A Strategic Approach towards Maximizing Organization Value
Purpose – The purpose of this paper is to cull out outsourcing lessons from real life cases of renowned global companies and derive some models of outsourcing which may be used by scholars and practitioners for outsourcing in modern global context.
Design/methodology/approach – A case based analysis of outsourcing decision making is done based on the global companies like Boeing, Microsoft and Rhodia. Conceptual models of outsourcing were derived on the basis of given cases. The paper integrates concepts including a range of recently published (1993-2005) theoretical works, practitioner developments in practice and industry studies (cases).
Findings -The paper provides information and action approaches to outsourcing that may increase the competitive advantage of companies. In addition, the paper provides a useful perspective in the proper use and applications of outsourcing. It outlines the benefits of adopting outsourcing techniques and offers practical suggestions for maximizing organizational value through integrated answers.
Research limitations/implications – The theoretical concepts that form the foundation of the paper appear to have a significant application to the outsourcing decisions. Some, but not all, have been tested empirically.
Practical implications – This study allows global managers to reformulate their outsourcing decisions to achieve a more successful outsourcing in a more strategic & integrated manner.
Originality/value – This paper describes current trends in outsourcing, explores the elements of outsourcing and presents them into an enhanced integrated framework. It offers the potential of improving the success of outsourcing in practice, resulting in increasing effectiveness. Moreover, it provides a strategic perspective that is necessary for an effective outsourcing process.
Keywords – Outsourcing, Competitive Advantage, Off shore location, Vendor selection
Paper Type – Case Based Conceptual Study
Procurement plays an important role in helping companies to achieve the desired savings and profitability. Strategic sourcing has gone to new levels and gone to new levels for building process excellence and aligning capabilities with requirements of corporate buy, procurement have a key role in the corporate quest for value growth (Andersen and Katz, 1998).
Many researchers say that their greatest flashes of inspiration come not from extraordinary events but from everyday activities. Intuitive leaps are triggered by observing life unfolding around them, they say. We are all familiar with the anecdote—historically accurate or not—of an apple falling on Isaac Newton’s head while he rested beneath the tree, jolting him to contemplate universal gravitation. And readers of Thomas Friedman’s best-selling book on globalization, The World Is Flat, understand why he conceived of his metaphor of a level global playing field one night after visiting Bangalore, India’s Silicon Valley. Outsourcing has rapidly become a part of the everyday social lexicon. Harvard Business Review has identified outsourcing as one of the most important management ideas of the past 75 years.
Outsourcing saves precious resources and allows focus while building on core competencies. Further, it leads to more profits, increased share holder value, greater efficiency and better services. Therefore, more and more companies are moving their non-core business processes to outsource providers.
International outsourcing represents an opportunity to obtain materials at a lower cost than is possible in the home country (Cavusgil et al., 1993). The trend towards such sourcing has been on the increase. To reduce costs European and Japanese companies are relying less on internal sourcing of materials (Swamidass and Kotabe, 1993). American firms too are taking advantage of such trends and outsourcing mainly from Mexico and Southeast Asia. For example, Nichols and Taylor (1995) predict a major shift in the procurement from Mexico of high priced and high labor content materials that are inexpensive to transport.
Strategies which result in lower procurement costs without significantly compromising quality (Min and Galle, 1991) or increasing transportation charges are expected to become more widespread (Caddick and Dale, 1987).
The recent General Agreement on Tariffs and Trade (GATT) and the establishment of the World Trade Organization (WTO) have helped to globalize the sourcing option.
Countries may now be identified as production platforms where a specialized activity in a company's value chain can occur and provide a competitive advantage (Porter, 1986). These countries might possess special endowment factors such as low labor cost, availability of resources, good infrastructure, skilled workers, and local demand for manufactured products (Porter, 1986). To exploit these advantages, a firm may source from a number of locations to minimize overall cost (Alguire et al., 1994) and gain access to technology and quality output.
Global sourcing is also advocated as a means of achieving economies of scale, improving quality, and preparing export markets by obtaining knowledge from purchasing activities overseas (Arnold, 1989). Sourcing may now be regarded as a network (Johanson and Mattsson, 1988), in which firms try to manage the flow of materials. As a result of these changes, 90 per cent of the large US firms now source globally (Fawcett and Birou, 1992). This percentage is expected to increase even more.
