MODULE 43VPbVQ FREDRICK ETSE and Technology
- 1. PSM 556 UNIT 4 OUTSOURCING 07/15/2 STRATEGIC SOURCING AND PURCHASING Dr. Jacob Kuutuome 0207525237 MSc. Procurement. & SCM
- 2. OUTLINE • Definition of terms • The Nature of Outsourcing • Categories of outsourcing • Theories of outsourcing • Outsourcing Process • Advantages and disadvantages of outsourcing
- 3. Definitions of terms • Subcontracting is the use of an outside organization to perform work that an organisation cannot do itself because of a impermanent shortage of resources. • Outsourcing is any task, operation, job or process that could be performed by employees within a company, but is instead contracted to a third party for a significant period of time. • Insourcing is an opposite of outsourcing where an organization decides to incorporate into its activities previous outsourced work
- 4. The Nature of Outsourcing • Almost every organization outsources in some way. • A company can outsource both core and non-core functions but typically, the non-core business function are mostly outsourced.
- 5. Areas to be Outsourced • Making the right decision can add significantly to your organization's bottom line in terms of cost savings and increased efficiency. How then can the organisation know that it is making the right decision?
- 6. The right way is by… • determining whether an activity should be outsourced. • determining the extent to which the activity is core to the organization’s main function • appraising the competence of contractors or providers available to carry out the outsourced activity.
- 7. Outsource Developing contracting Collaboration In-house CORE low High High COMPETENCES OF CONTRACTOR Low
- 8. Reasons to outsource • The core reasons to pencil down a business function for outsourcing could be • Value of Money • Operational reasons • Strategic reasons
- 9. Value of Money • Most people in the outsourcing sector outside the supplier community say that lowering cost is always the driver for outsourcing. • The rationale is: if a company could do it at a lower cost in-house it would not outsource. • The opposite is also true.
- 10. • First step is to identity as much as possible the willingness of the supplier to disclose of his cost and profit structure • Overall cost of service can be compared with prices offered by alternative suppliers • Usefulness of the supplier must be evaluated by comparing the actual outputs with the original objectives stated. • Involve purchasing professional in the early stages to achieve what the organisation is looking for • Aside from actual cost saving, the organization can achieve a leaner balance divesting itself of assets that would otherwise be required in-house. Value For Money….
- 11. Operational Reasons for Outsourcing • Ability to Downsize at Will • Improved Performance • Freeing up Resources • Quicker Turnaround Time • Uncertainty over Business Climate • Accelerated Time to Market • Receive an important cash infusion
- 12. Strategic Reasons for Outsourcing • Improve company focus • Gain access to world class capabilities • Get access to resources that are not available internally • Accelerate reengineering benefits • Improve customer satisfaction • Increase flexibility • Sharing risks
- 13. Categories of Outsourcing • Turnkey vs. partial outsourcing • Body shop vs. project management vs. total outsourcing • Tactical outsourcing/ strategic outsourcing/transformational outsourcing These three categories can further be grouped depending on where they are taken place, as Onshore, Offshore, and near shore.
- 14. • Onshore outsourcing • stands for the fact that the vendor is operating in the same country. For example a Ghanaian company outsources a function to another Ghanaian company. This type is most common because it does not entail much risks and it is easy to evaluate and to choose a vendor. • Near shore outsourcing • refers to outsourcing to a company in a close country. In many cases the countries share borders. • Offshore outsourcing • means to outsource a function to a company in a distant country.
- 15. OUTSOURCING THEORIES • Current literature mentions four separate approaches that enlighten the reasons for outsourcing and that help to differentiate whether to make or buy. • These are • Transactional Cost Theory • Resource-Based View • Power Theory and • Relational View
- 16. Resource Based View (RBV) • This concept is the bases of core competences concept • RBV believes that a firm's resources and capabilities are its most important assets so the primary concern of RBV is about obtaining access to another firm's core competencies to gain competitive advantage • If the organisation is to focus on its core competencies as the basis of its sustainable competitive advantage, then activities which do not constitute a core competence for the firm can be given to outside firms which can provide these at lower cost.
- 17. Transaction Cost Theory (TCT) • Transactions occur whenever a good or service is transferred from a provider to a user • After the core and the non-core competencies are identified, the transactional cost theory can help to determine what elements of the non-core competencies are best to outsource. • TCT aims to reduce the costs associated with carrying out a transaction when deciding whether to make-or-buy. • There are three attributes which influence a firm's decision to make or buy: frequency of transaction, asset specificity and degree of uncertainty associated with a transaction.
- 18. Power Theory • Every department tries to maintain and gain as much power as possible. • Therefore it answers the question of what to outsource as a matter of power. • That means the departments/functions that have less power compared to the others, are that which might be outsourced
- 19. Relational View • This theory believes that a firm's critical resources can also consist of inter-firm resources, meaning it is not only the firm's own resources that can be critical to its success, but also resources from firms that are into partnership can contribute to gain a competitive benefit.
- 20. The Outsourcing process • There has been quite a number of propositions when it comes to the process of outsourcing which is more of a decision making process. • This course adopts the framework by Moore & Hvolby modified by Weele.
- 21. Competenc e analysis Assessm ent and Approval Contract Negotiati on Project Execution and Transfer Managing Relationshi p Contract Termination Strategic phase Transition phase Operational phase
- 22. • The strategic phase answers three significant questions of what, why and who before considering opting for outsourcing. • This activity is carried out by doing a competency analysis ,SWOT analysis and mapping core capabilities to non-core ones with stern evaluation by the firm to attain a third party service provider to do the outsource job
- 23. •The transition phase of this framework begins once the service provider takes ownership of the outsourced activity and consists of activities like contract mediation, the job execution and the handover.
- 24. • The operational phase is very crucial and offers highpoint on the merits of giving due diligence to the job process and execution, completion and the choice of applying good management of the relationship strategies. • It also offers the client the opportunity to measure the performance of the provider against any SLA or KPIs.
- 25. Advantages: • Allow you to focus your time where you need. Outsourced professional will do the work with you and for you, leaving extra time to concentrate on other areas of business. • Less money spent, more money earned. Reduced cost from eliminating salaries, benefits, hiring, training, expense accounts and payroll processing • Shared resources. Outsourced professionals will have resources available to assist with increased growth of your company. • Goals reached quicker. By hiring the professionals you know you are receiving the skills and knowledge of the experts meaning faster results.
- 26. Disadvantages: • Communication may require more effort. • Allowing others to be in control which requires sharing responsibilities. • May have several different accounts and so may not be focused on your project at all times. • Loss of Managerial Control • Hidden Costs • Threat to Security and Confidentiality • Quality problems • Tied to the Financial Well-Being of another Company • Bad publicity and ill-will
- 27. Logistics Outsourcing Performance Measurements Logistics system performance Customer satisfaction Employee morale Financial improvement
- 28. Group discussion QUESTION 1 Describe how internal relationships change when a part of an organisation is outsourced QUESTION 2 What steps should managers take to make outsourcing a success?
- 29. THANK YOU 07/15/2025 MSc. Procurement. & SCM