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CHAPTER- II

CONCEPTUALIZATION OF OUTSOURCING

SECTION-1

OUTSOURCING - GENERALIZED CONCEPTS

The History of Outsourcing.

24. Research indicates that as far back as the thirteenth century, outsourcing

was raising the indignation of European Union workers. Fast forward to 1602 when

the formation of the Dutch East India Company created the first multinational

corporation in the world, and the first to issue stocks. It was not the Dutch, nor the

British, but rather the Portuguese that dominated India first, with colonies there as

early as 1498. However, in 1594, a group of Dutch merchants sought to break this

Portuguese monopoly with their own expedition (it failed) to India. Eventually, the

Dutch merchants succeeded, and the Dutch East India Company was successful in

India and elsewhere in Asia and the rest of the world. It got silver from Peru, copper

from Japan, and traded them in India and China for textiles. Among its other

responsibilities, the Dutch East India Company assisted in the Dutch control of the

all-important spice trade. Interestingly enough, the company’s headquarters was

eventually located in Jakarta, Indonesia; which can be taken a signature for

globalization and outsourcing in the sixteenth century. Similar to the Dutch

difficulties breaking through the Portuguese stronghold in India, the British struggled

mightily in encountering the Dutch in the early seventeenth century. Eventually,

though, the British East India Company presided over the British in India,

established Hong Kong and Singapore, employed Captain Kidd to stop piracy, and

cultivated tea in India. This company laid claim as the administrative arm for India

for the British for centuries. While the legacy from this period is one of harsh

imperialism, the British has been responsible for providing many important

contributions to the subcontinent, such as a railroad infrastructure, the English

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language (the language of government and administration), medical and

engineering expertise, and a rule of law.

25. Outsourcing history was not restricted solely to European powers. The

ancient Chinese empire and the Japanese were adept at outsourcing to their

conquered nations. Perhaps as early as 5000 BC, farmers were growing crops in

northern and southern China. The Chinese learned to rely on agriculture as a

means of self-reliance, but, as all cultures have learned, progress and advancement

cannot occur without contact and trade with other nations. During the reign of the

Han dynasty (206 BC–220 AD), China extended its political and cultural influence

over Korea, Mongolia, Vietnam, and Central Asia, and even had several Roman

embassies during this period. During this period, the famous passageway to South-

east Asia, the Silk Road, commenced, and expanded for military and economic

reasons. It is interesting to note that while China wasn’t a part of the Roman Empire

during this period, it had a friendly relationship, much of which was based on trade.

Back and forth the Chinese rulers opened and closed trade. Another example of

trade as a political issue was the commerce in opium. Opium was used and

produced in China for medicinal purposes but not smoked as a drug until the

eighteenth century. As the Chinese government sought to stop the consumption and

trade of opium within its borders, the British were taking control of the trade from

their European rivals. The British East Indian Company waged war for three years in

order to secure the right to sell opium in China. The production of opium in India

was very profitable for the East Indian Company, and was used to trade for

manufactured goods and tea. Because of the social impacts of these opium dens,

the Chinese government made opium illegal in 1836, and sought to close down

these facilities. The British refused the request to stop exporting opium, even though

it was illegal in its own native land. When the Qing government sought to pressure

Queen Victoria by threatening to cut off all trade in response, the Opium War began,

and the British triumphed, ending with the Treaty of Nanking in 1842. This treaty

gave Britain unfair trade provisions, and allowed them to keep Hong Kong as a

British Colony (it was a barren island at the time). To this day, the legacy of this war

provides a history of Chinese resentment and concern in its dealings with the West.

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Certainly, outsourcing and globalization have deep roots in history. It is impossible

to separate the historical aspects of colonization from that of outsourcing. 1

Outsourcing - General Conception

26. Outsourcing has become a vital ingredient of corporate restructuring

initiatives. Much of the early literature and studies on outsourcing have focused on

manufacturing. Historically, manufacturing outsourcing –often referred to as the

make-or-buy decision – has been more prevalent. In the 1980s and 1990s a

considerable amount of attention was given to manufacturing outsourcing and

the implications for the long-term competitiveness of both organisations and

economies. Outsourcing in manufacturing became very prominent in the 1980s.

Outsourcing in this context involved the development of longer-term supplier

relationships, which were characterized by collaboration and joint problem solving in

a range of areas. Adopting collaborative supplier relationships were viewed as

means of reducing the risks associated with outsourcing. More recently, a similar

process of outsourcing has been occurring in the area of business. Business

services are services that are provided to other businesses, rather than directly to

the public. The figure below shows an overview of outsourcing process in terms of

business organizations. Examples of business services include computer

services, professional services (legal, accountancy, market research, technical,

engineering, advertising, human resources and consultancy), research and

development, recruitment agencies and call centers.2

Figure 1 : Business Process Outsourcing Overview 3

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27. Outsourcing is nothing new to the private sector. Firms always purchased

services from outside when they found that it was cheaper than in-house production.

Outsourcing is the delegation of tasks or jobs from internal production to an external

entity. Outsourcing business is characterized by expertise not inherent to the core

of the client organisation. The concept of outsourcing was introduced to the public

sector organisations during the “New Public Management” movement in the 1970s

in Britain and the USA, and quickly spread into other countries. This was a resultant

of globalization. This practice became more popular after the dot-com crash of the

early 21st century. One of the methods; “Alternative Service Delivery”, being

practiced and experimented by governments all over the world. Hence this always

involves a considerable degree of two-way information exchange, coordination, and

trust. 4

28. The term outsourcing could be loaned from the US private economy and is

derived from the expression “Outside Resource Using.” The verb “To Outsource”

means to push or shift aside, and describe a situation when some organization,

from various reasons in order to cover certain necessary functions or operations,

uses entrepreneurial activities of other, usually more specialized entrepreneurial

subject, company or organization. In the world, this method of covering some

activities by means of other organizations is neither revolutionary nor new. In the

economics, the outsourcing has been broadly and successfully used since the

beginning of the eighties of the 20-th century. For instance, Japan was among the

rst countries, which started to apply the outsourcing through the strong reductions

of bureaucracy and development of entrepreneurial subjects able to quickly respond

the changing market demands.

29. By using of the outside resources, the entrepreneurial subject responds to

the rationalization pressure, reduces costs, increases the labor productivity or

enhances quality of its production or services. The company strives for reaching of

competitive advantage in the globalized market that is based on the top know-how.

Brie y said, the organization or company concentrates its attention and main effort

in the areas which are fundamental for its activities, and where achieves competitive

results and best skills and knowhow. Remaining – secondary activities – are

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rationally implemented through other ways Thus, it is a situation when the input,

otherwise obtained from own resources, is purchased from other organization in a

form of provided services, products or some absent competitive knowledge or skills.

