In the modern world, many organisations choose to outsource one or more their business processes to manage the increasingly costs or to profit at the high level of skills' expense (Langfield-Smith, Thorne & Hilton, 2007, p917). But it should be done only after a serious analyse at the business needs and available options. Only effective outsourcing decision can help the companies to develop their business (Srivastava, Arora & Grover, 2010).
Before the company outsource its production, sever factors should be considered carefully. In this essay, it will first describe the dimensions to be considered before the company decides to outsource its production. Then it will discuss how the relationship strategy approaches to contracting assists organisations to choose to outsource. After that, two cases from Australia are provided and discussed. In this essay, it will compare and contrast the two organisations' decisions to outsource. At the end of the essay, a conclusion will be given.
As mentioned above, before companies outsource their business processes, several factors should be considered carefully. Several scholars have conducted studies about outsourcing. In the next few paragraphs, it will describe three previous studies about outsourcing dimensions.
Mcivor writes a report in 2010, in that report he states three key dimensions when companies want to outsource their business processes. According to Ronan Mcivor (2011, p32), the first one is -Relative capability position. This means the company should conduct an internal analyse to find out what they can do and how well they do inside the company, then compared with competitors or suppliers to find out whether the company possesses a competitive advantage over others.
As in Mcivor's report (2011, p32), the second dimension is contributing to competitive advantage. Generally, when process does not a source of competitive advantage, the manager will consider outsourcing this process. On the other hand, if a process is the main reason for the firm to reach the competitive advantage in the market, the management will not consider outsourcing this process.
The last one as Mcivor's report (2011) is potential for opportunism. When there is a high opportunism potential with outsourcing, the management will not consider outsourcing the process. When there is low potential for opportunism from vendors, management will consider to outsourcing the process only if the first two factors allow them to do so.
After considering several factors, and if processes are suitable for outsourcing, the company should choose an appropriate relationship strategy.
As Mcivor wrote in 2011, there are three relationship strategies of outsourcing. When the supply market is very competitive and buyers who have very similar requirements, the company can make a nonspecific contracting with supplier. When there are only few players in the supply market and the companies have quite specific needs, recurrent contracting is a good choice for these companies. The last choice as Mcivor (2011) recommended is called relational contracting. The companies can choose this kind of relationship strategy when there is a high potential for opportunism as well as the process is critical for the company.
No matter what kind of relationship strategy the companies employed, the key points are the strategy can help the companies to build up a stable relationship with the supplier. Also, the relationship strategy should help the company to achieve the competitive advantage in the market.
Besides the formal relationship strategy, the companies should also adopt informal buyer-supplier relationship
Recommendation
To sum up, before the management want to outsource the process, several factors should be considered carefully. First, three dimensions- relative capability position, contributing to competitive advantage and potential for opportunism should be considered. As discussed above, the company would like to outsource the processes which are not important for company to achieve the competitive advantage and there is no high potential for opportunism from vendors. To do that, company can reduce the cost as well as focus on its core business. Then based on the analysis of three dimensions, if both inside and outside conditions allow the company outsources the process, there are three relationship strategies available for company to choose. The company should choose the suitable strategy based on the companies' own situation.
According to Chwen Sheu, John Wacker and C.L. Yang's research (Micvor, 2011, p33), the informal supplier-buyer relationship is also important when outsourcing, because in the contract it cannot cover every risk and outcome. So the best relationship strategy is the company needs a formal contract with its supplier as well as has informal relationships when outsourcing.
References
1. Langfield-Smith, K, Thorne, H and Hilton, R 2007, Management Accounting, 4th edn, McGraw- Hill Australia
2. Mcivor, R 2011, "Outsourcing done right", Industrial Engineer, vol. 43, no 1, pp 30-35
3. Mcivor, R 2008, "What is the right outsourcing strategy for your process?" European Management Journal, vol. 26, pp24– 34
4. Srivastava, S., Arora, S. and Grover, N. 2010 "Outsourcing: As a Competitive Strategy" AIMS International Conference on Value-based Management, August 11-13
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