Lecture 6: Outsourcing and Risk Management

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.

Description

This quiz covers the basics of outsourcing, including its definition, characteristics, forms, and rationale. Also, learn about the outsourcing matrix and process, risk assessment, and critical success factors.