This method supersedes all the internal activities connected with administration of

the source, and pushes this source aside. By implementation of such an

entrepreneurial strategy, the organization becomes more exible, capable of

responding to market changes and customer demands in the turbulent marketing

environment. However, elimination of internal activities, formerly run by own forces,

brings the biggest danger connected with outsourcing implementation, since the

transition of own operations to other organizations results in losses of skills and

know-how in the eliminated eld. Even if they can be recovered, the organization

would have to undergo a very complicated, expensive and lengthy process with no

guarantee of success.

30. From the all-society perspective, the outsourcing implementation calls for

progressing division of labour, deepening of specializations, knowledge and skills. It

concerns such function areas, which do not relate to the primary activities of the

organization or company, albeit the organization or company usually performed

them itself so far. In a case that the organization or company eliminates activities

that have hitherto been the primary ones, we cannot talk of the outsourcing

implementation, but rather of cooperation – manufacturing cooperation. The term

outsourcing implementation usually means implementation of activities in the eld

of services.5

31. Government organisations are generally large. Large organisations have

many internal functions. Any organisation can be expected to specialize in only a

few functions. In the initial stage outsourcing was not considered as so important

business option as more and more emphasis was given to organization’s own core

competencies. Though the initial and principal motive behind outsourcing in the

country of origin USA was to take advantage of lower-cost labour, the term is getting

global and multidimensional due to wider objectives. Starting in the late 70s,

outsourcing was not formally identified as a business strategy until 1989 when it

entered from ancillary to support services. In the 1990s, as organizations began to

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focus more on cost-saving measures, they started to outsource those functions

necessary to run a company but not related specifically to the core functions: those

that give the company a strategic advantage or make it unique. Since long

outsourcing or ‘contracting out’ used to be defined as the transferring of the

performance of non-core functions, previously accomplished in-house, to an outside

provider. The current stage in the evolution of outsourcing is the development of

strategic partnerships which even considers outsourcing core competencies if found

profitable through cost benefit analysis. 6 Though the very concept of outsourcing

evolved around many focal perspectives over the years, the compiled definitions in

table below will give a holistic view. 7

Literature reference Focus of outsourcing definition/ perspective Loh and Venkatraman (1992) Contribution by external vendors.

Lacity, Willcocks and Feeny (1996) Dismantle internal departments by transferring to third-party vendors.

Quinn and Hilmer (1994), Lei and Hitt (1995), Casani et al. (1996)

Non-strategic processes are most suitable for outsourcing.

Hu and Saunders Gebelt (1997) Contract out all or part of its information systems operations.

Grover, Teng and Cheon (1998) Turning over in source functions to external service provider(s).

Barthélemy (2003) Turning over all or part of an organizational activity to an outside vendor.

Hirschheim and Lacity(2000) Transferring IT assets, leases, staff and management responsibility to third-party vendors.

Kern and Wil lcocks (2002) Contract out or sell to a third party supplier.Lacity and Willcocks (2000) Transfer to suppliers.Langfield-Smith and Smith (2003) Contracting of any service or activity to a third

party.Levina and Ross (2003) Transfer property and decision rights to an

external organisation.McCarthy and Anagnostou (2004) A contract is the means by which the planning,

responsibility, knowledge, and administration of processes is transferred to an external party.

Mol et al and Quelin (2005). Outsourcing entails a stable long term collaboration agreement.

Holcomb and Hitt (2007) Outsourcing can be used to obtain key capabilities to supplement existing capabilities.

Table1: Outsourcing Definitions in Research Literatures 8

Outsourcing, Privatization and Contracting Out – Analogous Ambiguity?

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32. Successful outsourcing can only be achieved if the outsourcing agency

requesting the work retains responsibility for the function or activity performed. In

other words the government holds control of the function. On the other hand,

privatization of a function or activity shifts the responsibility to the private sector.

Control is no longer managed by the governmental agency. 9 As with privatization,

there is a determining factor between the two terms. Privatization entails transfer of

property, facilities, services and responsibility from Government to a private sector

entity. Outsourcing does not involve any such transfer or any abrogation of

responsibility. Additionally, regular monitoring and close oversight remain essential

ingredients of outsourcing. Providers of outsourced support are generally called

contractors since the provisions of the contract they have signed govern their

functioning. However, a more precise and appropriate term that is used for them is

‘service providers’.10 Again outsourcing does not equal contracting out. In this case

it is the manner in which the work is structured. Contracting out is tied to a per diem

rate, getting paid no matter what the results. Outsourcing combines incentives to

the equation. Thus, timely results, superior performance or quality labor is valued

and compensated.11

Figure 2 : Ambiguous Interrelations SECTION-2

ANALYSIS OF OUTSOURCING PROCESS

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The Economics of Outsourcing.12

33. The justification for any business strategy, action or conduct can usually be

found in one or more economic theories. Borrowing from classic economics, the

“Transaction Cost theory” is based on the premise that organisations seek to

economize on transaction costs. Originally formulated by Coase in 1937, this theory

proposes that investments, including investments in outsourcing, help reduce

transaction costs, and in turn, reduce the size of the organisation, making it more

productive. Most of the literature uses this economic theory to justify outsourcing.

Another economic theory that applies to outsourcing is “Agency Theory”. This theory

deals with the impact of outsourcing on employees, or “agents,” who work for the

owners of client businesses. According to this theory, as a organisation grows in

size and its supply chains and employee interactions increase, the owners need

to increase the number of employees who work as agents to support the complexity

of the organization. Thus, an investment in outsourcing saves the organisation’s

time, improves its control over its core activities by moving non-core activities

outside, and requires fewer employees.

34. To justify outsourcing, there is one additional, non-economic theory worth

mentioning. This “Social Exchange theory” is called inter organisational relationship

theory. According to this theory, relations arise for a number of reasons, each

possessing a particular set of behavioral and structural elements. This theory helps

to explain the outsourcing relationships that evolve and change over time. It is best

used to explain the reasons for inter organisational relationships that are based on

exchanges in the differing organizational structures (i.e., between the organisations

outsourcing to each other) in terms of behavioral aspects. Understanding the

relationships allows an economic theory, like transaction cost theory, to better

explain the efficiencies observed in the outsourcing process. Whatever the

theoretical foundation of outsourcing used, the motivation for outsourcing is

supported in the economic theory of “Comparative Advantage”. Applied in the

context of trade between agencies, this theory focuses on the basic economics of

outsourcing. According to this theory, if an external outsourcing provider can

perform work activities more productively than the client; the client should allow the

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external outsourcing provider to do the work. This allows the client to focus on what

they do better i.e., on their core competencies. By focusing solely on their core

competencies, according to this theory, both the provider and client will enjoy more

success in their respective sectors.