Outsourcing is a phenomenon that has been one of the most sustained (Lewin and Peeters, 2006; Sanders et al., 2007) yet controversial trends over the past few years (Venkatraman, 2004), and consequently researchers have found it attractive. In particular, offshore outsourcing has become one of the mainstays of several different research disciplines, including international business, strategic management, supply-chain management and information.
Drivers for Outsourcing
Table 1: Drivers for Outsourcing
Access best in class business processes
Harness leading technologies
Free up management time
Acquire new skill
Acquire better management
Focus on strategy
Focus on core function
Avoid major investments
Assist a fast growth situation
Handle overflow situation
Jump on Bandwagon
It may be due to one of the previous reasons, but a deeper problem may be that the function in question is not doing a good job of trumpeting its accomplishments or of showing management that the cost of keeping the function in-house is adequately offset by the resulting benefits. In these cases, it may do no good to outsource the function because management may be replacing a perfectly adequate in-house staff that is not good at publicizing itself with a supplier who performs no better but who is quick to point out how much it is doing for the company. If management suspects that this may be the reason why outsourcing is being considered, it is useful to bring in a consultant who can review the performance of the in-house employees and see if they are, in fact, doing a better job than they are saying.
What Concerns Most?
In spite of its growing importance in various disciplines, however, several aspects remain unclear (Ramamurti, 2004). One of the major concerns is making of the location decision, which, despite the recent growth in interest, has still received limited attention (Bunyaratavej et al. 2007; Doh, 2005; Kotabe and Murray, 2004).
Although it is quite obvious that forfeiting the hierarchical control of an activity raises different managerial concerns, different aspects of offshore outsourcing are often explored in the light of various theories and existing research on making ownership based [equally captive] foreign investments, i.e. foreign direct investments [FDIs] (Graf and Mudambi, 2005).
For instance, the application of Dunning's (1980, 1988) eclectic paradigm facilitates elaboration when the specific advantages of ownership (O) and location (L) apply, but not the advantages of internalization (I) (Hätönen and Ruokonen, 2007). In other words, companies benefit from producing an activity abroad, but not if they use internal resources. There exists no “internalization advantage” when the benefits of external production outweigh those of internal production (Dunning, 1988) and as a consequence companies shift towards ‘buying’ instead of ‘making’.
Previous discussion of Literature leads to the following research questions to be addressed in this article:
What factors influence the offshore location decision when ownership of the activity is transferred to foreign vendor?
What impacts a vendor selection?
How offshore outsourcing can contribute to the competitive advantage of an organization?
The main idea of case development and case based research involves generating theory and models (Eisenhardt, 1989). This article uses case approach for certain model developments for organization who want to leverage global sourcing. Case research is a form of qualitative research with insights from literature, interviews and news analysis. The aim of case based study is to build on a theory on the basis of the insights gained from field-based interview and case data or to elaborate further upon a prior theory or a framework by making it clearer, adding more details or broadening the scope.
A qualitative research is useful in case of creating a novel and accurate insights in the following areas:
It has been argued that qualitative case research is useful in terms of creating novel and accurate insights (Eisenhardt, 1989; Halinen and Törnroos, 2005), particularly in areas in which
There is limited prior knowledge
The existing situation seems to be inadequate
In a situation of complex and multiple variables with lack of clarity on their interdependency.
The choice of research context was based on its suitability, for the purposes of the study. The cases were eventually chosen from different industries and with different line of operations.
CASE 1: Boeing –Generating Competitive Advantage though Outsourcing:
Boeing is the world's leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. Additionally, Boeing designs and manufactures rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles and advanced information and communication systems. As a major service provider to NASA, Boeing operates the Space Shuttle and International Space Station. The company also provides numerous military and commercial airline support services. Boeing has customers in more than 90 countries around the world and is one of the largest U.S. exporters in terms of sales.
The Boeing Company is one of the two premier manufacturers of commercial jet aircraft in the world, holding more than 45 percent share of the global market for large commercial jet aircraft. Despite its large market share, in recent years Boeing has found it tough going.
