Implementing Strategic Response to Outsourcing

2435 words (10 pages) Essay in Economics

17/10/17 Economics Reference this

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During the last thirty years, the growing awareness of ecological issues and the sensitive angle towards environmental problems has significantly modified environmental policy and economic methods within the leading industrial countries. The tendency is towards a post-Fordist regulation system, in which traditional command-and-control functions of the state are being substituted by the rising power of vital customers, environmentally aware stakeholders and governmental but market familiarized incentives.

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Most industrial companies have begun to basically rethink their ecological policies: “The conclusions businesses are coming to are that the environment issue won’t get away, that standards can solely rise,and that a proactive instead of a compliance strategy is the most effective. This is the chance for consultants” (Caldwell & Smallman 1996:17). Enterprises are turning towards a proactive environmental policy, attempting to become a” good corporate citizen”, with additional to voluntary initiatives or passing through environmental audits like ISO 14001 or the EU’s EMAS (Tapper 1997, Vollmer, Braun & Soyez 1996).

Here we will observe the emergence of a brand-new accumulation regime which means the requirement for permanent innovation and adaptation in environmental matters, generating a brand-new demand for specific services, seldom provided in-house. The implementation of recent managerial practices and instrument like environmental management systems, auditing schemes, eco-labelling etc., and the growing requirement for technical assistance are reasons for the dynamic evolution of the demand for specialised external services. Knowledge based enterprises offer services, such as in the fields of technical development, service industry, legal services, insurance, environmental due diligence, and advertising.

Introduction to Outsourcing

As the business competition progressively grows global and complex, corporations have realized that it‘s now not feasible for them to realize and maintain competitive position within the international market on their own. Thus, involving alternate firms via outsourcing has been a helpful strategic tool to leverage globally dispersed resources because it provides benefits in value, capability, and alternative aspects compared to in-sourcing. Thus corporations will focus their limited resources on their core ability and probably be efficient and effective within the international market (Kannan & Tan, 2002; Lankford & Parsa, 1999). In addition, the increasing environmental pressures have caused the business environment to vary in some ways(Zhu, Sarkis, & Lai, 2012). Corporations face rigorous environmental regulations, and customer demand for environmentally sound goods. Also, marketplace requirements can be a catalyst likewise when they attempt to enter a market with high environmental necessities like Europe (Defee, Esper, & Mollenkopf, 2009).

Many industrial facilities within adequate environmental compliance requirements have chosen not to dedicate existing workers or hire new workers to manage environmental compliance activities. Reasons involve the significant cost related to having dedicated environmental compliance workers and therefore the substantial liability related to the assigning of environmental compliance-an extremely complex and constantly evolving area- to staff members who have inadequate expertise and alternative responsibilities. These facilities have chosen to outsource their environmental compliance activities.

In the past decade, there has been a move among organisations towards outsourcing. With inflated fervour and conviction, organisations have wanted to reconstitute, build flexibility and cut down costs by outsourcing services and activities which used to be provided in house (Fill, c., Visser, E., 2000).The essence behind contracting and outsourcing is the belief that the firm in concern would have the benefit of a third party taking responsibility for several of its internal functions or processes instead of holding that responsibility on its own.

Due to the realisation of the power of the green consumer voting with their purchasing choice, there are an increasing number of firms exploring the probability of involving environmental matters into their operations. Companies are adopting environmental management practices in reaction to the increase in environmental legislation, considerations over liability, the direct and indirect costs or regulatory compliance, concern regarding overall firm-competitive position and public concern regarding environmental degradation (Gottlieb, 1995; Porter and Van Der Linde, 1995).On another note, its claimed that companies are increasing their profits and improve their environmental performance by laying emphasis on resource productivity. The environmental management pertain to environmental audits, Total Quality Management (TQM), pollution prevention plans, environmental coaching for workers, total cost accounting, life-cycle analysis, hiring a designated environmental manager, Research & Development (R&D), and not limited to environmental standards.

