just right outsourcing

Question 1

forms of risk when outsourcing

Answer 1

1. strategic risk (results from opportunistic behaviour)
2. operational risk (outsourced service fails to meet quality or reliability standards)
3. intrinsic risk of atrophy (as company outsources-> looses core group of people who are familiar with the activity)
4. intrinsic risk of location (sovereign risk, exchange rate risk)

Question 2

types of strategic risks

Answer 2

1. shirking - underperformance while claiming full pay (Principal agent problem)
2. Poaching - vendor secretly uses data to make extra money
3. opportunistic renegotiation - client has no alternative and must pay current price to supplier

Question 3

reducing a process to reduce risk

Answer 3

-dividing process into different activities
-determining the risk profile for each activity

Question 4

mechanisms for mitigating risk

Answer 4

horizontal chunkification: dividing tasks among vendors (mitigates shirking and opportunistic renegotiation)
vertical chukification: one supplier is only doing one step (mitigates poaching)

Question 5

managing each strategic risk

Answer 5

shrinking - monitoring; horizontal (compare)
poaching - use vertical (no overlapping tasks); never use horizontal; keep sensitive in-house
opportunistic renegotiation - horizontal (reduces dependency); retain some internal capabilities