Week 3 / Global Outsourcing and Offshoring Flashcards
Outsourcing
Wiki definition
Outsourcing is an agreement in which one company hires another company to be responsible for a
planned or existing activity that is or could be done internally, and sometimes involves transferring
employees and assets from one firm to another.
Offshoring
Wiki definition
Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting
processes, such as accounting.
Nearshoring, Onshoring, Reshoring
Nearshoring: Outsourcing to a nearby country, preferably a neighboring one or that’s at least on the same continent. This helps to travel and hold face-to-face meetings more frequently, at a lower cost.
If a US company outsources to China, that’s offshoring.
If a US company outsources to Canada, that’s
nearshoring.
If a US company from New York outsources to Detroit,
that’s onshoring (aka same country).
If a US company returns outsourcing process to US, that’s reshoring.
Why Outsourcing?
The offshoring and outsourcing phenomenon is, in
a way, the logical outcome of the strategic focus on
“core competence” which implies that a firm should
abandon functions it cannot best perform in-house
or at home, to external vendors, or partners, or
foreign countries.
Driving Factors
- Drop in IT costs: communication over distance
not just much cheaper but also much easier - Shortage of skilled technical and managerial
personnel in the US and in Europe as the
population ages - Acceleration in the rate of technical change
which forces a greater degree of externalization
so that companies can keep up with the pace of
competition.
Constraining Factors
- the consequent escalation of wages in the foreign
location - transaction costs that can be avoided with
vertical integration (such as negotiations,
monitoring, coordination, “hold-up,” and quality
control). - fears of supply chain disruptions
- fears of technology spillovers and consequent
competitive threat - regulatory prohibitions and constraints on
offshoring.
Managerial implications of outsourcing
Establishing and managing a network of outsourced
providers can be likened to the development of an
inter-organizational community of practice (CoP).
CoP: groups of people interact, often across
organizational boundaries, so as to deepen their
knowledge and share their expertise about a set of
problems.
Four pillars of a community of practice (CoP)
- Organizational dimension
- Cognitive dimension
- Economic dimension
- Technological dimension
Organizational Dimension
It concerns the relationships that arise between the
outsourcer and its external contract provider:
- the way in which the relationship will be set up and governed (Governance),
- how that relationship will be managed by boundary spanning (boundary spanning management). boundary spanning has traditionally been used to describe activities needed to address organization–environment interactions.
- and how the participants organize themselves into a virtualized entity. (Virtualization). As an organization outsources, it takes on a more distributed nature, thereby behaving like a “network of virtual teams” that can be scattered around the globe.
Cognitive Dimension
This dimension represents the cognitive homogeneity of the outsourcer–external contract provider relationship and deals with the mechanisms that are employed to coordinate it.
It includes the impact of organization and national cultures on outsourcing relationships (culture) as well as the communication modes those parties utilize to bridge their unique cultures (Communication).
Economic Dimension
The economic dimension highlights benefits, costs,
and performance factors in an outsourcing
relationship.
• transaction costs and benefits need to be assessed
on a continuous basis.
• while a particular outsourced operation may add
value, this may be detrimental to other outsourced
operations. Thus, assessment should be in terms of
the total supply chain.
Technological Dimension
This dimension relates to the technologies that will
enable and facilitate the outsourcing relationship.
Technology in the form of information systems
needs to be implemented to facilitate the continuous
assessment and monitoring of the outsourced
operation.
Three manifests of Outsourcing Strategy
- Leadership
- Learning
- Risk Mitigation
- Leadership
Because the firm has now entered a contractual
relationship with a third party, it has in essence
moved into one of two nonhierarchical models:
market or hybrid.
Market model places the firm in a supply-chain
environment since the firm becomes a buyer of
the services that external contract providers
supply. The firm should expect to see change in
its power relationship.
Hybrid model represents a collaborative
relationship. Here, the firm faces the risk that one
party will attempt to take advantage of the other.
- Learning
Many organizations simply do not know how to
learn due to the difficulty in transferring and
integrating knowledge.
Even if a firm retains internal control of its core
competency, that firm will not be completely
immune from its reliance on outsourced
capabilities.