Levels of Outsourcing13

35. The economic perspective differs with levels of outsourcing

from its generic expression. There are usually three levels of outsourcing:

a. Tactical Outsourcing. On the first level, tactical, the reasons for

outsourcing are usually tied to specific problems being experienced by the

organisation. Often the organisation is already in trouble and outsourcing is

seen as a direct way to address problems. Typical examples of “trouble” are:

the lack of financial resources to make capital investments, inadequate

internal managerial competence, an absence of talent, or a desire to reduce

headcount. Not surprisingly, tactical outsourcing often accompanies large-

scale corporate restructuring. Thus, many tactical relationships are forged to

Generate immediate cost savings, eliminate the need for future investments,

realize a cash infusion from the sale of assets and relieve the burden of

staffing. The focus of tactical outsourcing is the contract, specifically,

constructing the right contract and, subsequently, holding the vendor to the

contract. Traditionally, the expertise for making these arrangements came

from the purchasing department. However, there is an emerging expectation

that every manager involved in the supply chain process understand and be

accountable for the aspects of outsourcing that affect their area of charge.

Establishing and maintaining tactical outsourcing relationships, specifically

functional or comprehensively, is the responsibility of the entire organizational

team. Frequently, the contract was simply a fee for services, with much of the

value stemming from the discipline of spending dollars externally. When

managers formed successful tactical relationships, the value of using outside

providers was clear: better service for less investment of capital and

management time.

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b. Strategic Outsourcing. Over time, as businesses sought greater

value from outsourcing relationships, the goals of these relationships

changed. Executives realized that, rather than losing control over the

outsourced function, they gained broader control over all of the functions in

their area of responsibility, hence, were freer to direct their attention to the

more strategic aspects of their jobs. Facilities managers, for example, could

focus more on infrastructure issues, instead of worrying about staffing

janitorial positions. Technology executives could hand over running of the

data center to a service provider and turn their attention to serving the needs

of internal customers. This logic remains compelling. To meet the

requirement of earning greater value from outsourcing, how it was used and

where it was applied had to change. The scope of outsourcing relationships

grew significantly, as did the service provider’s involvement. By virtue of the

increasing dollar value of the relationships, the integrated scope of services,

and the length of the new relationships, outsourcing was no longer a tactical

tool but a strategic tool. Most important, the managerial mind-set regarding

the nature of these relationships matured, from one between buyer and

supplier to one between business partners. Strategic outsourcing

relationships are about building long-term value. Instead of working with a

large number of vendors to get the job done, in a strategic model,

corporations work with a smaller number of best-in-class integrated service

providers. These relationships thus evolve from vendor supplier

arrangements (which are often adversarial) to long-term partnerships

between equals, with the emphasis on mutual benefit.

c. Transformational Outsourcing. Transformational outsourcing is third

generation outsourcing. The first stage of outsourcing involved doing the

work under the existing rules; the second stage used outsourcing as part of

the process of redefining the corporation. This, the third stage, uses

outsourcing for the purpose of redefining the business. To survive

economically today, organisations must transform themselves and their

markets in an ever more daunting challenge to redefine the business world

before it redefines them. To that end, outsourcing has emerged as the single

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most powerful tool available to executives seeking this level of business

change. Those who take advantage of transformational outsourcing

recognize that the real power of this tool lies in the innovations that outside

specialists bring to their customers’ businesses. No longer are outsourcing

service providers viewed only as tools for becoming more efficient or better

focused; rather, they are seen as powerful forces for change—allies in the

battle for market and mind share.

36. Phases of Outsourcing Process14 The phases of any outsourcing

process are almost similar irrespective of levels. The figure at the end of description

about phases of outsourcing will give a holistic view of the total process.

a. Strategy phase. Defining the objectives and scope of the

outsourcing concept and determine the feasibility of outsourcing before

making the decision to proceed. Also, planning the total effort in terms of

time, budget, and necessary resources.

b. Scope phase. Establishing baselines and specify the service

levels required of vendors. Clarifying relationships between the function(s) to

be outsourced and those functions that remain in house, to include proper

interfaces. Developing the request for proposal, collect and analyze

responses from vendors; and, finally, choose a vendor.

c. Negotiation phase. Negotiations proceed with the

chosen vendor until a contract is drawn up and, ultimately, signed by both

parties.

d. Implementation phase. This phase marks the transition from in-

house provision of services to outsourcing.

e. Management phase . Throughout this phase, management of the

outsourcing relationship with the vendor is done. It includes the negotiation

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and implementation of any changes in the outsourcing relationship seen as

necessary to ensure a successful outcome.

f. Completion or termination phase. At the end of the

contract period, the decision either to negotiate another contract with the

same vendor or to terminate that relationship and align with a new vendor is

taken and the cycle begins again. Alternatively, a decision is made to bring

the function back inside the organization.

Figure 3: Phases of Outsourcing Process 15

Factors considered for Outsourcing

37. Private sector and corporate concept of outsourcing suggests a critical

analysis to prioritize and decide the sectors to be outsourced. This is also equally

important to select the appropriate vendor to serve the organizational objective. The

core value of individual organisation should be restored as it would be performed by

in house capacities. The concept of outsourcing in defence environment may not be

in a similar posture with corporate ideas, but the core concept of benefiting the

parent organisation remains same. Therefore it requires no emphasis when the

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question of selecting a suitable vendor comes. The figure below will give an idea

about the factors catered by corporate organisations to take up outsourcing affair.16

.Figure 4: Factors Considered for Outsourcing

The Benefits of Outsourcing

38. Numerous benefits are listed in the favour of this business function in

different research literatures. Few are appended below:17

a. Cost Reduction. Organisations can achieve considerable cost

reductions through outsourcing strategies. Outsourcing enables the

outsourcing organisation to benefit from supplier cost advantages such

as economies of scale, experience and location. Suppliers may take on

investment and development costs while sharing these risks among many

customers and thereby reducing supplier costs for all customers. For

example, in the financial services industry many banks have outsourced high-

volume transaction processing functions such as electronic payments

and processing of cheques to service providers with greater economies of

scale in order to reduce the cost of each transaction. Furthermore, by

gradually outsourcing processes the customer can reduce risks by converting

its fixed costs into variable costs.

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b. Performance Improvement. Service providers can often achieve

much higher levels of performance in certain processes than can be achieved

internally by the outsourcing organisation. This performance advantage is

based not only on reduced costs. Specialist suppliers can often provide

higher levels of service quality than those of internal functions within the

outsourcing organisation. The performance improvements that service

providers can deliver has given rise to terms such as “Transactional” and

“Transformational” outsourcing. “Transactional outsourcing” involves the

service provider delivering process efficiencies and process improvement.

Alternatively, “Transformational outsourcing” involves the service provider

delivering business and process transformation. The outsourced process

shares inter-dependencies with other business processes, is complex and is

strategically important to the customer organisation.

c. Flexibility. In the past, organisations attempted to control the

majority of business processes internally on the assumption that

controlling supply eliminates the possibility of short-run service

disruptions or demand imbalances in its customer markets. However,

such a strategy is both inflexible and inherently burdened with risks. Owing to

issues such as cost pressures, rapid changes in technology and increasingly

sophisticated consumers, it is very difficult for organisations to control

and excel at all the processes that create competitive advantage.

