The Emergence Of Outsourcing Business Essay
Outsourcing has become a strategic decision for organisations that want to become more effective and efficient in their operation in order to focus on the aspect of their business operations that they are more efficient in, and allow other experienced and efficient firms to handle the part they are less effective in. This can be seen from the following argument: The usual concept of firms, in which the different value chain activities are carried out within is being replaced by the idea of a network or even a virtual organisation, in which lesser operations are performed within the firm (Burn and Ash, 2000:15). In support of this position Ching et al, (1996) argued that firms should only undertake those functions which bring added value and characterize the firms’ competitive advantage, while the rest of the activities must be outsourced. Organisations normally prefer to outsource the activities which are not fundamental for maintaining their core competitive advantage.
The major reasons behind outsourcing are:
reducing time spent on a particular activity,
and improving quality of output (Dogerlioglu, 2012).
The word outsourcing describes transferring an activity which was normally undertaken in a firm to an external body which makes the organization as the customer of this external body (Varadarajan, 2009). The act of outsourcing is an acceptable exercise between private and public organizations and is a key element in business strategy. Outsourcing involves redesigning the boundaries that exist between a firm and its supplier (Mclover, 2005). It can result a significant change that characterize dismantling the normal structure of the organisation. The success of outsourcing is not without its criticism. As it can be seen from the argument of Oshri et al (2011) in which he stated that sourcing strategy poses several pitfalls, such as loss of critical or overdependence on an external organisation. This dissertation will try to explore the motivation behind why many firms today have chosen outsourcing, and why others have not really being attracted to outsourcing regardless of the acclaimed benefits associated with it.
In order to carry out this study the dissertation will be structure into five chapters. The first part of this dissertation will be tiled Chapter One. This chapter will be used to introduce the topic, give background to this study, specify the research question, problem, hypothesis, and use to state the dissertation objectives.
The second part of the dissertation will be titled Chapter Two. This chapter will be used to conduct secondary research on the topic by exploring existing literature in this field of study. The next part of the dissertation will be the Chapter Three which will be dedicated to designing a research method and methodology that will be applied in the primary research during the cause of this dissertation.
There will also be a Chapter Four in the research which will be used for the data analysis and findings that will be gathered from the primary research. The last chapter in this dissertation will be used for conclusion, give recommendations and to ultimately point out the possibilities of further research, which were not possible to be dealt with in this dissertation.
The Emergence of Outsourcing
The emergence of outsourcing can be attributed to numbers of inter-related factors within and outside the business environment. The breaking down of trade barriers between countries and continents lead to globalization. This provided many industries the platform to forge local, national and global partnership (Mcvlor, 2005). This tread created a fertile business environment for organisations to embark on business process outsourcing (BPO). The evolution of BPO organizations has presented a number of services to client firms that simply could not be efficiently in some of their activities. The emergence of outsourcing started in the manufacturing industries before later moving on to services and office functions, but today outsourcing has become a globally major industry.
One of the major drivers of outsourcing is the development in information and communication technologies. This can be supported by the argument that in recent decades innovative information and communication technology has critically changed the way business is carried out and the way in which companies compete (---, 2005). The outsourcing industry emerged from the manufacturing sector, before it was recorded in the IT sector. The early rationale decision behind organizations to engage in outsourcing was primarily based on cost-effectiveness. This was for manufacturing firms to locate production units close to the source of the raw materials which helped to reduce time of moving such materials, and ultimately reduce cost. This can be seen from the argument that one of the reasons why firms have outsourced a number of their primary supply chain activities is that the costs of remaining up to date in a multitude of supply chain activities has become financially burdensome (Lonsdale and Cox, 2000).This attracted many U.S based firms to Countries like Canada and host of others in the 1980s.
The greatest surge in outsourcing was noticeable in the 1990s during the IT outsourcing. Organizations during this era began to contract some of their activities to third-parties. Several countries including India, which has witnessed technological advancement in the area of IT, became a destination of choice for many IT firms such as business centers and software development firms on the U.S (ezinearticales). The benefit of outsourcing recorded in these earlier times became the driving force for many other business sectors such as medical, media transcription and even legal transcription to outsource some of their business processes due to the cost effectiveness advantage. These are made possible by the organizations evolving structures due to globalization opportunities, which allow organizations to embark on vertical integration (make internally) or outsourcing (source externally) (Mclvor, 2005). Presently business process outsourcing organizations are rapidly growing in China, India, Philippines, and all over the global. This surge has benefited several international organizations, and it is perceived to continue into the foreseeable future and even beyond
The acclaimed benefits attributed to outsourcing have compelled several organisations to choose to contract an activity within the firm to an external institution. Even though these benefits have brought cost reduction and lead to effectiveness and efficiency, several firms have stayed away from actually undertaken it. This can be supported with the argument of Ohsri et al (2011), in which he stated that global sourcing offer multiple benefits, such as;
cost advantage through attaining economies of scale,
access to unique expertise of a third party,
and reduction of overhead cost.
On the other hand, there are counter arguments about the benefits of outsourcing, even though these advantages are realizable by undertaken outsourcing. In the work of Mclover (2005), he pointed out that the anticipated cost reduction that several firms expected in the long is very difficult for them to account for it. That it also takes longer for firms to begin to see any benefit from outsourcing, and in many cases the part of the organisation activities that is outsourced might just be as a result of bad management. The weakness in this competences that lead to the outsourcing in the first place might reappear in other activity once the first have been outsourced. This research will explore these benefits and the pitfalls, and try to address how firms can better approach the outsourcing decision.
To research into the efficiency justification and cost benefits of outsourcing in organizations.
