The outsourcing process enlarges the network of the outsourcing company, which is a basis for value creation. In fact, when outsourcing, companies can have access to more resources and capabilities thank to this network.
All the business partners that constitute the network can gather and combine their resources and capabilities, which enable them to have much more opportunities and alternatives in their processes and businesses.
This huge network built through outsourcing makes possible combination of internal and external resources and capabilities, which enables synergies.
Synergy means that a system of several elements interact to produce a different or a greater effect than each element would do individually. In this case of corporate synergy, this is mostly about revenue effects.
In fact, when companies decide to outsource, the goal is to generate more revenue by using the network and the provider’s resources and capabilities.
That is the reason why it is necessary to use the network properly in outsourcing processes. In fact, companies must pay attention to the suppliers they choose in order to create value because if they do not use the network correctly, negative synergies can also appear.
The combination of internal and external resources enables companies to use the complementary existing between the different business partners.
Indeed, they all have their different advantages and strengths, and they must use them in order to create the more value they can. This is how the network brings value when outsourcing.
Collaborative partnerships can bring very important and profitable synergies, particularly when there is a strong relationship between two partners from two different areas.
Indeed, the partnership is based on the full complementary of the business partners, which brings significant synergies within the outsourcing network.
Synergies bring many advantages in outsourcing. Indeed, not only they enable saving costs, but they also are the basis for value creation.
Every partner has its domain of competencies with a certain expertise, and that is what brings synergies. Expertise is a key factor in outsourcing because it leads to value creation, through synergies.
All this is the very reason of the multiplication of strategic alliances over the last decade. Indeed, the number of strategic alliances has almost doubled in the past ten years, and this number is going to rocket even more in the future.
Indeed, many companies now understand the purpose of outsourcing. Moreover, they know that they have to outsourcing in order first to survive in the market and then in order to create more and more value thanks to synergies.
That is the reason why outsourcing has become very attractive for companies and the network is now something indispensable, which means that companies cannot keep working alone, or they will go bankrupt at some point.
However, it has to be based on a long-term agreement because synergies can only exist for long-term relationship. Indeed, it is not possible to benefit from the network resources and capabilities in a short-term agreement because a strong relation needs time and processes also need time to be properly implemented.
For this reason, it is necessary to prepare the process well in order to undertake it without any doubt of its success, or a very low probability of failure.
Value of Resources and Capabilities
What enable synergies and value creation are resources and capabilities. There are internal and external resources and capabilities that will help the company to benefit from outsourcing and relationships advantages.
First, there is value generated from resources and capabilities of external providers. This is about out-tasking, using external providers that will undertake tasks that are not in your core competencies.
This outsourcing process aims at using the provider’s expertise and performance. Suppliers have specialized capabilities that will create value for the outsourcing company. Indeed, the company uses its capabilities to focus on core competencies and uses the external providers’ capabilities for other tasks.
In this perspective of the value created by using resources and capabilities of an external provider, there are two different aspects that bring synergies within the outsourcing relationship: task specialization and knowledge diversity.
1. Task specialization
The specialization of the provider is the cornerstone of the attractiveness of outsourcing. Indeed, the provider is specialized in the task he is undertaking for the outsourcing companies.
The supplier executes the same task for all his customers, and that is the reason why suppliers are experts in their domain. Expertise is the key factor of the effectiveness of outsourcing processes.
By executing the same process for many customers, the providers can accumulate a lot of experience and knowledge about this very process and that is what enables them to become experts.
Task specialization is all about “learning by doing”, which is a key factor for success in outsourcing. Indeed, standardization and specialization lead outsourcing processes to success.
Besides, it also enhances the innovation performance because suppliers have specialized capabilities and access to human and organizational resources, which enables them to know the process perfectly and be better at innovation.
They can achieve the efficient degree of knowledge and expertise that will permit innovation and improvements.
2. Knowledge diversity
The providers have a broad knowledge about different industries because they produce for a different kind of customers, although they are still doing the same activity.
Thus, the supply network is a tremendous source of diverse knowledge about a different kind of industries and companies, which means different processes.
Thanks to this diversity of knowledge within the supply network, suppliers can easily manage to apply their methods in different conditions and circumstances. Diversity helps suppliers to be able to deal with any situation, which is a great advantage for them and their customers.
In fact if companies wanted to do every task on their own, they would have less satisfying results because of their lack of knowledge and a lack of visibility on their business. That is the reason why the supply network is a great strength for outsourcing companies, thanks to knowledge diversity and expertise.
Thus, the network generates value for outsourcing companies; it is an external value creation. Every supplier can innovate thanks to his own knowledge.
They all have their domain of expertise and can use all these knowledge in any case, for many different customers. Besides, it permits to be very fast for companies and thanks to their supply network; they can enter the market faster than companies that are not outsourcing.
Without suppliers, companies would not be performing as much as they can thanks to outsourcing processes. Thus, knowledge diversity creates value for outsourcing companies.
We have just seen the value generated from resources and capabilities of an external provider. Secondly, there is also value created from shared resources and capabilities of both the company and its suppliers.
Indeed, synergies can appear thanks to the relationship between a company and its suppliers. They are working together in order to improve the process, and their performance, and this is what creates value.
