Lecture 6: Outsourcing and Risk Management

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Questions and Answers

What percentage of outsourcing is said to be at risk according to various sources?

  • 70% (correct)
  • 50%
  • 80%
  • 90%

What is one of the commercial risks in outsourcing?

  • Change of key management positions
  • Uncertainty in terms of price and costs (correct)
  • Technical risk
  • Unavailability of qualified staff

What can be used to mitigate contractual risks in outsourcing?

  • Leading-edge technology
  • Contracts (correct)
  • Performance metrics
  • Incentives and penalties

What is one of the factors that can lead to a failure in outsourcing?

<p>Unavailability of qualified staff (D)</p> Signup and view all the answers

What is one of the critical success factors of outsourcing?

<p>Selecting the right vendor (C)</p> Signup and view all the answers

What is an example of a loss that can occur in outsourcing due to a failure?

<p>Loss of $400 million in sales (D)</p> Signup and view all the answers

What is outsourcing?

<p>The decision and subsequent transfer process by which activities are transferred to an external supplier (B)</p> Signup and view all the answers

What is the forecasted size of the outsourcing market in 2021?

<p>USD 99.10 billion (B)</p> Signup and view all the answers

What is one of the major characteristics of outsourcing?

<p>That the buyer is exposed to a cost and risk profile (C)</p> Signup and view all the answers

What is turnkey outsourcing?

<p>Taking full responsibility for the execution of the entire function (D)</p> Signup and view all the answers

Why do companies opt for outsourcing?

<p>To reduce control costs and operating costs (A)</p> Signup and view all the answers

What is nearshoring?

<p>Outsourcing of activities to nearby low-cost countries (A)</p> Signup and view all the answers

What is the last phase of the outsourcing process?

<p>Contract termination (A)</p> Signup and view all the answers

What is the goal of the four-phase model?

<p>Always customer focus for all phases (B)</p> Signup and view all the answers

What is the success rate of outsourcing?

<p>A majority of those who opt for outsourcing report high satisfaction (A)</p> Signup and view all the answers

What is offshoring?

<p>Outsourcing of activities to low-cost countries (A)</p> Signup and view all the answers

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Study Notes

Definition and Characteristics of Outsourcing

  • Outsourcing is the decision and subsequent transfer process of activities from a company to an external supplier.
  • Key characteristics of outsourcing include:
    • Activities initially performed in-house are transferred to an external party.
    • Assets, knowledge, and sometimes people are transferred to the external party.
    • An extended relationship between parties is involved over a longer period.
    • The buyer is exposed to both cost and risk profiles.

Forms of Outsourcing

  • Offshoring: Commissioning work to a provider in a low-cost country.
  • Nearshoring: Outsourcing activities to nearby low-cost countries.
  • Onshoring: Outsourcing activities to providers in the same country.
  • Turnkey outsourcing: The external provider takes responsibility for executing the entire function.
  • Partial outsourcing: Only a part of an integrated function is outsourced.

Rationale for Outsourcing

  • Tactical reasons:
    • Reduce control costs and operating costs.
    • Free up internal resources.
    • Improve performance.
  • Strategic reasons:
    • Improve company focus.
    • Gain access to world-class supplier capabilities.
    • Get access to resources not available internally.
    • Improve customer satisfaction.
    • Increase flexibility.
    • Share risk.

The Outsourcing Process

  • Three phases:
    1. Strategic phase (Why, what, who?)
    2. Transition phase (How?)
    3. Operational phase (How to control?)
  • Four-phase model:
    1. Market search and preliminary assessment.
    2. Detailed audit and supplier selection.
    3. Contract negotiation and execution.
    4. Supplier report card and post-contract review.

Risk Assessment

  • Technical risks:
    • Maintaining crucial knowledge in the company.
    • Ensuring the supplier applies leading-edge technology.
    • Ensuring supplier staff capability.
  • Commercial risks:
    • Uncertainty in price and costs (mitigated using incentives and penalties).
  • Contractual risks:
    • Difficulty in mentioning all terms and conditions in a contract.
  • Performance risks:
    • Supplier capacity and flexibility to meet fluctuating requirements.
    • Buyer capacity and flexibility to trace and track supplier operational processes.

Critical Success Factors

  • Understanding company goals and objectives.
  • A strategic vision and plan.
  • Selecting the right vendor.
  • A properly structured contract.
  • Open communication with individual groups involved.
  • Ongoing management of the relationship.
  • Senior executives' support and involvement.
  • Careful attention to personnel issues.

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