To explore the motivation, benefits and what drives potential firms to want to undertake outsourcing
To examine whether there existing considerable customer client relationship with the outsourcing success.
To examine the pitfalls and why firms are unwilling to implement outsourcing.
To examine the communication channels use in business process outsourcing
What is the perceived benefit that drives the success of outsourcing in the claims department of the Insurance business sector?
Despite the cost reduction, and profit benefit associated with outsourcing, most insurance companies still do not know that their organisation can benefit from it. This research will therefore try to address the reason why most of these firms still find it very unattractive to get involved in outsourcing. The research will also try to explore some of the pitfalls, and try to anwser why firms do not want to get involved in contracting some of the organisations noncore operation to external firm.
Outsourcing has become an important business approach, whereby a competitive advantage may be gained when products or services are produced more effectively and efficiently by outside suppliers (McCarthy and Anagnostou, 2004).
Since the emergence of outsourcing, it has recorded several acknowledgements both from the academic and practitioner alike. The acclaimed benefits and advantages of outsourcing is seen to account for the reason why many organisations outsource. This has seen cost driven down, providing access to expertise lacked internally within many of these organisations that decides to embark on outsourcing.
The essence of core competences has forced many organisations to rethink which of their unique value operations should be undertaken internally, and which activity should be sourced externally (Quinn and Hilmer, 1994). The need for organisations to remain efficient and effective in its operations can be attributed to the reason why so many firms decide to source for external capabilities. In addition to directing resources onto core competencies, other strategy issues which promote the consideration of outsourcing are;
- fast organizational growth,
- and the need for better flexibility to manage demand swings (Eisele, 1994).
Business process outsourcing has resulted in a widespread exercise among the private and public sector since the emergence of this practice has become a major part of business decision making strategy.
This chapter will be used to explore past literature on outsourcing, it will explore various arguments on the reasons why organisations decide to outsource. It will also examine some of the pitfalls and how organisations that choose to embark on outsourcing minimizes the communication gaps, and how such relationships are kept healthy. In order to undertake the literature review, the chapter will be divided into different topics;
The first topic is the motivational factors and shift towards outsourcing. This topic will be used to address the motivation behind why companies want to outsource.
In the second topic, the pitfalls and benefits of outsourcing will be used to explore some of the recorded benefit and risks involved in outsourcing.
The third topic, leveraging on external capabilities through outsourcing will be used to examine the opportunity of external capabilities and how outsourcing allows firms to leverage on such external capabilities outside of the firm.
The fourth and final topic will be used to explore inter organisational relationships that exist between the client and supplier in outsourcing.
Motivational factors and shift towards Outsourcing
The breaking down of trade barriers has contributed to globalization. This has changed the way companies do business. There has been a move away from national markets in the direction of a system in which national markets are integrating into a single global market (Hills and Jones 2001.This deregulation has resulted in the globalisation of external environments in which many organisations compete (Wirtz, 2001). This new trend of globalization has brought the need for organisations to remain competitive. This led many organisations to look for new ways of conducting their business that gives them competitive advantage. Mclvor, (2005), argued that competitive pressures and increased product complexity have led companies to create flatter, vertical integrated organisations. In order to respond to these changes taking place in today’s business environment many companies have chosen outsourcing as a way of accessing external capabilities. The varying business and economic environment motivates firms to outsource professional service activities to skilled personnel in less expensive labour markets (Gupta and Seshasai, 2007). Outsourcing is the handover of an activity to an external supplier; it is an alternative to internal production (Aubert et al, 2003)
The dynamic to outsource has been stimulated by management styles, such as business process reconfiguration (Hammer and Champy, 1993). This is important that essential solutions be found to business problems to attain step improvements. The use of downsizing to accomplish cost savings and increase flexibility, and the introduction of benchmarking, which encourages the companies to look outward to achieve world class performance force many firms to outsource. This can be collaborated with the argument of McCarthy and Anagnostou, (2003) that manufacturing organizations are complex systems that intentionally evolve in reaction to market needs, competition and innovation. They argued in support of this position, that directing this evolution is an essential management duty. This duty involves making decisions about the configuration and frontier of an organization, to guarantee competitiveness relative to market demands and stability. In support of the motivation of shift towards outsourcing, Kakabadse and Kakabadse (2000) concluded from their work that the major motivations for outsourcing are;
-Economic reasons which brings about superior specialization in the delivering of services, as outsourcing allows economies of scale and the durability of demand for the activity.
-Quality reasons which provides access to skills and competencies.
-Innovation, which brings improvements in quality through innovation. The development of new service products can result in new demands.
The figure (X) below represents distinctive elements of the outsourcing decision and shows where the motivators, benefits, risks, and factors are usually encountered during such decisions.
Adopted from Kermic et al, (2005)
The outsourcing marginal activities will enable the organisation to focus on its core business, in so doing enabling the organisation to maximise their returns on internal resources (Quinn and Hilmer ,1994). They also argued that outsourcing can give the organisation access to the external supplier capabilities and innovative efforts, which would have been expensive or difficult for the company to develop internally. This will also enable the company to reduce risks and lower cycle times and investments that are encountered in new technology adoption.