Transaction Cost Economics & Resource Based View Theory

Two influential theories within the study of outsourcing are Transaction Cost Economics (TCE) and the Resource-Based View Theory (RBV) of the firm. Each of these theories brings forward a valuable contribution to understanding outsourcing. Transaction Cost Economics specifies the conditions based on which a firm ought to manage an economic exchange internally within its boundaries, and also the conditions appropriate for managing an economic exchange externally, i.e. outsourcing (Williamson, 1975, 1985).Transaction Cost Economics argues that firms ought to take into consideration the level of transaction specific investment within the economic exchange as the principal determinant of whether an economic exchange ought to be managed internally within the organization. Another theory to understanding the outsourcing decision is the Resource Based View, which considers the firm as a bundle of assets and resources that, if used in distinctive ways, can bring forward competitive advantage (Peteraf, 1993; Barney, 1991). The Resource Based View is very important to the study of outsourcing, as superior performance achieved in organizational activities relative to competitors, would elucidate why such activities are internalized within the firm.

Transaction costs are the costs of activities beyond the cost of a product or service that are needed to exchange a product or service between two entities. Transaction Cost Economics focuses on how much effort is needed for the seller and buyer to complete an economic exchange or transaction(Williamson, 1981) and the factors influencing whether or not the organization opts to conduct a transaction within the open market within hierarchy like vertical integration, for instance, or supply chain. Transactions could embody dimensions of asset specificity, uncertainty, transaction, and market and hierarchies governance mechanisms for coordination. While a variety of constructs have been developed to evaluate Transaction Cost Economics theory, three of the most imperative ones that replicate the elemental aspects of the theory are asset specificity, uncertainty, and governance mechanisms or structures (Grover and Malhotra, 2003). Williamson (2008) argues that much of the explanatory power of Transaction Cost Economics theory turns on asset specificity. Asset specificity refers to the interchangeableness of assets that support a given transaction. Asset-specific investments generally represent costs that have very little if any value outside the exchange relationship. These costs can be in terms of human or physical specificity (Zsidisin and Siferd, 2001).

The greater the degree of asset specificity within the relationship, e.g., between buyer and seller, the more seemingly it is that companies can collaborate. Companies engaged in transactions involving highly asset-specific investments, as such, a greater level of dependency on their current customers than companies with lower asset specificity, are more seemingly to adopt environmental management practices like ISO 14001 (Delmas and Montiel, 2009).We tend to believe that this can be true in the case of dyadic relationships of the type we examine, in terms of environmental collaboration and investments not solely in ISO 14001 systems, but including eco-auditing, planning, design, and environmental technology. Uncertainty refers to the unforeseen changes in circumstances encompassing a transaction, and in a Transaction Cost Economics context is that the basis of disturbances to which adaptation is needed(Williamson, 2008). Uncertainty may occur before or after a transaction, and will be mirrored in constructs like unpredictability of the environment, technology, and demand volume and variety. Behavioural uncertainty includes performance evaluation and information asymmetry issues.

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The different kinds of uncertainty establish partially the extent of cooperation in organizations, as added uncertainty in relationship is connected to greater needs for cooperative adaptation (Williamson, 2008).Within the context we tend to examine, greater supplier demand uncertainty is probably going to require extra effort to collaborate with the focal client within the supply chain, in particular if the supplier represents a considerable component of the supplier’s sales. Markets and hierarchies represent polar governance mechanisms within the Transaction Cost Economics approach (Williamson, 2008),though the degree of cooperative or relational governance may exist as hybrid structures between markets and hierarchies (Heide and John, 1992; Bensaou, 1997).

Markets and hierarchies utilize completely different mechanisms to coordinate the flow of materials and services through the value chain. Hierarchies within corporations, e.g., vertically integrated entities control and direct this flow at a higher level within the management hierarchy, with the extent and power structures being the key role. In the case of market driven transactions, buyers have more power. The extent of cooperative behavior within the buyer-supplier relationship has been projected as a useful measure of the coordination construct (Rosen et al., 2000). Greater coordination and greater control are arguably more conducive to collaboration, particularly within the case of buyer-supplier environmental collaboration (Grover and Malhotra, 2003). Each of these relationships results in more collaboration overall and breaking out of this sort of relationship needs a higher transaction cost. Specifically, a hierarchical relationship, characterised by deeper extent of coordination, which incorporates increased frequency of communication and control, and characterised by more formalized outsourcing, is more conducive to collaboration, than a market relationship with weak collaboration (Dekker, 2004).

From an environmental perspective, for example, greater controls could require companies to contractually have ISO 14001 certification before they’re allowed to do business with a buyer. Supply chain coordination practices have been found to contribute to joint programs and involvement in environmental practices between buyer and seller(Simpson, et al., 2007). Control aspects of relationships and enforcement-related costs are anticipated for adoption of green supply chain practices (Vachon and Klassen, 2008). Monitoring is at times in place when certain opportunistic hazards exist and if these hazards have high costs resulting in greater transaction costs. It has often been argued that the larger the costs related to environmental collaboration, such as more performance metrics and performance monitoring costs, the less probable the environmental practices will occur (Tate, et al., 2011). These high transaction costs could require greater control mechanisms. Thus, if transaction costs for adopting environmental practices are high, then it has greater probability that controls are going to be put in place to ensure organizations adopt these environmental practices and collaborate.