Thus, there is value creation due to the relationship with business partners, who are working together, in order to achieve the same goals. This is how results can be improved and how outsourcing processes create value.
3. Inter-firm complementarity
In this perspective, we are talking about the co-created value. In fact, value is created from shared resources and capabilities of all the parties within the network.
When they are all working together within the network, it makes it easier to enter intermediate markets, and it is also faster to get the results expected thanks to greater opportunities.
In fact, companies are complementary, and this is what enables the network to have more opportunities. As companies’ resources and capabilities are complementary, they can benefit from more opportunities according to other resources available within the network.
Thus, there are much more opportunities when companies work together in order to make better results through greater performance. Consequently, outsourcing processes enable to create value through shared competencies within a network. This value creation comes from synergies.
The best example of commentaries is Research and Development (R&D). Indeed, it exists Research Joint Ventures among companies that can even be competitors on the market.
Indeed, for departments like R&D, it is much more beneficial to make alliances between companies because it enables to have double resources, which means more results and faster.
That is why it can be beneficial to associate with another company on the same market, at least for sharing some resources that are useful for both.
It is quite a common thing to find research alliances, particularly in high-tech industries. Thus, we can say that the network is the most important thing in outsourcing because it is the cornerstone of value creation.
Indeed, without the network there is no synergy, no diversity and no complementary between companies, whereas those are key factors to the success of the process. That is the reason why companies should not neglect the importance of the network.
To summarise these two parts about synergies and resources & capabilities, one word can be sufficient: network. Indeed, network enables to create synergies thanks to the multiplication of resources and capabilities.
This is the basis of the value creation through outsourcing. Suppliers are experts, and this is what enhances performance and speediness thanks to specialization. Besides, there is a great complementarity among companies that belong to the network.
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Course Structure
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Strategic Frameworks for Outsourcing Decisions
4 lessons
This Chapter is based on OUTSOURCE, OUTSMART, OUTPROFIT – KNOW WHEN TO DO IT, AND HOW TO DO IT WELL by the author. Sydney, Australia based author Vivek Sood is the world’s foremost authority on Global Supply Chains.
Fundamentally, Each Of The Department Carries Out Its Tasks At Four Different Levels – The highest level being strategic, the next lower level being tactical, the next lower level being operational and the finally the lowest level is the executional level. At the lowest level the execution of the task is carried out, while at the highest level the plans are long term all-encompassing plans.
Outsourcing has been around for a long time and is widespread. While biases abound, there are relatively very few situations in which a company must not outsource, or must outsource.
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Myths About Outsourcing and How to Know the Truth
3 lessons
You want to find out how to use the leverage provided by outsourcing without the risks inherent in all leverage. We will be covering that material in the second part of this book. However, I want to point out in this chapter that everybody who in interested in the topic of outsourcing also have pre-conceived opinions on the topic. No doubt, you will have some too.
This myth pervades the thinking in some executive circles, based on the assumption that the decision to outsource can not only be easily implemented, but also easily reversed! However, in most cases this is far from true. Outsourcing is a strategy not a tactic. You are making a multi-year commitment, not only because of the contract, but to make the financial reasoning work; you also have to dismantle the PP&E, systems and people you have built up over time.
We will however, briefly focus on three relevant parties - BP, Transocean and Halliburton for the sake of discussion relevant to this Chapter - on modularized outsourcing.
To answer the key question above, let’s first examine a typical project cost structure. It is estimated that the software costs are no more than 15-20% of the overall cost of systems renewal.
Obviously, depending on the contractual terms and conditions specific to the arrangement between any two or more parties, there can be an infinite number of variations of the outsourcing arrangements.
Outsourcing is a common practise in the current context but many contracts are still failing. New models and perspectives enable companies to find new way of outsourcing and try to fix the problems.
Results-focused Outsourcing and Modularization is very attractive for companies in the current global context because it brings flexibility, control and cost reduction.
In all our project work in outsourcing, nothing comes close to value added as in preparation. Frequently we come across situations where companies think they have done adequate preparation, when a few simple questions reveal that it was far from adequate.
If preparation was the critical first step in the process, then the next one, designing a fit-for-purpose market engagement process is the most artful step in the entire process. As we will note later in this chapter.
Outsourcing can be a great success, as well as it can turn into a disaster. That is the reason why the following points need to be carefully analysed in order to meet the objectives of the company through strategic sourcing.
Selection is the next step in our outsourcing process. Indeed, we have already seen that preparation was crucial, and engagement was the next step after preparation.
We can define almost all the selection methods that exist, although we could find more methods that combine some aspects of each one of the following methods.
Although it can take time to establish a criteria evaluation, it is necessary for the customer not to be surprised in the future. There are different selection methods and one can be better than others according to the project's characteristics.
Outsourcing processes, sharing information is necessary and very beneficial for all parties. Sharing information among all the supply chain partners seems to be the best strategy for managing integrated supply chains.
To conclude, integration is what links all the different subsystems or components of the process. It brings them all together in one unique system and enables them to work together.
Value creation is the final key of the outsourcing process. It involves a lot of expertise, knowledge on the process, as well as the needed capabilities and tools.
Value-creation is the primary goal of any business. Most companies must agree on the fact that Results-focused outsourcing is the best way to create value.
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