The motivation for outsourcing is multifaceted; this is because what drives one company to outsource might not be the reason why another decides to do the same. Even though the reason for outsourcing can be anchored on efficiency and cost reduction, there are other factors which may lead many organisations to embark on it. Kremic et al, (2006), argued that there are three major factors behind the motivation for outsourcing:
They stated that the need for organisations to drive down cost force them to look for cheaper ways of providing the same services. This can be supported with the argument (Fontes, 2000) that the desire to save indirect costs may also be responsible for the decision of outsourcing. There are other group of professionals (Mullin 1996, Elmuti and Kathawala, 2000) that believes that the motivation behind the shift towards outsourcing is strategy driven rather than cost alone. The strategy driven outsourcing argument focuses on improving business performance. This can be supported by the statement (Jennings, 1997) that due to intense competition, companies are compelled to re-examine and redirect scarce resources. Resources are usually redirected to the organizations core functions where they make the greatest positive impact. In support of redirect resourcing to core competencies, there are other strategic factors that motivate outsourcing (Large, 1999) such as rapid organisation expansion, changing technology and the need for greater flexibility. This can be supported by the argument that, organisations desire to respond quicker to customer requirements brings the outsourcing decision (Kermic et al, 2005).
There are opinions that also support political motivated outsourcing. This can be seen in the argument of Avery, (2000), that other variables responsible for outsourcing in the public sector organisations include the agendas of elected officials, public opinion, and current national and international development. Another argument in support of the political motivated outsourcing is the one put forward by Deakin and Walsh, (1996). Deakin and Walsh stated that managers in public organisation usually recognize an accountability improvement in the particular function being outsourced. The motivation for outsourcing also saw arguments in support of organisations’ desire to access innovation. This can be supported by the statement (Quinn,1999) that organisations invest in areas where it perceives an opportunity for unique value added and prevent large inventory, facilities, and development risks incurred by many of its rivals. This can also be supported by the argument of Lacity et al (1996) that efficient supplier management practices may perhaps drive down cost more drastically than was realisable through economies of scale. The motivation and the shift towards outsourcing can also be as a result of organisations’ drive towards performance improvement. Mclvor, (2005), pointed out that several specialist suppliers are able to attain higher level of performance in certain activities, that would have otherwise be difficult to do internally by many organisations. In the research carried out By Maltz, (1994), he discovered that the primary driver of warehousing outsourcing is not cost reduction, instead is the quality of service.
In the study carried out by Abraham and Taylor (1993), they argued that there are three motivational factors responsible for outsourcing;
- Savings on wage and benefit payments
- Transfer of demand uncertainty to the external supplier
- Access to specialized skills and inputs that organisations cannot internal provide.
The desire for many for to remain flexible also account for the motivation for why they chose to outsource (Mcvlor, 2005). The decision to outsource can provide a firm with higher flexibility through an external supplier, giving the organisation access to the capability to quickly increase production in reaction to changing condition at reduce cost. Flexibility is the ability to respond and adapt to changing conditions. It enables organizations operating in relentless competitive environments focus on their positive aspects and tries to find support from other firms for reinforcing their weaknesses, in order to keep their competitive edge (Dogerlioglu, 2012).
The need for specialization also drives organisation towards outsourcing. This can be seen from the argument (Quinn, 1999) that specialists in supply markets can develop greater knowledge depth, invest more in software and training systems, and be more efficient. These advantages can bring value to deliver better services at a lower cost to customer and at the same time allow the supplier to make profit. In support of the flexibility argument (Carlson, 1989) stated that outsourcing provides companies with greater capacity for flexibility, especially in the purchase of rapidly developing new technologies, fashion goods, or the many components of complex systems. This position was supported by the argument (Espino-Rodriguez and Padron-Robaina, 2004) that outsourcing impacts functional strategies, such as enhanced quality, better services and superior flexibility.
Benefits and Pitfalls of Outsourcing
There are several benefits that can be gained by companies that decide to outsource some of their activities. This can be seen from the argument (McCarthy and Anagnoustou, 2003) that outsourcing have resulted a vital business technique, in which a competitive advantage could be gained when products or services are produced more effectively and efficiently by outside suppliers. The opportunities associated with outsourcing cannot be denied, as it allows organisation the flexibility to source for capabilities from outside the firm, it has been argued that outsourcing has the potential to enhance the performance of a company in a number of many ways. These comprise reducing costs, increasing the quality of service, increasing flexibility, and allowing the company’s management to concentrate on its core competencies (Bailey et al, 2001). The benefits of outsourcing differ from organisation to organisation; Bean, (2003) stated that the general benefit of outsourcing include price/cost reduction, specifically in support services and research and development(R&D), program, flexibility, enhance attention to critical customer attention, international know-how and bigger foreign markets through economic investment, and lower turnover rates. In outsourcing, a network of suppliers can provide an organisation with the skill to alter the scale and scope of their production capability upward or downward, at a lower cost. This can be supported by the argument that outsourcing can reduce the product/ process design cycle time, if the customer uses multiple best-in-class suppliers, who work concurrently on individual parts of the process (Quinn and Hilmer, 1994).
The price/cost reduction benefit of outsourcing has received many arguments in favour of it. Barthelemy and Dominique, (2004) who argued that outsourcing brings cost efficiency, stated that controlling cost is one of the key reasons behind outsourcing. They concluded that external suppliers are considered as specialists who can render the same or improve level of services at a much lower cost than the one internally provided by the firm. In the process of outsourcing, firms can capture several non-financial benefits, such as being able to react to environmental uncertainty in ways that do not increase costs related with internal bureaucracy (D’ Aveni and Ravenscraft, 1994) by focusing on developing their core competencies, while outsourcing the non-core activities to specialist supplier for both unique and continual improvements. In support of this position, Quinn, (200) argued that organisations encounter limitations in terms of the depth of specialist knowledge possessed by the suppliers. This can be seen from the report (DiRomualdo and Gurbaxani, 1998) that several firms find it challenging to acquire, develop, and retain the people and technical know-how within the firm needed to maintain existing complex systems to develop and implement new technologies.