Boeing designs and manufactures rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles and advanced information and communication systems. As a major service provider to NASA, Boeing operates the Space Shuttle and International Space Station. The company also provides numerous military and commercial airline support services. Boeing has customers in more than 90 countries around the world and is one of the largest U.S. exporters in terms of sales.
Headquartered in Chicago, Boeing employs more than 1,58,000 people across the United States and in 70 countries. This represents one of the most diverse, talented and innovative workforces anywhere. More than 90,000 of our people hold college degrees--including nearly 29,000 advanced degrees--in virtually every business and technical field from approximately 2,700 colleges and universities worldwide.  Our enterprise also leverages the talents of hundreds of thousands more skilled people working for Boeing suppliers worldwide.
The company’s problems are twofold  :
First, Boeing faces an aggressive competitor in Europe’s Airbus industries. The dogfight between Boeing and Airbus for market share has enabled major airlines to play the two companies off against each other in an attempt to bargain down the price for commercial Jet aircraft .Second the airline business is quite cyclical and airlines sharply reduce orders for new aircraft when their own business is in a downturn. This occurred in the early 1990s and again after the events of September 11, 2001, hit the airline industry hard, and resulted in slumping orders for Boeing and Airbus.
During down turns ,some of which can be lengthy ,intense price competition often occurs between Airbus and Boeing as they struggle to maintain market share and order volume in the face of falling demand. Given these pricing pressures, the only way that Boeing can maintain its profitability is to reduce its own manufacturing costs. With this in mind, Boeing is constantly studying make or buy decisions. The objective is to identify activities that can be outsourced to sub contractors, both in US and abroad, to reduce production cost.
When making outsourcing decisions, Boeing applies a number of criteria. First Boeing looks at the basic economics. The central issue is whether an activity could be performed more cost effectively by an outside manufacture or by Boeing  . Second Boeing considers the strategic risk associated with outsourcing an activity. Boeing has decided it will not outsource any activity deemed to be part of its long term competitive advantage, particularly design work and final integration and assembly .Third Boeing looks at the operational risk associated with outsourcing an activity. The basic objective is to make sure Boeing does not become too dependent on single outside supplier for its critical components. Boeing philosophy is to hedge operational risk by purchasing from two or more suppliers. Finally Boeing considers whether it makes sense to outsource certain activities to a supplier in a given country to help secure orders for commercial jet aircraft from that country. This practice is known as offsetting and it’s common in many industries. For example Boeing decided to outsource the production of certain components to China. The decision was influenced by forecast suggesting that the China will purchase more than US $ 100 billion worth of commercial jets over the next 20 years. Boeing hope is that pushing some subcontracting work China’s way will help Boeing gain a larger share of this market than its global competitor Airbus.
By 2003, Boeing was outsourcing some 64% of the work involved in building a commercial Jet aircraft, up from 50 % a decade earlier, with companies in Japan, Italy and elsewhere shipping sections or entire wings to Boeing. For its part, Boeing has decided to focus its efforts to design, final manufacturing integration and assembly and marketing and sales. 
Every other activity can be potentially outsourced. There are signs that Boeing will outsource substantially more work than ever when making its latest Jet, the 7E7,a ‘super efficient’ wide body Jet scheduled for market introduction(D Gates,2005). 
Model- Learning from Boeing
Market & risk Analysis
Market Engagement Models
Alternative Scenario Assessment
Problems with Outsourcing:
Boeing (BA), beset by repeated snarls that have delayed commercial deliveries of its 787 Dreamliner into early 2010, is rethinking the global outsourcing model that critics say has caused much of the nearly two-year holdup.  The company is making plans to bring more work back in-house.
Frustrated by production and design snafus that Boeing engineers say have led the company repeatedly to send staffers out to suppliers to iron out difficulties, the company's top executives are suggesting they will rely less on their outside suppliers. While the forthcoming version of the Dreamliner, the 787-8, may be affected by the plans over time, efforts to scale back on outsourcing are expected to be more aggressive on future versions of the plane, especially the 787-9, scheduled for delivery in 2012. 
Boeing, which had originally planned to put its first 787 into the air in August 2007, now expects the initial test flight by this coming June. Customers, some of them irked by the delays, should take delivery on the first version in the spring of 2010. Boeing's stock, which topped 106 a share in the fall of 2007 as record orders for the new plane rushed in, now hovers around 42.
