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MANAGING ORGANIZATIONS
Session 15 & 16:Interor anizational Relationshi s &
PGP 2010-12 Section B
Term 1:June-September 2010
Sourav MukherjiAssociate Professor of Organization & Strategy
Indian Institute of Management Bangalore, India
Organizational Forms for the Future
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3A NEW WAVE IS SWEEPING ACROSS THE BUSINESS WORLD
Bharti Televentures has outsourced itsnetwork management to Ericsson & ITmanagement to IBM
S Mukherji
Kingfisher Airlines has outsourced itsground handling facilities to Indian Airlines
Hindustan Levers have outsourced itshuman resource managementto Accenture
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4WHY IS EVERYBODY THINKING ABOUT OUTSOURCING ?
Outsourcing leverages the benefits of specialization
Not about core versus non-core Not only about cost reduction
S Mukherji
Outsourcing today is about value maximization
Enabled by widespread availability of information
and information technology Possible to separate the physical flow of resources
from flow of information
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5FOUR STRATEGIC REASONS FOR OUTSOURCING
Cost Minimization
Accessing superiorcompetencies andprivileged assets
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2
S Mukherji
Superior resourceleverage
Risk diversification
3
4
While these are collectively exhaustive, they are not mutually exclusive
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6COST EFFICIENCY CAN ARISE FROM VARIOUS SOURCES
Cost Minimization
Accessing superiorcompetencies andprivileged assets
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2
Moving beyond arbitrage
Manufacturers derive scale economies bydemand aggregation
Services derive better utilization bydemand aggregation
Specialization and greater scale enablinginnovation and automation, which finally
S Mukherji
Superior resourceleverage
Risk diversification
3
4
leads to greater efficiency
Superior value at competitive prices
Challenges of managing scale, varietyand developing superior processes
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7ACCESS RESOURCES THAT ARE DIFFICULT OR
UNECONOMICAL TO BUILD
Cost Minimization
Accessing superiorcompetencies andprivileged assets
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2
Complementary assets take time to build.Such time cannot be afforded when timeto market is critical
- pharmaceutical distribution network
Privileged assets are difficult to create- airport ground handling facilities
Certain competencies are required only
S Mukherji
Superior resourceleverage
Risk diversification
3
4
.
in loss of flexibility- strategy consulting
Many of these command a price premiumrather than being available at low cost
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8LEVERAGE RESOURCES TO MAXIMIZE VALUE ADDITION
Cost Minimization
Accessing superiorcompetencies andprivileged assets
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2
Review of activities within each functionto determine which among them are
- transaction intensive, non specificto organization, have scale economies
- specific to organization
A specialized player might be in a betterposition to do certain activities within thefunction. Therefore ideal for outsourcin .
S Mukherji
Superior resourceleverage
Risk diversification
3
4
Organization resources are better leveragedto focus on activities which are specific tothe organization
Not a matter of core versus non-core butdetermining where is it that the organizationcan add value
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9PORTFOLIO OF CLIENTS TO MINIMIZE DEMAND VOLATILITY
Cost Minimization
Accessing superiorcompetencies andprivileged assets
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2
Outsourcer maintains a portfolio of clientswhose demand profiles are uncorrelatedwith one another
Transfer resources from one client project
to another depending on demand
Possible only if skills are fungible
A lication in eo le intensive service
S Mukherji
Superior resourceleverage
Risk diversification
3
4
business- critical driver of scale
Minimizes risks arising out of demand
volatility that the client would not havebeen able to do on their own
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10OUTSOURCING HAS ITS COSTS AND RISKS
Application of transaction cost theory to build a decision framework
Transaction specific investmentscreate potential for opportunistic
behaviour leading to an increasein negotiated prices
Costs of searching, drawing,negotiating end enforcing contracts
Other relatedorganizationalcosts
Transaction
Strategic
risks
S Mukherji
Costs get escalated when thereis business uncertainty
Risks of knowledge spillover anddivulgement of sensitive information,
often tacit and complex in nature
Disruptive effect of supply shockson business, where contractualcompensation might not be asufficient safeguard
Productioncostwithinorganization
Production
cost ofmarket
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What are some of the deterrents of opportunistic behaviour ?
Do markets always fail when there are small numbers and needfor transaction specific investments ?
S Mukherji
Can there be an economic rational for trust ?
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The Prisoners Dilemma: An illustration
0,10 5,5
2,2 10,0
X
Does not
confess
ConfessX confession: 0 or 5 years
X not confession: 2 or 10 years
Individual strategy implies confession
If Y thinks similarly, he will also confess
TO CONFESS OR NOT TO CONFESS
S Mukherji
YDoes not
confessConfess
Alliance strategy: 2 years each
Based on trust , risky
Cost of betrayal high (10 years)
Most suitable for long run
Opportunism in an economic transaction may be curbed
keeping long term interests in mind
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OUTSOURCING LIFES TOUGH AND MUNDANE TASKS14
Offers a pool of assistants in India whompeople could call or email to ask for help
Outsource tasks that can be accomplished overphone or email is relatively short period of time~ 20 minutes
Doctors appointment, restaurant reservation,
Illustrative examples of Personal Process Outsourcing
S Mukherji
A lady outsourced breaking off a relationship
Users wishing to outsource onerous or unpalatabletasks post them on the web and invite bids
50,000 users after 1.5 years of existence
A man sought bidders to clean his ears and foundsomeone highly qualified
Source: News item from AFP, appearing in Hindu, 29 th June 2008