Outsourcing can provide an organisation with greater flexibility, especially in

the sourcing of rapidly developing new technologies. Specialist suppliers can

provide greater responsiveness through new technologies than large

vertically integrated organisations.

d. Specialization. Outsourcing can allow an organisation to

concentrate on areas of the business that drive competitive advantage and

outsource peripheral processes enabling it to leverage the specialist skills

of service providers. Specialists in supply markets can develop greater

knowledge depth, invest more in software and training systems, be more

efficient and therefore offer higher salaries and attract more highly trained

people than can the individual staff of all but a few integrated companies.

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These advantages can generate enough value to deliver a better service at a

lower cost to the customer, whilst allowing the supplier to make a profit.

Specialization can also allow an organisation to gain a competitive advantage

in its industry. Also, specialization can have a positive impact upon career

development opportunities for employees in specialist service providers. For

example, in the case of employees in specialist functions such as information

technology in large diverse organisations, the scope for career progression

is normally limited to within a single function.

e. Access to Innovation. Many organisations are reluctant to

outsource because they fear they may lose the capability for innovation in the

future. However, in many supply markets there exists significant

opportunities to leverage the capabilities of service providers into the

services of the customer organisation. Rather than attempt to replicate the

capabilities of service providers, it is much more prudent to use outsourcing

to fully exploit the service providers’ investments, innovations and specialist

capabilities.

f. Freeing up resources for Core Functions. Every organisation has

limits on the resources available to it. Outsourcing permits an organization to

redirect its resources, most often people resources, from noncore activities

toward activities that serve the core purpose. The organization can redirect

these assets onto priority activities.

f. Focus on Core Operations18. Offshore outsourcing is strongly

influenced by the need to focus on core activities. Outsourcing processes

frees up management time and resources and enables the best utilization of

the two. Once the core processes are identified, the organisation should

target to outsource peripheral/support activities. Outsourcing these processes

will help management to concentrate on core activities, thus enabling the

system to strengthen its capability. The benefits of outsourcing are also

manifested in peripheral processes, as noncore to the organisation is core to

the outsourcing provider.

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g. Shared Infrastructure. An individual organisation usually has a

limited ability to increase the utilization of infrastructure assets (facilities,

networking, computer equipment, support staff, and management) beyond its

own purposes. Outsourcing enables multiple companies to split the

infrastructure costs with other companies, thereby lowering their cost.

h. Improvements in Service Level. Noncore for the outsourcer is

core for the vendor. The vendor focuses on reengineering and running the

processes efficiently. Since it is a core activity for the vendor, he would strive

to bring about improvements in the outsourced process and deliver superior

quality standards. There are a number of examples to illustrate this benefit.

For example, companies which have outsourced data processing have seen

steep improvements in the accuracy of data recording, often even up to 80–

90 percent reduction in errors19.

j. Process and Product Innovation. If the process is a

noncore activity for the organisation, maintaining best systems and practice

for executing the process takes a lower precedence. However, if the process

is outsourced, the vendor not only tries to incorporate the best available

systems but also aims at doing the process in the most efficient way. The

organisation’s experience in dealing with the process is limited to its own

process while the vendor has been executing the process for various parties.

Hence, the vendor has a large experience base enabling him to leverage his

learning and employ best practices to eliminate, simplify, and rationalize

steps and costs in the process to the benefit of the clients. Additionally,

outsourcing vendors are usually motivated to improve the process to increase

their efficiencies in order to reduce the costs because they are paid for

completed work at contracted service levels.

The Risks of Outsourcing

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39. The outsourcing process involves some degree of risks as well. Some risk

factors are listed below:20

a. Cost Increases . There is evidence to suggest that when

organisations outsource to achieve cost reductions, costs do not decrease

as expected and in some cases can increase. When organisations outsource

to achieve cost reductions, there is normally an early anticipation of cash

benefits and long-term cost savings. However, many organisations fail to

account for future costs and in particular that of managing the outsourcing

process – sometimes referred to as the hidden costs of outsourcing. There is

a tendency to under-estimate the management resources and time that have

to be invested in outsourcing. Some organisations fail to realize that

resources have to be invested in managing the relationship with the

service provider, which is particularly important in the case of critical business

processes. In many cases organisations outsource in order to effect

improvements in certain parts of the business which have been causing

problems. However, it is untrue to assume that once the process is

outsourced, the problem will disappear. For example, poor performance

internally may have been due to weak management. It is often the case that

the person previously responsible for managing the process internally is

responsible for managing the external service provider. This problem is

further worsening if the outsourcing process has involved the transfer of staff

from the outsourcing organisation to the service provider. Therefore, it is

important to determine why the process is being outsourced in the first place.

b. Supply Risk. Organisations can encounter significant

risks when they use service providers for processes that they have

performed internally in the past. Over dependency on a particular service

provider can lead to significant risks in terms of cost, quality and service

provider failure. For example, service providers may fail to achieve the

necessary quality standards demanded by the outsourcing organisation.

Therefore, an organisation may decide to keep a process in-house in order to

guarantee quality and reliability of service. It is crucial for the outsourcing

company to monitor changes in supply. When a company chooses to

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outsource it may do so on the basis of the presence of competition amongst

a number of service providers in the supply market. However, many

organisations fail to monitor changes in the supply market and their

impact upon the outsourcing process. Public sector organisations often had

difficulties with monitoring and managing public sector contracts due a

lack of the requisite skills and experience . Many organisations fail to

recognize that managing an external service provider requires a different set

of skills than those associated with managing an internal department.

c. Loss of Skills. Outsourcing can lead to the loss of critical skills

and the potential for innovation in the future. In the long term, an organisation

needs to maintain innovative capacity in a number of key processes in order

to exploit new opportunities in its respective customer markets. If an

organisation has outsourced a number of critical processes its ability to

innovate may be severely diminished. Innovation requires slack resources,

organic and fluid organisational processes and experimental competencies –

all attributes that outside supply does not guarantee. These risks can

become more pronounced when the objectives of the outsourcing

company and the service provider are conflicting. Service providers can

also become competitors in the future once they obtain the requisite

knowledge and skills to deliver the entire service requirements of which the

outsourced process is a significant element.

d. Data Security. The most obvious risks revolve around the

access, storage and transfer of information. The outsourcing vendor may

have access to some sensitive information which the particular organisation

needs to guard. Particularly when Government organisations are employing

outsourcing vendors for accomplishing non core functions this risk of “critical

and sensitive information mishandling” prevails.

e. Organisational Change Implications . Outsourcing has

significant collective implications for an organisation. The implications of

outsourcing are often ignored in favour of the need to reduce costs.

However, the effective management of these implications is crucial as

employees view outsourcing as a disapproval of their performance,

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which can often lead to industrial action. Outsourcing can lead to the

redeployment of staff within the outsourcing organisation or the transfer

of staff to the service provider. The demands associated with outsourcing

transcend organisational boundaries, and therefore, the approach to

managing the change process must ensure that complementary

processes and behaviours are exhibited within and between organisations.