Putting Suppliers on Notice
Because of political and commercial sensitivities, Boeing executives are playing their cards close to the vest on just how far they will go in backing away from outsourcing. Changes could unsettle suppliers who are believed to account for some 70% of the 787-8 in dollar terms, a far larger share than Boeing has outsourced on other planes  . Chicago-based Boeing has outsourced much of the work on the new plane in a bid to contain costs and because foreign purchasers and their governments like to see work on the planes done in their countries.
Boeing's legion of partners span the globe. Mitsubishi, Kawasaki, and Fuji in Japan, for instance, produce the wings, forward fuselage, and center wing box, respectively. Sweden's Saab makes cargo doors and Italy's Alenia Aeronautica produces a horizontal stabilizer and central fuselage. Companies in Britain, France, Germany, and South Korea make other parts. And at least 10 U.S. companies, ranging from General Electric (GE) to Moog (MOGA) chip in on various parts.
However, high-level managers in the commercial planes division have been hinting for weeks that changes in this supply chain are in the works. Scott Carson, who heads Boeing Commercial Airplanes, in late November, told editors at Aviation Week (like BusinessWeek, a publication of The McGraw-Hill Companies (MHP)) that Boeing is determined to fix its supply chain woes. "We fully recognize that we made some mistakes in that regard," Carson said. "On the 787-9, we are pulling more of the engineering back inside to try and alleviate some of the issues we've had on the 787-8." 
Case 2: Microsoft –Vendor selection:
When Microsoft decided to enter the video game market with it’s X box gaming console it faced a crucial strategic decision: Should manufacture the Xbox? or outsource manufacturing to third party, and if so, whom? Although Microsoft is primarily known as a software company, it has a long had a small but important hardware business selling computer mice, keyboard and joysticks under its brand name. However, Xbox was different. This was not a simple computer peripheral; it was a fully functional specialized computer, with multiple components including microprocessor, memory chips, graphic chips and an internal hard drive. Microsoft quickly decided that it lacked the capability to make the Xbox itself and manage global supply chain. After reviewing potential suppliers ,it decided to outsource assembly and significant logistic functions to Flextronics ,a Singapore based manufacturer .Flextronics has global sales in excess of US $ 13 billion and more than 1,00,000 employees .In addition to Microsoft ,customers include Dell ,Ericssson telecom AB, HP, Siemens AG, Sony Ericsson and Xerox. 
Microsoft had already contracted out the manufacturer of computer mice to Flextronics, so it knew something about how the company operated and was happy with the cost and quality of Flextronics products. In looking for a supplier Microsoft wanted a partner that could manufacture the X box at a low cost , maintain very high product quality, respond quickly to shift in demand and share related information on production schedules ,product quality and inventory with Microsoft on a real time basis. Flextronics seemed to fit the bill for a number of reasons.
Flextronics has been pursuing and industrial park strategy that enabled the company to tightly manage it own supply chain , reduce chances of supply disruptions , lower costs which have been passed to Microsoft in the form of lower prices for X box. This strategy required key suppliers to site their factories next to a Flextronics assembly plant at low cost locations near customers end markets. Flextronics has presence in Brazil, China, Mexico, Hungary & Poland.
Initially Xbox was manufactured in Hungary (for sale in Europe) and Mexico (for sale in N America & Asia). Within a year they shifted from Hungary to China, where labor cost was a fraction. In 2003 Xbox production moved from Mexico to China.  China proved to be a sub optimal location for manufacturing of X box. Flextronics can execute production shifts very quickly – within three weeks since all the relevant manufacturing data in centralized information system. 
Microsoft feeds information using web based systems. Flextronics manages its inventory closely with demand supply in real time. Microsoft overall manages 40 strategic suppliers for X box, including manufacturer of microprocessor, graphic chips, hard drives and flash memory.  (Flextronics handles supply of inputs like circuit boards plastic molding) The information exchange between Microsoft & Flextronics ensure that production schedules between all the players in supply chain are tightly coordinated so inventory is minimized ,shortages are avoided and demand & supply are balanced.