The benefit of outsourcing is noticeable in the IT industry which also has recorded a huge surge in many organisations outsourcing various activities to external suppliers. A firm specializing in information technology can capture efficiencies in two ways (Large, 1991), economies of scale associated with large operations help reduce per unit cost associated with computing, and the knowledge base of experience and expertise in the organisation translate into efficient and effective company. Friedberg and Yarberry (1991) argued that most huge data canters have inefficiency level anywhere from 10 to 30% which could be eliminated with the right kind of solution. That this inefficiency can be address by using outsourcing to attain economies of scale and make the organisation become more efficient (Khosrowpour et al, 2011). This can be supported with the argument (Sineneskey and Wasch, 1992) that in an outsourcing arrangement the client pays for the services rendered.
The benefit related arguments on outsourcing have also seen its share of criticisms, because it is not all the professionals that agreed that outsourcing has resulted in all this benefits to organisations that implement it. This can be seen in the report of Bloch and Spang, (2003) in which they cited McKinsey research conducted in 2003, shows that of the 35 large BPO operations looked into, it shows that the companies fail to get some of all the expected benefit of outsourcing. They argued that many organisations are not critical with their evaluation or, conduct them very poorly, and such make outsourcing decisions based on inaccurate assessment of their internal inefficiency. Since outsourcing is rather a new tool of management the entire costs are not yet know. This it-self is a risk (Kremic et al, 2006). There is preliminary tendency to exaggerate the benefit of outsourcing, and the external vendors are likely to perform better in the beginning of a contract to impress the customer (Schwyn, 1999).
The challenges highlighted in the case against outsourcing are anchored on arguments such as loss of management control, reduction in flexibility and increased costs. For example, competitive outsourcing needs a high standard of supplier management to prevent the pitfalls of transferring critical functionality, or becoming too reliant on a supplier for day-today performance of vital business functions (McCarthy and Anagnoustou, 2003). In support of this argument Domberger, (1998), stressed that outsourcing can generate new risks, such as the loss of critical skills, developing the wrong skills, the loss of cross-functional skills, and the loss of control over suppliers. This argument was critically dealt with by Earl, (1996), by elaborating on the risk associated with the decision to outsource. He pointed out eleven challenges such organisations will encounter. The first was business uncertainty resulting from handing in a core business process to an external vendor, and that such firms can also be outsourcing to organisations with out-dated technology. He also pointed out that such decisions can result endemic uncertainty due to different user needs and the risk associated with new technology, that there are hidden costs and lack of organisational learning also associated with outsource. He also stated that outsourcing can result in loss of innovative capacity, dangers of an eternal triangle, technological indivisibility and lastly fuzzy focus.
The decision to outsource is taken mostly on faulty ground with minute contemplation for the long term competitiveness of the firm (Mclvor, 2005). Only few organisations have made a strategic view of outsourcing decisions, with several firms deciding to outsource instead of produce for short term reasons of cost efficiency and capacity (Mclvor, 2000). Many companies lack structured foundation for evaluating the reason for wanting to outsource, and that such decisions are not strategically thought through. This statement was supported by the argument (Lonsdale andCox, 1997) that several companies decide to outsource because they want to reduce headcount and cost. Many firms making the decision to outsource do not consider the cost of locating and evaluating suppliers, writing of contract and managing the relationship. Such costs can reduce the financial benefit associated with the decision to outsource Barthlelemy, 2003). This can be collaborated with the argument put forward by Lebas, (1999) that the cost accounting practicing and financial performance system employed by most manufacturers deciding to outsource, has indicated that several of these firms accounting system have not being able to catch up with industry’s evolving technology .
Leveraging on External Capabilities through Outsourcing
Outsourcing enables organisations to leverage on external capabilities; this can be supported with the definition of outsourcing put forward by Sako, (2006) that outsourcing happens when organisations chose to buy, rather to produce things internally. This as a result, outsourcing involves superior specialization as organisations change from making products and services internally to sourcing them externally. This argument was backed by Caloghirou et al., (2004) in which they stated that dealings might take place within an organisation and between firms and other companies, and that such organisations might deal with each other in such a way that, it will allow them to have access to knowledge outside their firm boundaries. The opportunity provided by outsourcing cannot be underplayed, because it does not only allow firms to gain only competitive advantage, but also enables such firms to tap into external knowledge that help them to satisfy their customer needs more robustly. This can be backed by the argument (Ciborrra, 1991) that collaborations are institutional arrangements that enable organisations to bring in new expertise, inferred and explicit knowledge and know-how. This is supported by the argument that a broader strategy will give access to new opportunities and allow the firm to assemble new organizational competences based on the incorporation of complementary knowledge sets from external agents (Teece, 1991).
Outsourcing was described (Smith et al, 1998) as a kind of arrangement of cooperation that brings about inter-firm alliance anchored on mutual trust between partner companies for enhancing performance of the inter-organisation dealings. Internally challenges, variability of technologies and market uncertainty increase the need for firms to seek external partners for corresponding cognition (Nooteboom, 1999a). This can be supported by the argument (Hagadoorn and Duysters, 1997), that in the world of fast technological evolvement organisations consider learning through a variety of networks as a way of generating profitable returns in a long-term standpoint. The opportunity and advantage of accessing external capability through outsourcing was seen in the argument of Arora and Gambardella, (1990) that external technological knowledge acquisition is best seen as being complementary to the development of in-house capabilities rather than a substitute. Also that successful organisation are increasing both their internal innovation capacity as well as buying external technology and knowledge.