However, organisations have had extreme difficulties with embracing and

effectively managing the change process required. Organisations often

ignore the fact that successful outsourcing is heavily dependent upon

1 Buffington Jack, An Easy Out: Corporate America’s addiction to Outsourcing, (88 Post Road West, Westport, CT, USA, Praeger Publishers, 2007), pp 15-17.

2 McIvor R, Humphreys P K, Wall A P, McKittrick A, A Study of Performance Measurement in the Outsourcing Decision, ( Jordan Hill, Oxford OX2 8DP, UK, Elsevier Linacre House, 2009), p39.

4 T.L. Doherty and T Horne. Managing Public Services. London: Oxford University Press, 2002, pp 333-334 .5

? Procházka Lt Col Josef, Armed Forces of the Czech Republic (ACR), Outsourcing Implementation in the Armed Forces, February 2003.

6 Handfield Rob, ‘A brief history of outsourcing’, http://scm.ncsu.edu/public/facts/ facs060531.html, entered on 23 oct 2009.

7 McIvor R, Humphreys P K, Wall A P, McKittrick A, Op Cit, p 51.

8 Solli-Saether Hans and Gottschalk Petter, Norwegian School of Management, Norway, Managing IT Outsourcing Performance, (701 E, Chocolate Avenue, Hershey, PA, USA, Business Science Reference), p 4.

9Keene, Wallace, J., “Federal Outsourcing - Part I,” The Public Manager: The New Bureaucrat, Vol. 27, Issue 1, (Spring 1998), pp 13-16.

10 Suman Maj Gen (Retd) Mrinal, Outsourcing of Defence Logistics in the Indian Armed Forces, Strategic Analysis, Vol-31, No-4, July 2007, p605.11

? Keene, Wallace, J., Op Cit, pp 29-32.

12 Marc J Schniederjans, Ashlyn M Schniederjans, Dara G Schniederjans, Outsourcing and Insourcing in an International Context, (80 Park Drive, Armonk, New York, USA, M.E. Sharpe Inc., 2005), pp 10-12.

13 Brown Douglas and Wilson Scott, The black book of outsourcing : How to manage the changes, challenges, and opportunities, (New Jersey, USA, John Wiley & Sons, Inc., 2005), pp 20-24.

14 Ibid, p 25.

15 Ibid, p 26.

16 8th Annual Outsourcing Index: Money Matters, Outsourcing Essentials, VOl. 3 No. 4 Winter 2005.

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the attitudes and commitment of their workforce. Outsourcing has a

negative impact upon the job security and loyalty of employees even

when they retain their positions in the outsourcing organisation. The

perspectives and responses of employees at all levels and positions have

a significant impact on the successful implementation of strategic change

processes. For example, key employees should be retained and motivated,

which involves identifying employees with important process knowledge.

Furthermore, given the strategic nature of the decision to outsource, culture

change is vital. However, effecting culture change is an enormous task.

CHAPTER-III

GENERALIZED CONCEPT VIS-Á-VIS MILITARY TRANSLATION

SECTION – 1

OUTSOURCING IN DEFENCE- PROS AND CONS

17 McIvor R, Humphreys P K, Wall A P, McKittrick A, Op Cit, pp 42-45.18

? Patel Alpesh B, Aran Hemendra, Op Cit, p 20.19

? Ibid, p 21.20

? McIvor R, Humphreys P K, Wall A P, McKittrick A, Op Cit, pp 45-48.

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Growing Trend of Outsourcing

40. Outsourcing is the new buzzword in defence economic domain at present

days. Again outsourcing is a term that is frequently used but often misunderstood in

defence sector. Before going into farther details, it is important to define the term

militarily. US Department of Defense defines outsourcing as ‘The process of

contracting out to private companies tasks that used to be performed by members of

the uniformed military. The assignments range from routine jobs like cooking and

cleaning to specialized ones like maintaining and repairing sophisticated weapons

systems, translating and transcribing, and interrogating Iraq prisoners.’ Which is in

simple words - the transfer of a function previously performed in-house to an outside

provider.21 The Business Executives for National Security organization of New

Zealand defines outsourcing as “contracting out for certain services and support

formerly accomplished with internal resources.” Outsourced providers often are

referred to as contractors or third parties. When outsourced work is subcontracted,

the outsourcing business still provides oversight and adds value to the customer’s

supply chain.22

41. The outsourcing of military services from the armed forces to the private

sector is an increasing trend. But the trend of such functions can be traced to a far

historic age. The U.S. Army began outsourcing logistics support during the

Revolutionary War (1775–1783). The Civil War (1861–1865) increased the use of

contract logistics to supplement the armies’ transportation and subsistence

capabilities. This practice continued into the present, with Operations Desert Storm

and Iraqi Freedom providing the most recent examples of extensive outsourcing for

logistics support. Contractors are now an integral part of the wider Department of

Defense workforce that delivers combat support to the U.S. Army on the

battlefield.23 The military de nition of the outsourcing implementation is different

from the civilian one. In the framework of the armed forces, the outsourcing

implementation means using of capacities of the private sectors for running such

activities that were previously performed solely by the personnel of the armed

forces or their civilian employees. This tool has become a powerful vehicle to

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(Million US$)

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launch the reform of the armed forces and raise the effectiveness of the whole

defense sector.24

42. Before translating the idea of outsourcing in military language the growing

trend of this function in business are needed to be appreciated. In business world it

shows a growing trend worldwide. The following figure projects the rise of business

process outsourcing revenues earned by US Government from 2002 to 2008 which

clearly depicts the growing trend of reliance on outsourced services.

Figure 5: US Government Business Process Outsourcing Revenue 2002-200825

43. Objectives of Outsourcing. Numerous factors can be listed to

substantiate the accelerated trend of outsourcing in corporate arena. It is

understandably obvious that the objectivities pursued by corporate agencies may

not suit military requirements in toto but certainly justifies numbers of objectives

among all these. In general terms outsourcing adds flexibility in functionality which

can be a demanding factor for military process at times. However the figure below

comprehends a holistic reasoning of such affair.

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Figure 6: Outsourcing Objectives26

Advantages of Outsourcing in Defence sector

44. Outsourcing offers ranges of advantages in defence sector. Some are:27

a. Reduction of manpower assigned to logistic functions, releasing

personnel to combatant areas, focusing core competence.

b. Reduced costs of Specialist training, Employment and Overhead for

facilities, Facilities maintenance, Equipment.

c. Reduction in inventory will diminish risk of stock loss and

obsolescence.

d. Finally, payment will be made only when the service is satisfactory.

26

? Outsourcing Essentials, Op Cit.

27 Major (L) Muzri Bin Hj Mokhsin, Royal Brunei Armed Forces, Privatisation of The Defence Industrial Base, http://www.pasols.org, entered on 23 Oct 2009.