Microsoft and Flextronics had worked for years together; there were strong personal relationships between employees of the two companies. This helped to cement the business transaction. Some Microsoft people are located at Flextronics US operations centre in San Jose ,California and some Flextronics people at Microsoft headquarter in Redmond ,Washington(J Carbone,2002). 
Strategic decision for new venture
Make or Buy: Focus on core business
Previous relationship with the list of vendors
Strategic fit and operational fit
Cost and value
Ability to customize solutions
Model - Learning from Microsoft
Case 3: Partner Choice Framework for Rhodia Inc
Rhodia is a world leader in the development and production of specialty chemicals. We provide added-value products and high-performance solutions to diversified markets, including automotive, electronics, flavors and fragrances, health, personal and home care, consumer goods and industrial, through its six global enterprises.  It has strong geographic presence in high-growth markets, combined with the dedication of our 14,500 employees and our resolute commitment to sustainable development places Rhodia in the strongest of positions to face the challenges of today’s industry. Rhodia is listed on Euronext Paris. Rhodia leads the world in the production of mild amphoteric surfactants, phosphorus chemistry and guars and derivatives, as well as in high-performance silica’s, rare earth-based, formulations and diphenols. Rhodia is number two in polyamides and the number three producer of cellulose acetate tow.
Rhodia is recognized as the major sulfuric acid regenerator in the US and, as one of the first companies to implement the Clean Development Mechanism of the Kyoto Protocol.In 2001, its worldwide sales topped €7 billion.  Yet for all its strengths, the French company has not been immune to the persistent slowdown in the chemical industry, a situation that has been aggravated by a heavy debt burden. Tackling Rhodia's profitability challenges has required some radical restructuring, including no fewer than five change initiatives at group level. One of these change programs, a drive to improve the efficiency of Rhodia's fragmented finance function, has turned out to be the most radical of all.
By transferring the bulk of its finance and accounting processes to a shared service center in Prague, Czech Republic (where those processes are currently being standardized), Rhodia revolutionized an operation that had been scattered across more than 60 locations in seven European countries.  The transfer, undertaken in partnership with Accenture, which runs the center, is ongoing. But in less than two years, outsourcing has already delivered substantial benefits for Rhodia—among them, a 30 percent reduction in costs. What's more, Rhodia's approach to transforming its finance function has put the company in the forefront of business process outsourcing in European chemicals. Rhodia was breaking new ground by deciding to outsource at all; this simply wasn't done in France. Moreover, according to Accenture engagement partner Christian Marchetti, it is also "probably the first European company" to do so on such a scale, in central Europe and on a wholly new, Greenfield site.
Prague was, in some respects, a natural choice for Rhodia. The company initially considered creating an internal, pan-European shared service center for its finance function, which would have boosted productivity simply by consolidating the work of the various processing offices. However, any potential benefits would have been severely compromised by the cost of such a change. "The existing IT landscape was extremely complex," explains Marchetti in an article. "Rhodia's European offices operated with three enterprise resource planning systems, which included eight different SAP platforms and 12 different purchasing systems." Renewing all these systems across multiple countries would have been prohibitively expensive.
By early 2000, the prospect of actually outsourcing the finance function to an external provider capable of delivering a comprehensive, integrated solution in a low cost, well-resourced location was looking increasingly attractive to Paul Van Beveren, Rhodia's change manager for finance. But before he could choose a provider, he needed to decide on the location.
Southern Europe—Lisbon, for example, or Barcelona—might have filled the bill. Central Europe, by contrast, was attractive to Rhodia; the company had operations in Poland and an important plant in Slovakia. Consequently, the search was narrowed down to three potential sites: Prague, Kraków and Budapest. Based on a number of criteria, including both cost and quality of resources, Prague quickly emerged as the most attractive of the three.
First, labor costs—some 70 percent of the total cost of any shared service center—were "significantly lower" in the Czech Republic than in Poland, explains Van Beveren. Prague also offered one of the best educated populations in Europe, if not the world: 88 percent of the Czech labor forces, between the ages of 24 and 64 have completed secondary school. Add to this excellent transportation and communications facilities, as well as some of the best values in commercial real estate in Europe, and the Czech capital came out well ahead of its competitors.