Outsourcing allows firm to innovate by acquiring needed capability from external sources. This can be seen from the argument that in reaction to competitive pressures, firms look to harmonize and reinforce their internal capabilities by building digitally enabled extended enterprises that tap into specialized skills and capabilities of other organisations across the globe (Hagel and Brown 2005). An increasing proportion of innovations are created not by individual organisations that are self-sufficient with regards to technological resources, but through combinations of capabilities which might be positioned in other companies and institutions. Transversely a lot of sectors, company competitiveness now rest not simply on the capabilities that it can generate and exploit internally, but on the effectiveness with which it can access and exploit sources of technological knowledge and capabilities away from its boundaries (Howells et al, 2003). In strategic outsourcing the greatest leverage of all is the full exploitation of external supplier investment, innovations, and specialized professional capabilities that would have been costly or even impossible to duplicate within the organisation (Quinn and Hilmer, 1994). Thus, outsourcing offer organisations the opportunity to gain competitive advantage, because it allow firms to access the capabilities of suppliers, that offer organisations the opportunity to improve their performance (Mclvor, 2005).
In the process of outsourcing, organisations look outward to superior expertise, to incorporate into their value chain. This can be supported with the argument (Harrison et al, 1991) that firms enhance their value chain performance when they align with exchange partner, in order to access complementary capabilities. In support of this argument Holcomb and Hit, (2006) pointed out that in strategic outsourcing; firms look for partnerships with specialized firms that possess capabilities beneficial to the firm. The skill to access new and potentially more valuable capability (Morrow et al, 2005) is crucial driving for strategic outsourcing because this action can fundamentally shift an organisation capability base. Strategic outsourcing relationships are very vital to value creating activities, as long as these relationship brings specialized capabilities that are complementary to those currently possessed by the organisations internally (Parkhe, 1993), most importantly when these capabilities result exclusively valuable synergy.
Howells et al, (2005) noted that increasing ratios of innovations are created not by individual firms that are independent with respect to technological resources, but through integration of capabilities that may be situated in other organisations and institutions. And that across several sectors, firms competitiveness now hang not only on the capabilities that it can generate and exploit internally, but on the effectiveness with which it can benefit by utilising sources of technological knowledge and capabilities outside its boundaries. A number of researches (Powell, 1998) have tried to explore how companies can access know-how and knowledge from outside the organisation and effectively import and absorb that technological knowledge. Also facts show that (Teece et al., 1997) organisation performance is influenced by its abilities to integrate and redirect resources. This process is known as dynamic capabilities. External capability compels organisation to outsource, thus (Caloghirou et al, 2004) the capability of a firm to take in knowledge and information from external sources is the pivot in the process of transformation of knowledge and information into new knowledge and its conversion into new value. Lee, (2000) pointed out that as the environment of outsourcing relationship changes from a contractual to a partnership-based relationship, the significance of knowledge sharing through the outsourcing partnership is reaffirmed.
Inter Organisational Relationship in Outsourcing
Outsourcing involves the process of turning over a part or all of organisation activities to external supplier (Lee, 2000). This means that there need to a healthy inter-organisation relationship between supplier and customer for outsourcing objective to realize. Willcocks and Choi, (1995) argued that the area in IT outsourcing that has being minimum researched is this inter-firms relationship subject, and more specifically the features that decide an outsourcing relationship. DiRomualdo and Gurbaxani, (1998) argued that, the most essential finding from their research is that, relationship with vendor, such as contract type, decision, performance, measures, risk, reward allocation scheme must be aligned with strategic intent underlying the outsourcing scheme. The way and management of a buyer (Mclvor, 2005) and supplier relationship will be shaped by the objectives of the outsourcing strategy. This will be determined by the importance of the activity outsourced, and the degree of risk in the supply market will also be needed to ascertain the kind of relationship that will be established. Pointing some of the challenges of organisations that decides to outsource are bound to encounter, Littler et al., (1995) pointed that management of collaboration is exceedingly intricate. Exploration of organisations that have gone into partnership such as outsourcing has shown that more than 50% of the collaborative efforts are unsuccessful. It appears that managers meet problems that are different from the ones they are used to within their firm boundary Wognum et al, 2002). The fundamental concept of a relationship approach is concerned with the collaboration and sharing of resources, either physical or intangible, as well as the principal goal of attaining competitive advantage through improvements in product and process redesign, making both firms more efficient in the supply of the final product Cousins, (2001).
The in inter-organisational relationship such as the one brought about by outsourcing will be determined by both the supplier and customer, as can be seen from the argument (Burt and Doyle, 1994, p. 5) of that the type of relationship adopted will naturally depend on the parties involved, the external environmental conditions, and that the overall readiness of the parties to go into such an agreement. Wognum et al, (2001) identify three changes experience in inter-firms collaboration. They termed the first increased value, in this case suppliers change from just producing component, to also developing them which have even larger added value. The second is longer-lasting collaborative partnership of one or two years contracts are required for the production and delivery of parts. At the expiration of the contract both parties resume negotiation for renewal because in collaborative product development collaborative partnership takes a longer time. The third was termed larger mutual dependency, given that suppliers can deliver superior added value, a longer-term collaborative relationships is established by the client. This is because they become more dependent on the knowledge, continuity, and care of the selected suppliers. In fig (x) 1(a) the collaboration is met with several conditions due to the increasing level equality in the relationship. On the other in 1(b) management of collaboration no longer means that one party tries to use, influence, or control the other party, but, instead, that the relationship between client and supplier is the central aspect(Lamming, 1996).
