Kong Poon Kam Kai Institute of Management. Reasons for outsourcing. Examples of outsourcing - PowerPoint PPT Presentation

Transcript of TDC Seminar on the Pros & Cons of Outsourcing

  • TDC Seminar on the Pros & Cons of OutsourcingDr. Gilbert WongExecutive DirectorPoon Kam Kai Institute of ManagementUniversity of Hong Kong

    The University of Hong KongPoon Kam Kai Institute of Management


    Reasons for outsourcingExamples of outsourcingA credit card company outsource it data capture and customers expenditure reporting IT functionA hotel outsource its laundry servicesThe university outsource its catering serviceReasonsContain cost because of the lack of competence & sharing the vendor economies of scale Avoid specific investmentsImprove serviceRefocus resource strategically


    The context for outsourcingIntensified competition leading to Need for building distinctive competenceOrganizational downsizingNeed for flexibility The need for diverse inputs in businesses in the new economy e.g. delivery health care service on the netBut are these alliances/partnering or outsourcing?


    Why in-sourcing in the first place? Theory of the firm as resource coordinator but why not the market e.g why do hotels have an Engineering department?Transaction cost theory organizations in-source to minimize transaction cost arising out of:Uncertainty in the demand Possible opportunistic behavior of supplierThe cost of writing a detailed contract and the cost of enforcing the contractDeveloping the distinctive competence of the organization in specific activities e.g. software development or the coordination of activities e.g. sales and IT team>> what to outsource and the nature of the outsourcing relationships


    What to outsource?Two dimensions:Useful vs. critical functionCommodity vs. differentiatorUseful commodity - activities that do not distinguish the company from its competitors e.g. payroll, accounting system - outsourceCritical commodity - activities that are important but does not differentiate e.g. aircraft maintenance outsource or in-source depending on strategyUseful differentiator - differentiate the company but not in a critical way good IT team developing special application outside the companys main business migrate or integrateCritical differentiator e.g. research in an investment bank keep in house


    What to outsource?Internal or External providerInternal providerExternal providerMigrate or integrateCriticalUsefulCommodityDifferentiate


    The transition to outsourcingContractual issues how to draft the contracts who should be involved, transition process

    People issuesWhat will happen to existing staff, how the insiders relate to the outsider

    Organizational adjustment


    Types of inter-firm relationships


    From outsourcing to partnering From outsourcing contracts on a one-off basis to relationship managementFrom exchange of interest to mutual learningFrom hard to hard AND soft benefitsFrom close ended to open ended relationshipsFrom legalist rights to honor & obligationsFrom having control to sharing controlFrom contractual deliveries to organizational adjustmentsFrom dealing at the strategic level to partnering at all levelsIts all about managing a network of relationships


    Dimensions of a successful outsourcing relationshipRelationship structure where the parties define the goals of the relationship What they hope to accomplish, and most importantly, how they will measure success

    The management structure defines how both organizations will work together to ensure success and, when necessary, take corrective actions on less-than-desired outcomes



    Relationship structureDefine relationship strategically creating a basis for LT cooperationCapturing the intent, not just the terms of the relationshipManage expectation carefully chances of repeated business?Defined scorecardDifferentiate between the client and the CustomersMatch pricing & contractual terms to the goals and culture of the partnersCreate incentives for improvementsDefine management structure in advance


    Management structureKeep strategic responsibilities close to the top, but create multilevel organizational linksConduct regular goal oriented meetingsEncourage lateral, multi-channel communicationsDefine escalation processUse scorecard to keep track of performanceReward providers employeesImplement a change processTreat the relationship as a valuable organizational asset