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Disadvantages of Outsourcing in defence sector

45. On the contrary outsourcing entails some disadvantages when applied in

defence organizations. Those can be:

a. Security Hazard. Rear Admiral Hugh Edleston said, “Outside

agencies were sometimes better placed to provide training and resources but

he warned: "There is a slight risk that things can get out of hand and these

companies become small armies themselves."28 There are other formidable

problems surfacing in what is uncharted territory - issues of loyalty,

accountability, ideology, and national interest. So, there should be security

vetting and close monitoring before handing over any specific sector to them

under the outsourcing scheme.

b. Loss of Flexibility. One of the most obvious possible downsides of

going to war with civilians is the loss of flexibility.29 It is also applicable in

peacetime scenario. It will be difficult to hold a civilian in the same manner as

the service personnel unless we bring them under certain terms and

conditions.

c. Discipline. Chain of command and authority is one of the most

troubling questions in case of outsourcing. Contractors are not subject to the

same orders that apply to soldiers regarding good order and discipline. So,

handling of those people needs extra procedure and care.30

d. Legal Issue. International law such as the Geneva Convention does

recognize the necessity of civilians’ support for combat forces but only in

noncombatant roles that keep them out of direct engagement with the enemy

forces. So, it restricts the civilian to remain functional only within the

noncombatant areas.

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SECTION – 2

OUTSOURCING EXPERIENCES – GLOBAL DEFENCE FORCES

United States of America

46. In realizing the US Department of Defense's (DOD's) Joint Vision 2010, the

Department must meet three major challenges; Readiness, Quality of life,

Modernization. These challenges can be met by freeing up the additional resources

required for modernization in the future by managing its internal operations and

particularly its support activities more efficiently. A DoD report, released March 2008

determines that outsourcing can lower costs and improve readiness. Thereby a

comprehensive review was undertaken to identify functions that could be

outsourced, analyze them to determine where outsourcing is cost effective and

begin the outsourcing process. It was felt that Outsourcing offer significant

opportunities to generate much of the savings necessary for modernization and

readiness. USA is continuing outsourcing of non-core activities and further

reductions of infrastructure31.   

47. There are numerous examples of outsourcing's beneficial results. Within the

Department of Defense, experience demonstrates that outsourcing have yielded

both significant savings and increased readiness for each of the military services. As

a result of cost comparisons conducted between 1978 and 1994 the department

now saves about $1.5 billion a year. The US Air Force has successfully outsourced

all support functions at Vance Air Force Base [Okla.] and several bases overseas.

The Air Force also contracts for maintenance for the KC-10 and F-117 aircraft and

for software in the B-1 and B-2 aircraft. The Army has created a government-

industry team to upgrade the Paladin artillery system. The Navy outsources a

substantial amount of ship repair, including maintenance on its most advanced

surface combatants. US navy savings by outsourcing from 2000 per year estimates

about $2.5 billion. The Navy recently began a series of planning conferences

involving appropriate officials from headquarters and major commands focusing on

strategies for attaining its future outsourcing goals. In totality DoD currently

outsources about 25 percent of this workload to support, operate and maintain DoD

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installations -- such as facilities maintenance, food services, local transportation and

vehicle maintenance.32

United Kingdom33

48. The UK Ministry of Defence (MoD) and the Armed Forces have considerable

experience of outsourcing. This involves the transfer of activities which were

traditionally undertaken ‘in-house’ by the Ministry and the Armed Forces to private

firms. In 1983, as part of its aims of improving efficiency and achieving value for

money, UK Ministry of Defence (MoD) introduced a new competitive procurement

policy, embracing competition for equipment and for support services. By 2001,

MoD was reporting the use of contractors and market testing in areas such as

catering, cleaning, laundry, security guarding and maintenance, together with

engineering and supply, range operation and support, training/instruction, bird

control, academic and support functions at Military Colleges and target simulation

and electronic warfare training. Overall market testing was estimated to have

resulted in cost savings of some 20% to 30%. In 2006, MoD introduced an

expanded programme of market testing under which in-house units were actively

encouraged to bid against private firms for MoD contracts. Since then UK military is

continuing with the function of outsourcing in various capacities.

Australia 34

49. The transformation of the Australian Defence Forces (ADF) in recent

decades has many features in common with the outsourcing in large private sector

enterprises. There is a success story about this organisational transformation.

Defence has been learning from experience elsewhere in the private and public

sectors and in the process, has identified some of the distinctive features of the

reform process in Defence. Major structural change has been associated with these

developments. Outsourcing of a wide range of services formerly provided by

military personnel or Defence civilians is one of the key features of such change. As

a result of these changes, the number of private sector employees supporting

Defence capability has increased and the proportion of military personnel employed

in less priority positions decreased significantly. These structural changes and

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outcomes have much in common with developments in the private sector. For

Defence however, the pressure for transformation usually derives from budgetary

rather than competitive market forces.

50. The strategy underpinning these developments is long standing. For

example, the 1987 White Paper entitled “The Defence of Australia” indicates that, "A

program of management reviews will identify areas in which ADF personnel can be

replaced at less cost by the use of civilians and private industry." More recently, the

“Defence Efficiency Review” recommended that ADF should harness the potential

and resources available through local non military sources. The very essence of this

review is to free up resources from support and administrative activities to

strengthen the ADF's combat capabilities. This review eventually led to the idea of

outsourcing in ADF.

51. The move takes the trend towards outsourcing key military roles to a new

level. The Defence Materiel Organisation recently issued a unique tender request

titled “Contracted Security and Intelligence Services to the Australian Army”. These

security managers will be responsible for protecting soldiers in army barracks from

attacks, as well as investigating mismanagement and fraud inside the base. The

Australian army has used private security guards to monitor the perimeter of its

defence bases for more than a decade but it is the first time it has outsourced the

management of base security to civilians rather than uniformed intelligence officers.

The outsourcing of such a delicate area of the army’s functions reflects a distinct

shift of organisational management. Outsourcing is also seen as a more economic

and efficient way of filling jobs that do not necessarily require a soldier, sailor or

airman to perform them. 35

New Zealand

52. New Zealand Defence Forces (NZDF) Outsourcing Strategy36 describes that

“Because of an increasing operational tempo and a shortage of both financial and

personnel resources, the NZDF is seeking to return to its core competencies.

Effective logistics outsourcing will enable defense forces to focus on their core

competencies while releasing personnel to focus on what they meant to do-war

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fighting. Most logistics functions performed in the military also are conducted in the

commercial sector; thus, there are viable candidates for outsourcing. Outsourcing of

noncore competencies is based on the notion that an organization seldom can excel

at more than a handful of activities and, to achieve maximum efficiency, it should

focus on those activities. The defense organization is no exception.

53. For the NZDF, identifying warfighting capabilities as a core competency was

relatively easy. The difficulty was in identifying the logistics services that should be

retained as core military competencies. The NZDF defined core and noncore

logistics functions; Core activities are those that would be undertaken by the NZDF

inside an area of operations whereas Noncore activities are those activities

associated with training and support that do not require military skills. Those are

generally commercial or administrative in nature, and are not directly related to

operational activity. Drawing from these definitions, noncore logistics functions can

be described as nonoperational activities that are not required to be undertaken by

military personnel.