Adopted from Wognum et al., (2001)
Inter-organisation relationship in outsourcing must be carefully examined before being adopted. Collaboration and relationship in product development increases the prerequisite for mutual association and communication between client and supplier. Relationship configuration (Wognum and Faber, 1999a, b)depend on various factors of both client and supplier organisations, like goals at several levels, processes, machines, methods, tools, people skills and experiences, people attitudes, organisational arrangements, like task definition, roles, responsibility and authority, and culture. Helper, (1991) pointed out two types of relationships, called the first exit, a relationship in which client organisation having a problem with its supplier searches for a new supplier. And the other voice, a relationship that a client collaborates with its supplier to try to solve the problems. Sako (1990) Inter-organisational relationship develops the idea of trust, defining it by using three categories namely; contractual trust a state in which the supplier will adhere to the points of the contract as agreed; goodwill trust, the trust that the other party will, if required, performs tasks in excess of the agreed terms and conditions, and; competence trust, the trust that the other party has the ability to be able to produce what the contract requires.
The need for organisations going into outsourcing of their activities to external partners requires a long term plan relationship with the supplier. This argument was put forward by Goo et al., (2006) when examining IT outsourcing, they reiterated the need for organisations considering outsourcing to look at establishing a long-term relationship. The survey they took shows that a lot of customers consider changing vendors due to a range of issues such as lack of satisfaction with the performance of the vendor, conflicts based on usual agency challenges, or newly rising conditions and needs. An inter-organisational relationship is the notion of trust (Barringer and Harrison, 2000). Meer-Kooistra and Vosselman, (2000) indicated from their observation that larger organisations with a great variety of products outsource complete product lines. They also noticed that firms, even though do not change their product categories, leave the production of components to other organisations. They also observed that firms outsource supporting services which are essential for the continuity of the firms, such as administration, information technology and maintenance. They also pointed out that when outsourcing involves essential components and services, it then involves setting up of close forms of collaboration between parties. They further stress that contracting essential components and services requires a specific alignment of the outsourcing relation to guarantee its continuity and to retain the economic advantages of the outsourcing objective in the long-term.
The relationship arrangement adopted should be determined by the kind of product or service that the client is considering for outsourcing. The outsourcing firm is likely to employ a relationship bounded by clear contractual safe guide such as price, payment terms, a short-term perspective, and a clear definition of roles and responsibilities (Mclvor, 2005) Inter-organisational relationships with the firms are interrelated and inter-reliant as a result the format and development of buyer-seller relationships are influenced by the experience of both parties with other relationships (Ritter, 2000). The proximity of a relationship can be considered to be directly associated with the procedure of communication, the closer the relationship the less unstructured and extensive the communication. In mainly transactional arrangement inter-organisational communication is ingrained by regular formal meetings, while in closer relationships communication is more unstructured and unprompted (Bostrom, 1995). The experiences with regards to trust, jointly with extent of familiarity such as customisation and communication, derived from one buyer-seller relationship may be handed over to a second buyer-seller relationship (Doney and Cannon 1997). Improper configuration of aspirations and apprehensions is often responsible for the root cause of challenges in outsourcing relations (Vowler, 1996). And to overcome these challenges (Sheperd, 1995) argued that both organisations need to come up with shared goals to steer the relationship towards its objectives, and that mutuality will enhance collaboration by splitting the risks and profit of the partnership,
The literature review has reinforced the opportunities and advantage aligned with the decision for organisations to outsource their activities to external suppliers. It explores the secondary research in four stream;
The first stream explore the motivational factors and the shift towards outsourcing, this stream reveal that organisations that decides to outsources saw some external opportunities. It also shows that there are advantages to be gain by firms that choose to tap into the skills of other organisations to enable such firm deliver higher value to their esteem customers. The breaking down of trade barriers and the changes brought about by globalization also account for the reason why there are several opportunities aligned with the outsourcing decision. This was seen in the argument of Abraham and Taylor (1993), that there are three motivational factors responsible for outsourcing; savings on wage and benefit payments, transfer of demand uncertainty to the external supplier, and access to specialized skills and inputs that organisations cannot internally provide.
Outsourcing brought about profitable collaboration as agued by Quinn and Hilmer, (1994) that outsourcing can give the organisation access to the external supplier capabilities and innovative efforts, which would have been expensive or difficult for the company to develop internally. It will also enable the company to reduce risks and lower cycle times and investments that are encountered in new technology adoption.
The research also examines the benefits and pitfalls of outsourcing. and it uncovered that several reasons and factors compel organisations to outsource. The need for organisation to remain effective and competitive was discovered to be a driving force steering organisations towards the desire to outsource. Several of the arguments in the literature were directed in support of cost as a major perceived benefit of outsourcing. This was supported by the argument of Barthelemy and Dominique, (2004) who argued that outsourcing brings about cost efficiency, and controlling cost is one of the key reasons behind outsourcing.
There were also arguments that illuminated the need for organisations to focus on core competences, which enable the organisations to become more efficient by so doing reducing overhead cost. The research explored the opportunities of leveraging on external capabilities by outsourcing an activity to an external supplier. It shows that rather than develop new skills and expertise, which will be expensive and time consuming, organisations could just access such knowledge and skills by outsourcing. This was pointed out by Ciborrra, (1991) that collaborations are institutional arrangements that enable organisations to bring in new expertise, inferred and explicit knowledge and know-how. The secondary research also brought to light some of the pitfalls of outsourcing; it shows that outsourcing decisions are made from a faulty ground, because several organisations do not undertake a thorough internal evaluation before deciding to outsource (Mclvor, 2005). There are also serious arguments against the acclaimed cost benefits associated with outsourcing, because many organisations could account for the cost savings from the activity contracted out. Domberger, (1998), stressed that outsourcing can generate new risks, such as the loss of critical skills, developing the wrong skills, the loss of cross-functional skills, and the loss of control over suppliers.