As per an Accenture report, Van Beveren still had to sell the whole idea of outsourcing to Rhodia's management. "Outsourcing is still a very new concept in Europe," he explains. "Many companies fear a loss of control." He need not have worried. Rhodia Chairman and CEO Jean-Pierre Tirouflet "had no preconceived notions" about the outsourcing concept, says Van Beveren. "His attitude was, 'If it can improve profitability and we, have the guarantee that it will not affect quality, let's do it.' " In May 2000, Rhodia's executive committee gave Van Beveren the green light to outsource, and by early July, requests for proposals were circulating among the big consultancies. At the end of September, Accenture was selected. According to Van Beveren, Accenture's commitment to Prague was decisive. "They were willing to go to what was a completely greenfield environment," he says. "No one else was." 
To be sure, Accenture, which had had a large practice in Prague for more than 10 years, was no stranger to this ancient city at the heart of Europe. Nor was the company a novice in business process outsourcing—far from it. Between having 20 delivery centers worldwide offering finance outsourcing solutions, and its emphasis on using the outsourcing concept as a strategic tool, Accenture was capable of achieving the sort of improvements in information flow and decision making that Rhodia sought. Accenture's shared service center in Nove Butovice, a 65,000-square-meter, four-building business complex to the west of Prague, was almost tailor-made for Rhodia, the center's first client. 
So far, the transfer of the company's finance function to the site has been not only remarkably smooth but also surprisingly swift—a tribute to the power of a partnership that Van Beveren likens to a marriage. "If one of you makes a mistake," he says, "you can't lay back and tell [the other] to fix it—you have to jump in and help one another until it is solved. You can't put that kind of a relationship into a contract—it has to be built on mutual trust." Indeed, because centralizing processes would involve substantial organizational change for Rhodia, a cooperative relationship was essential. The six-and-a-half-year contract signed by Rhodia and Accenture in March 2001 recognizes this need for cooperation: It commits Accenture to run the Prague operations and provide finance back-office services to Rhodia subsidiaries in France, the United Kingdom, Germany, Spain, Italy, Switzerland and Slovakia. Accenture is responsible for the "knowledge transfer" process—a key element, for it was assumed that no employees from the existing finance organizations would want to transfer from their home countries, and new personnel, therefore, would have to be recruited and trained. 
The project has not been without its challenges, of course, especially in regard to these social aspects. The first wave of the transfer, which went live in July 2001 and involved UK finance, went relatively smoothly. But the second wave, in November 2001, which involved consolidating activities from France, Switzerland and Slovakia, was considerably more problematic.
Van Beveren insists, however, that "even in difficult situations, we had things under control." What's more, Accenture's rather novel approach—moving Rhodia's existing systems to Prague and then working on standardizing them, rather than standardizing first and trying to transfer the new, common system—has greatly facilitated the overall process. The project is not yet complete; additional transitions involving Germany are scheduled for later this year. But more than 150 people are now delivering back-office services from the Prague center to Rhodia subsidiaries in five European countries. The contract between Accenture and Rhodia is flexible enough to permit the "scaling up" of the current service to include just about every aspect of the finance function, as well as the addition of other support services. Van Beveren acknowledges that being able to share fixed costs with other center users would further reduce Rhodia's costs.
Model - Learning from Rhodia
Phase II: REQUIREMENT ASSESSSMENT
Phase III: LOCATION WHICH COUNTRY FOR WHAT?
Phase IV: LOOK FOR A VENDOR: SELECTION & CONTRACT
Phase V: CULTURAL FIT
Offshore outsourcing is one of the most sustained management strategies of the 21st century, and researchers are paying attention to this contemporary, yet complex and controversial phenomenon. Despite the increasing amount of research, from the theoretical and managerial perspectives several important aspects remain inconclusive. The focus in this article is on theory development in three complex areas. The first concerns the location, the idea being to identify the factors that influence the final decision, in which ownership is not the mode of control. Secondly, the aim is to explore whether offshore outsourcing facilitates international expansion via suitable vendor and thirdly how it contributes to the overall competitiveness of the organization. The article thus adds new aspects to the existing theory on outsourcing decision-making, which forms the basis of an emergent theory for future academic research.
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