Slide 1

Outsourcing

Part 2 - Evaluation & Management

Section 1 – A Framework for Evaluation & Management

• A Framework for Evaluation & Management - An Introduction– 1. No Formal OS Process– 2. Insufficient Understanding of the Costs Associated

with OS– 3. Core Business Approach

• The Outsourcing Framework.

• The OS Framework : An Overview (i.e. Stages 1-6).

Slide 2

A Framework for Evaluation & ManagementAn Introduction

The three key problems encountered by organisations in their

efforts to formulate an effective OS decision:

1. No formal OS process.

2. Insufficient understanding of the costs associated with OS.

3. Core business approach.

Source: McIvor (2005)

Slide 3

1. No Formal OS Process

• Many organisations make OS decisions primarily on the basis of reducing headcount and costs (Lonsdale & Cox, 1997):– often selecting parts of the business to OS based on what will

save the most overheads rather than on what makes the most long-term business sense.

Organisations fail to consider issues such as:• Should the organisation strive to maintain and build its capability in

a particular technology or turn to the best-in-class source?• Does the capacity exist within the organisation to provide the

activity?• Do the internal capabilities of the organisation in a particular

technology lag behind potential suppliers?– how much investment is required internally to match the

capabilities of the suppliers?Source: McIvor (2005)

Slide 4

2. Insufficient Understanding of the Costs Associated with OS

• Limited (or no) understanding of all the major costs associated with OS evaluation and management for example:– finding & evaluating suppliers– contract drafting and relationship management …

• Cost analysis in OS evaluation and management involves attempting to measure all important costs associated with the two alternatives:– costing systems?

• Need to address both quantitative and qualitative factors.

Source: McIvor (2005)

NB See Outsourcing Part 1 for additional detail on hidden costs.

Slide 5

3. Core Business Approach

• Misunderstandings / misperceptions on what is core.

• Mistakenly OS activities of significant value to the organisation currently, in the future and potentially contributing to the organisation’s competitive advantage.

• Nature of business may make the distinction between core and non-core activities less significant for example: – in rapidly changing industries technological innovations can

render an advantage in some activity obsolete almost overnight.– focus more on nature of the nature of the contract and managing

the organisation / supplier relationship.

Source: McIvor (2005)

Cont’d

Slide 6

3. Core Business Approach (Cont’d)

The leveraging of supplier capabilities through astute relationship mechanisms can be a source of competitive advantage. Moreover, even when an activity is considered to be ‘non-core’ to the organisation achieving competitive advantage, there are often implicit and tacit inter-dependencies with activities that are considered to be ‘core’ (Bryce & Usseem, 1998).

McIvor (2005)

Slide 7

The Outsourcing Framework

• See next slide.

Slide 8Source: McIvor (2005)

Stage 1Determining the Current Boundary of the Organisation

Stage 2Activity Importance Analysis

Stage 3Capability Analysis

Stage 4Analysis of the Strategic Sourcing Options

Stage 5Developing the Relationship Strategy

Stage 6Establish, Manage & Evaluate Appropriate Relationships

IF OS is appropriate THEN select relationship strategy

Slide 9

The OS Framework : An Overview

Stage 1 - Determining the Current Boundary of the Organisation

• Identifying the key activities that are performed in order to create and deliver the range of products and services offered by the organisation:– activities performed internally and those performed by

external sources.

• The purpose of the analysis is to provide an outline of the scope of the organisation both upstream into the supply chain and downstream towards end customers of the products and services.

Source: McIvor (2005)

Slide 10

The OS Framework : An Overview (Cont’d)

Stage 2 - Activity Importance Analysis

• Identifying the level of importance of the activities involved in creating and delivering an organisation’s range of products and services to customers.

• A critical activity has a major impact upon the ability of an organisation to achieve competitive advantage:– Perceived by customers as adding value.

Source: McIvor (2005)

Slide 11

The OS Framework : An Overview (Cont’d)

Stage 3 - Capability Analysis

• Analysing the capabilities of the organisation in the activities, previously identified, in relation to potential external sources (competitors or suppliers).

• That is, identifying any disparity between the sourcing organisation and potential external providers of the activities under scrutiny.

• Helps an organisation decide if OS certain activities will be detrimental to their competitive position.

Source: McIvor (2005)

Slide 12

The OS Framework : An Overview (Cont’d)

Stage 4 - Analysis of the Strategic Sourcing Options

• Evaluates the implications of the strategic sourcing options based upon the importance level and capability of the organisation in the activity under scrutiny in comparison to external sources.

Source: McIvor (2005)

Slide 13

The OS Framework : An Overview (Cont’d)

Stage 5 - Developing the Relationship Strategy

• This stage outlines the steps involved in building relationships across organisational boundaries in order to achieve the objectives established for OS.

• Key steps include establishing:– the objectives for OS and– selecting the appropriate supply relationship to achieve these

objectives.

Source: McIvor (2005)

Slide 14

The OS Framework : An Overview (Cont’d)

Stage 6 - Establish, Manage & Evaluate Appropriate Relationships

• This stage is concerned with implementing the OS strategy, a number of issues need to be addressed:– supplier selection– contracting issues– managing the relationship– relationship performance evaluation

• This evaluation serves as a context for action:– maintain the relationship at its current level– develop the relationship– discontinue / reduce the scope of the relationship

Source: McIvor (2005)

Slide 15

Required Reading

• Jones, W. (1997) Outsourcing Basics, Information Systems Management, vol. 14, pt. 1, pp.66-69.

• Lee, M. (1996) IT Outsourcing Contracts, Industrial Management and Data Systems, vol. 96, pt. 1, pp. 15-

20.

• McIvor, R. (2005) The Outsourcing Process, Cambridge University Press, pp.12-14, 35-36, 66-67, 86-88.

Slide 16

ReferencesThe following texts were used in the preparation of this material.

Barthelemy, J. (2003) The Seven Deadly Sins of Outsourcing, The Academy of Management Executive, vol. 17, no. 2, pp.87-98.

Barthelemy, J. & Geyer, D. (2000) IT outsourcing: findings from an empirical survey in France and Germany, European Management Journal, vol. 19, no. 2, pp.195-202.

Jones, W. (1997) Outsourcing Basics, Information Systems Management, vol. 14, pt. 1, pp.66-69.

Lee, M. (1996) IT Outsourcing Contracts, Industrial Management and Data Systems, vol. 96, pt. 1, pp. 15-20.

Slide 17

References (Cont’d)The following texts were used in the preparation of this material.

McIvor, R. (2005) The Outsourcing Process, Cambridge University Press.