The secondary research also looked into the inter-organisational relationship that exists in outsourcing situation between clients and vendors. This shows that inter-firm relationship is a better part of outsourcing decision making. It also revealed that several contractual outsourcing agreements were terminated due to mistrust between parties; there is eminent need for organisation to adopt an inter-organisational relationship that best suits the interest of both firms. This was echoed by Littler et al., (1995) that management of collaboration is exceedingly intricate. The inter-firm relationship is critical factor to the successes of outsourcing agreements, and this should be developed according to the duration of the outsourcing agreement. The need for the appropriate inter-firm relations to be adopted was reiterated by DiRomualdo and Gurbaxani, (1998) in which they argued that, the most essential finding from their research is that, relationship with vendor, such as contract type, decision, performance, measures, risk, reward allocation scheme must be aligned with strategic intent underlying the outsourcing scheme.
The literature review addresses a substantial degree of the research objectives, but there are some areas in the research that could not be dealt with in the secondary research, as such a primary research will be needed. The primary research will provide the opportunity to examine some of the acclaimed benefit of outsourcing and the pitfalls; it will also take a critical look at the overall motivation for outsourcing. And it will try to determine what the perceived opportunities in outsourcing are, that actually compel firms to what to undertake it. The next chapter will be used to design research methodology for the primary research.
This chapter address the research method and methodology that will be employed in the primary research. It will be used to design the research methodology by exploring the types of research methods available, and that which is most suitable for this dissertation. It will highlight the various steps and stages that this research will follow, such as the data gathering instrument, data analysis, sampling and limitations. The literature review as can be deduced from the secondary research did address some of the research objectives, but left some vital questions unanswered. As such, the primary research will try to explore these unanswered questions; in order to do this a primary research will be conducted as indicated above.
Primary Research Objectives
The concluded secondary research did address some of the objectives set out in this dissertation, but at the same time left several questions unanswered. The secondary research explores the reason why many organisations undertake outsourcing and what informed their decision to do this. The literature review conducted in the secondary research reveals that there are several benefits and opportunities for organisation that decided to outsource. This was reinforced by the argument (Barthelemy and Dominique, 2004) that outsourcing brings about cost efficiency, and reducing cost is one of the key reasons behind outsourcing.
The secondary research shows that there are contrary believes about the successes and acclaimed benefits associated with outsourcing. This position was supported by several academics and professionals. They argued that there are preliminary tendency to exaggerate the benefits of outsourcing and the external vendors are likely to perform better in the beginning of a contract to impress the customer (Schwyn, 1999). In support of this argument Domberger, (1998), stressed that outsourcing can generates new risks, such as the loss of critical skills, developing the wrong skills, the loss of cross-functional skills, and the loss of control over suppliers. As a result, the primary research is needed to explore and determine the motivation and benefit associated with outsourcing.
The primary research will try to explore the perception of organisations that have either outsourced or still currently engage in outsourcing to ascertain the degree of benefits or value they have captured from this decision and the challenges that have encountered. It will also explore potential organisations that are considering outsourcing, to see what drives them towards the decision to want to get involve in outsourcing.
The primary research will also explore how firms that engage in outsourcing maintain their relationship, by critically examining their communication pattern, the degree of control and how vital information are shared in outsourcing relationship. This can be seen from the argument of DiRomualdo and Gurbaxani, (1998) that relationship with vendor, such as contract type, decision, performance, measures, risk, and reward allocation schemes must be aligned with strategic intent underlying the outsourcing scheme.
Research Method and Methodology Design
In order to determine the research method that will be used in this research, two research methods was critically explored to determine the most appropriate for this dissertation. There are two main types of primary research namely Qualitative and Quantitative research methods. Quantitative research seeks to gather data and in most cases applies some form of statistical data analysis tool. It involves the use of structured questions in which the respondents is involved (Alvin et al, 2005, pp.204).
The data style and sources are clear and well defined, and the compilation and formatting of data gathered follows an systematic process that is largely numerical in character. Characteristically the data is collected using a deliberate pattern of questions in the form of a structured questionnaire survey including primarily closed questions with set responses (Burns and Bush 2006, pp. 202).
Qualitative research on the other hand is primarily concerned with collecting, analyzing, and interpreting data by observing what people do and say (Alvin et al, 2005, pp. 204). This was further explained by Burns and Bush (2006, pp. 202) that it involves the collection of in‐depth information via a process of asking questions to comprehend how people feel and why they feel as so.
Adopted Primary Research Method
Subsequent to a thorough analysis of the available research methods, quantitative research method will be employed in this study. The decision to adopt this research method is aligned with the research scope. It will allow structured questions to be designed to address the research objectives, by allowing insight to be gained into the motivation for outsourcing, and some of the challenges encountered in this exercise. The quantitative research will allow graphs, charts and statistic to be drawn, which will enable this dissertation to explore, describe and examine relationship and trends within the data that will be gathered from this research (Saunders et al, 2009, pp. 414)
Primary Research Data collection Instrument
The primary research data collection instrument will be the questionnaire. It will enable the research to formulate questions that will meet the research objectives. The questionnaires are used to gather information for purposes of research studies and also to help validate other research findings (Burns and Bush, 2011, pp. 223). A questionnaire is the most feasible and economical way of gathering data when conducting researches. Burn and Bush (2006, pp. 300) argued that the questionnaire design is a methodical process in which the research contemplates a variety of question formats. The questionnaire is structured and designed to complement the research objective and enable the whole procedure in becoming successful.