54. The New Zealand Army, Royal New Zealand Navy, and Royal New Zealand

Air Force have their own outsourcing initiatives besides the logistics functions

outsourced by the NZDF Logistic Development Directorate. This directorate, along

with the Ministry of Defence Procurement Directorate and the NZDF Strategic Plans

Directorate, performs strategic logistics outsourcing functions. The main logistics

systems outsourced by NZDF are

a. Supply and finance. The use of Resource Planning system

supply and finance software modules across the NZDF saved $3.06 million in

the year of 2001, surpassing the original estimate by 22 %. This figure does

not include an additional saving of $700,000 in personnel costs. This

happened to be a continually benefitting programme for NZDF since then.

b. Reprographic equipment and multifunctional devices. The

introduction of digital technology and multifunctional devices into the

performance of this function has enabled the NZDF to realize a significant

cost saving. The contract, signed in 1999 for 5 years, has saved at least $1

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million a year through reductions in staff and lower costs for photocopying

and printing. Equipment previously owned by the NZDF has not been

replaced, making substantial capital resources available for other purposes.

c. Office products and stationery. A contract signed in 2000

eliminated the need for stationery stores in the NZDF by providing personnel

the capability to order items electronically. Supplies are delivered directly

from the vendor to the customer within 48 hours.

d. Uniforms and other apparel. In 2001, the management,

development, and manufacture of NZDF clothing were outsourced to a prime

vendor contractor, Yakka Apparel Solutions. The contractor procures,

manages, warehouses, and distributes apparel, footwear, and personal

support items used by NZDF service personnel. The contractor’s IT system is

linked to the NZDF system, which enables NZDF personnel to order on line.

All orders, invoices, and payments are managed electronically. The NZDF

realized an initial saving of $3 million with the closure of the defense uniform

stores.

e. Consumables. In September 2002, the NZDF signed a contract

with a prime vendor to deliver consumable items directly to the customer.

Consumable items are defined as nonspecific military materials purchased to

meet both nonstock and stock requirements. Each year, the NZDF buys

approximately 50,000 consumable items with a purchase value exceeding

$20 million from more than 1,700 suppliers using contracts, standing offers,

and casual purchase agreements. The reductions in personnel and

inventories resulting from contracting with a prime vendor for consumable

items and the attendant use of electronic procurement ensued significant

savings for the NZDF.

India 37

55. From a theoretical perspective, there are four compelling factors that driven

the concept of outsourcing in Indian Defence Services. Those are - cost

minimization/value maximization, resource access, superior resource leverage, and

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risk diversification. The outsourcing decision for Indian Armed Forces is based on

'core' and 'non-core' activities that determine which activities need to be retained in-

house and which are to be purchased from the market. However, there exists a very

thin demarcation line defining 'core' and 'non-core' activities. From the perspective

of Indian industry, the Indian private sector is suitably placed to work closely with

their defence sector counterparts. The benefits of defence outsourcing to the private

sector is endless and includes import independence, technological self reliance,

faster and cheaper supply of logistics etc. However, not so long ago, the private

sector’s role in Indian Defence Services was confined merely to providing raw

materials, semi-finished products and parts and components to Ordnance Factories.

With the rising profile of Indian private industries on the global scene backed by

competitiveness, quality standards and efficiency there is enough confidence among

the private enterprises to delve into hardcore development and production of hi-tech

defence equipment. To accommodate private industry, in recent years the

government has initiated policy measures like for instance the Defence Procurement

Policy, to boost greater private participation. Some of the items are likely to be

outsourced to the private sector include land systems, vehicles, engineering

equipment, marine systems, aviation systems, arms and ammunitions, UAVs,

surveillance systems, IT and communication radars and radio sets. Besides, the

existing Defence Supply and Storage Network, vast Defence Estates, Armed Forces

Medical Services and Defence Personnel Recruitment are also under review to be

outsourced to private players for better management, speedy and quality services

and for revenue generation.

56. The Indian Army identified three broad areas for outsourcing: ‘system

support’ related to maintenance and repair of equipment; ‘services’ linked to

transportation, medicare and security; ‘contingency and competitive’ related to

services and civil contracts, etc. In its methodology of outsourcing, the army divides

logistics support into three levels: strategic, operational, and tactical or direct

support. On analyzing three levels of logistics, the Indian Army does not outsource

tactical logistics as it forms the first and second line of support to troops and

provides them confidence during operations. The Army feels that due to inhospitable

terrain and war-like circumstances, private operators may find it difficult to do

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business in some cases. The army categorizes all functions into core and non-core

functions. While the core functions are to be retained in-house because of their

criticality during military missions, the non-core functions, which are non-operational

in nature, could be outsourced.

57. Outsourcing in the Indian Air Force (IAF) goes back to as early as 1940 and

the experience so far has been mixed. A number of activities like security of IAF

installations, repair, overhaul and upgradation of various weapons systems and

equipment and refueling operations at various IAF bases have been outsourced at

varying proportions. Further outsourcing is contingent upon the suppliers' flexibility

and willingness to take up additional tasks. IAF feels that The core functions of air

warfare like self-sufficiency of combat units, operation of combat aircraft and first

line maintenance are not to be outsourced. However, the IAF is in the process of

drawing up an action plan to pursue outsourcing in the years ahead, and has set an

immediate target of fifty per cent, which would be increased depending upon the

satisfaction level.

58. The Indian Navy, by decentralizing financial powers, has been able to

outsource many activities for the purpose of inducting modern technology and

increasing levels of synergy and co-ordination. At present, these areas broadly

include: operational requirements like ship refit and overhaul, ship engineering, and

engine overhaul; technical support related to maintenance of equipment, building

conservancy, IT, and dredging of channels; administrative support for ferry service,

etc. The three areas which the Navy wants exclusive control over and out of the

ambit of outsourcing are: weapons and sensors; networking and communication;

and basic ship design. The Navy contends that these need heavy doses of

Research and Development costs or need to be under its control for operational

security reasons. However, in recent years the government has been encouraging

private player participation and the result is visible with Larsen and Toubro building

a huge shipyard at Hazira, Surat. Also, the Navy plans the support of strong defence

industrial base at major naval bases – Mumbai, Visakhapatnam, Kochi, Port Blair

and Karwar – as a major prerequisite to serve the outsourced activities of the Navy

more efficiently.

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CHAPTER-IVOUTSOURCING - BANGLADESH NAVY PERSPECTIVE

SECTION – 1BUDGET ANALYSIS OF BANGLADESH NAVY

59. Being informed about the basic concepts of outsourcing and modalities of this

function in a global overview an attempt will be made to determine the prospect of

Bangladesh Navy as a field of such affair. For the convenience of discussion the

broad idea is bisected into two basic discussion themes. It is required to analyze the

budget of Bangladesh Navy in the fiscal year of 2009-10 is brought under review.