The Resource-Based View Theory reflects the position that sustainable competitive advantage will be derived by corporations harnessing resources and capabilities that are valuable, rare, inimitable, and non-substitutable (Barney, 1991). These resources and capabilities embody the firm’s assets, organizational processes, and different salient attributes, along with information and knowledge that allow the firm to consider and implement strategies that improve its competence and effectiveness (competitiveness) (Barney, 1991; Daft, 1983) and could be combined into core competences (Hamel and Prahalad, 1990). Extensions of the Resource Based View involve the amalgamation of dynamic capabilities into the model (Helfat and Peteraf, 2003) and, significantly for our purposes, natural resources (Hart, 1995).

Collaboration is very important within the context of the Resource-Based View Theory, since by definition, it involves companies reciprocally leveraging each other’s resource base and capabilities in order to derive competitive advantage (Min, et al., 2005). Increasingly, collaboration-focused supply management capabilities tend to evolve to corporate-level core competences as competition shifts from the inter-firm to the inter-supply-chain level. Strategic supply chain management regards strategic collaboration as a vital cause of competitive advantage. This can be true for environmental supply chain collaborations (Gold, et al., 2010). Organizations that have internal environmental capabilities (resources)that maybe shared andutilisedwithsupplychain partners are going to bemore effective at developingsupplychain environmental collaborations.

An example of such collaboration is the green project partnership, as a resource provides competitive advantage with customers since it was connected to quality, flexibility, and environmental performance whereas partnership with suppliers was related to better delivery performance (Vachon and Klassen, 2006). Building these operational capabilities through greening of supply chains can develop them as valuable, rare, and difficult to imitate(Carter and Carter, 1998; Foerstl et al., 2010). Also, the probability that a supplier will collaborate effectively with key buyers environmentally depends on its own expertise and associated capabilities within the environmental management realm (Tate, et al., 2011).

Benefits and Costs of Outsourcing

There is emerging evidence that investors sometimes expect outsourcing to create value for shareholders (Hayes et al., 2000). The broad purpose of outsourcing is to: (1) lower the acquisition cost of some input by taking advantage of external suppliers’ lower costs, or (2) improve the standard of one or more inputs by buying some superior resource or capability from an external supplier. In either case, the supplier’s advantage is one that’s inimitable. If the firm could simply imitate the cost or capability advantage of potential outside suppliers, it would be able to easily bring the production of the activity “in-house”. Each of the direct cost savings and the acquisition of superior capabilities are often thought of, and described, in cost-saving terms – superior capabilities might solely be made at the same quality within the firm at a higher unit cost. However, it’s usual within the business strategy literature to investigate every specific activity on the value chain in terms of the firm’s ability to lower cost or to enhance quality.

Direct purchase cost savings or superior resources can be more than offset by inflation in governance costs. Governance costs are any costs in addition to production/purchase costs. Two varieties of governance costs are relevant within the selection between internal production of an activity and outsourcing: bargaining costs and opportunism costs. Bargaining costs embody the subsequent types of costs: (1) costs arising from negotiating contract details per se; (2)the costs of negotiating changes to the contract in the post-contract stage once unforeseen circumstances arise; (3)the costs of monitoring whether or not performance is being adhered to by the opposite party, and (4)the costs of disputes that arise if neither party wishes to utilize pre-agreed-to resolution mechanisms, in particular“ contract breaking” mechanisms. Whereas only the primary bargaining cost is experienced at the time of contracting (the others are experienced subsequent to outsourcing),nearly all of those bargaining costs are often anticipated and restrained at the time of contracting.


The difficulties and costs related to implementing a comprehensive strategic approach to outsourcing shouldn’t be underestimated. However, it’s necessary to emphasise that there are expected to be economies of scale and scope within the outsourcing activity itself. Hence, substantial efficiencies can only be achieved by establishing a group or department specifically dedicated to integrating company-wide experiences with outsourcing and exploitation of the relevant resources in this unit to ascertain project teams with expertise in specific outsourcing activities (Barthelmy, 2001).

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