The questionnaire allows the research question to be formulated into short questions that are administered to the respondents (Burns and Bush, pp.300). The questionnaire is designed so that each question is direct and short and it will consist of primarily closed questions. The questionnaires are constructed in such a way that the respondents understand and provide the appropriate response.
The questionnaire allows a descriptive or explanatory research to be conducted; it is used as a tool of quality control and allows gathering of significant data that enhances taking the appropriate decision (Bruce et al, 2002, pp.155). In order to administer the questionnaire in this research, different techniques will be employed. This will consist of telephone, face to face and internet mediated questionnaire approach.
The data analysis that will be employed in this research will be based on descriptive statistic data analysis method. The descriptive statistic data analysis describes the data and characteristics about what is being studied in the research. This form of data analysis approach is chosen because the research methodology is based on a quantitative method. It is mainly based on the experiences and motivations of what drives outsourcing from the view of the respondents. Descriptive statistic data analysis allows a researcher to describe and compare variables numerically, in such a way that it reveals the general pattern of responses (Burns and Bush, (2011), pp. 424).
Population and Sampling
Population is known as large collection of individuals or data that the research focuses on and known to have the same characteristics (Saunders et al., 2009, pp. 210). In the case of this primary research the population targeted consists of all the insurance companies in Belgium. The research will draw a sample from the population that will be targeted in this study, as the research cannot afford to cover all the insurance companies located in Belgium.
Sampling consist of gathering information from a cross-section of a population. It allows the opportunity for a more in-depth research in a small number of selected population (Bruce et al, 2002, pp.164). Sampling helps to decrease the size of a population one needs to focus on, by considering only sub-group instead of all possible components. There are two main types of samples, known as probability and non-probability sample. The probability sample is also known as representative sampling, suitable for inference. Non probability sample on the other hand does not allow the research to determine this probability, which is also known as non random sampling (Saunders et al, 2009, pp. 214). In order to carry out this research, non probability sampling will be employed; this decision is taken owing to the small number of the population (Belgium Insurance companies). This will allow the research to predetermine the companies that will be targeted in the research.
The sample size for this research will be 40 companies in the Belgium insurance market. These companies will be the main focus in order to gain insight into what motivates or discourages them to outsource. This sample size was chosen due to the time available for this research, the small number of insurance companies operating in the target market and the cost that will be associated with a much larger sample. This technique will allow each element of the targeted audience equal and known chance of being selected (Bruce et al, 2002, pp.164). This automatically translates into 40 respondents in the research. The data gathered from these respondents will be the basis from which the findings, conclusions, and recommendation will be drawn for this dissertation.
Reliability and Validity
The challenges faced by most research methodologies are
about its reliability and validity which is related to issues of bias (Saunders et al 2009, pp. 326). The tendency for Interviewees to provide bias responses during the cause of interview, due to unreliable and misinterpretation of questions is very high. The adopted data gathering tool in this research is most suitable for this study. This is because it is flexible, and allows the questions to be designed in such a way that it allows in-depth understanding of the research theme and objective to be comprehended by the targeted respondents.
The questionnaire makes it possible for consistency to be attained when conducting the research interview (Hague et al, 2004). Which makes the questionnaire a reliable and valid tool in this kind of research. The questionnaire allows for easy standardisation, and enables every respondent to be asked the same question in the same way. The questionnaire enables the questions to be designed and structured clearly and goes straight to the point.
There is a high degree of flexibility with the questionnaire which makes it possible for it to be to administered in three different approaches namely structured, semi structured, and unstructured (Hague et al, 2004). This also makes it possible for each question to be tailored in such a way that specific questions can be directed to a respondent to address specific research objective (Burns and Bush, 2006).
There are limitations that are anticipated in this research, as can be seen below
The questions could be interpreted wrongly by respondents, resulting in responses that are misrepresenting.
It can sometimes be very difficult to motivate potential respondents to complete questionnaires; which can have adverse consequence on the result of this research.
The targeted potential organisations are not located in the Netherlands market; as such there will be a need to travel to the target country. This will prove challenging as it will involve cost and time, which are scarce in this situation.
The research also will face with challenges of data; the data available on outsourcing are low. This is due to the recent nature of outsourcing, and most of the data in circulation are focus on IT outsourcing, which relatively does not address this research focus.
Ultimately time is one of the greatest constrains in this research. It will require several months to actually undertake a thorough and comprehensive study of this research topic, which is not available in this situation
The research methodology enables the primary research to design a technique that will be employed to address the research objectives set out in this dissertation. It allows for examination of all the tools available for conducting research and methodically selecting the one that meets the research needs.
In order to conduct this research, the quantitative research method was chosen. This method will allow data to be gathered using a predefined frame of questions. This was designed in the form of a structured questionnaire, including primarily closed questions with set responses. The sample size chosen for this research consist of 40 organisations, which appear small. However, the number of organisations present in the target market happen to be very small. The decision to include only structured question in this research is to make it easy for the respondents to be motivated to complete the whole exercise without being bored with open ended questions.
The data analysis adopted in this research is a descriptive statistic method. It is mostly used in a qualitative research, because it allows data gathered from the research to be inferred by comparing and describing results statistically. This data analysis has proven to be very reliable. The research also pointed out some anticipated limitations such as lack of access to data, cost, misinterpretation of questions and the willingness of the respondents to cooperative fully. The subsequent chapter will be used to present the research findings which will be gathered from administering the questionnaires to the target audience.