Thereby comparative profile of sectors likely or feasible for outsourcing is

determined. Following figure indicates the distribution of total budget of the fiscal

year 2009-10 into main head of expenditure in Bangladesh Navy. Point to note that

the largest head of all head less pay, allowances and capital purchase is service

head. The function of these services ranges into a wide variety of affairs which

seems likely or at least possible to be outsourced considering the business infra

structure of Bangladesh. The assessment of business and industrial infrastructure

demands particular attention as it is a dominant factor of outsourcing process

prospect determination. It is reasonably assumed that many functions performed in

house in Bangladesh Navy can be undertaken with more expertise by numbers of

vendors in our country.

Figure 7: Head Wise BN Budget 2009-1038

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60. The functions performed under budget head ‘services’ are of different variety.

It is certain that all the functions under this head cannot be performed by external

agencies even if cost reeducation factor permits. The consideration of operational

promptness, efficiency and security must be kept into prime consideration. However

these aspects are negotiated while outsourcing military functions worldwide as we

have seen in previous discussion. The problems of such venture will be covered at

length in later discussions. Keeping aside this issue, functions under service head

and repair & maintenance head can be primarily determined as the feasible sectors

for outsourcing. From this preliminary selection numbers of subhead such as arms

and ammunition or intelligence services cannot be outsourced in our context. It can

be argued that, these critical military functions are also been outsourced in many

countries around the world as discussed previously. But here the business and

industrial structure of our country comes into play. The prevailing business

environment is not apparently conducive for taking up such critical function into non

military hand at present. Also the mind set of associated authorities will not allow

such progression. The following graph represents a holistic view of expenditures

incurred against Bangladesh Navy 2009-10 budget ‘Services’ main head. In our

onward discussion we shall asses the performance in some sectors managed in

house and compare that with of outsourced (if done) functions.

Figure 8: Distribution of Main Head Services into Subheads39

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61. Besides the functions of ‘Services’ which are mostly support function another

practicable sector for outsourcing can be the head of repair and maintenance.

Under this hood the allocated budget is only 1% which necessarily does not

represent the actual picture. The graph below shows the distribution of entire repair

and maintenance budget according to the sanction of the fiscal year of 2009-10. But

the missing part is the man hour and costing involved in in-house facilities of repair

and maintenance of Bangladesh Navy. Seemingly the minuscule figure of this head

is translated into much larger load on Bangladesh Navy.

Figure 9: Distribution of Budget Main Head Repair and Maintenance 40

62. The analysis of budget refers to an apparent idea of possible sectors

subjected to outsourcing in Bangladesh Navy. These are mostly in broader term

support and service function under the budgetary heads discussed earlier. These

functions are necessarily not linked with operational aspects of Bangladesh Navy

rather related to comfort, amenity, habitability and security to some extent. Thereby

the functions likely to be studied are less liable to cause any sort of operational

discrepancies and unpreparedness.

40

? Ibid.

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(THOUSAND BDT)

TOTAL BUDGET 96000 THOUSAND BDT

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SECTION - 2PERFORMANCE EVALUATION

63. The representation of Bangladesh Navy budget could give a glimpse of

possible sectors for outsourcing. However it was relatively easier comparing to the

rest part. The justification and reasoning of such venture is not visible unless some

light of logic and rationale are shed on it. To study the feasibility of outsourcing in

Bangladesh Navy, a number of sectors have been considered to evaluate the

existing practices in various sectors with a view to determine the scope of

outsourcing in Bangladesh Navy. The function such as housing, base maintenance

or base security which all are done in-house are considered under outsourced

condition to justify the requirements and benefits related to outsourcing. We shall

discuss these sectors one by one.

Transportation

64. Bangladesh Navy is utilizing a huge number of transports both in

operational and supportive role. Transports are mostly used for admin, amenity and

some other non-combat activities in Bangladesh Navy. To add a comparative

dimension to this discussion, the practices of Indian Navy in this regard can be

mentioned. The Indian Navy keeps a very limited number of transports in their

inventory which are essential to meet their operational and admin matters. Other

than that, they employ from outside sources to meet routine or unscheduled

programme. This is being done with the consent and authority of area commander

level which helps to avoid bureaucratic complexity of obtaining approval. The

arrangements are normally in short term basis so the scope of modification is open

at lesser effort. Alteration and adjustment of such arrangement is done as per naval

requirement with less effort and short notice. 41

65. A detail study has been done by Bangladesh Navy in Khulna area to check

the feasibility of outsourcing in the transport sector. Under the directives of NHQ, the

Khulna naval area commander formed a committee42 and the committee found that

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in most of the cases the civil transport is economical than the service one. However,

the initiative could not be materialized due to some other problems. The

comparative expenditure rate of the committee report against per km is given in the

following table which indicates that except very few minor sectors all other cases are

in favour of outsourcing.

Ser

Transport &

Approx Value

(In BDT)

BN Transport

Expenditure/km

(In BDT)

Civil Transport

Expenditure/km

(In BDT)

Remarks

1

Bus

(25,00,000) 30.96 25.75

Civil Transport Profitable

2

Truck

(25,000,00) 36.65 25.75

Civil Transport Profitable

3

Jeep/Station

Wagon

(12,000,00)

13.68 22.00

Service Transport

Profitable

4

Pick up

(10,000,00) 30.32 19.00

Civil Transport Profitable

5

Ambulance

(15,00,000) 17.39 16.50

Civil Transport Profitable

6

Micro/Coaster

(15,00,000) 16.03 21.00

Service Transport

Profitable

7

Car

(7,00,000) 22.88 14.50

Civil Transport Profitable

Table 2: Comparative Expenditure of Transport in Khulna Area43

Housing Project

66. The Bangladesh government provides residential quarter for the naval

personnel. The constructions of buildings are done by civil contractors, and

subsequent maintenance to a limited extent, by the armed forces through the

Military Engineering Services (MES). A number of countries specially the western

countries do not construct housing for the government employees including the

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defence personnel. This case study compared the 15-storied building at NHQ

complex with the adjacent 16-storied building just out side the Naval Head Quarters

parameter namely “Gulf Heights” (G&H)44.

67. Both the navy made and civil made buildings provide almost similar facilities

in terms of space, fittings and other decorations. The comparative data’s of both are

appended below45:

Builder No. of

Flats

Space

(Sq ft)

Total Cost

(BDT)

Rent

(BDT)

Facilities

Navy 52 1650 15,83,67,500 -

3 bed, 3 bath, drawing,

dinning, 2 balcony

Civil 56

1800

1960

2000

-

16,000

18,000

17,000

19,600

18,000

20,000

3 bed, 3 bath, drawing,

dinning, 2 balcony and

security guard

Table 3 : Comparative Cost Effectiveness of Civil and Military Construction

68. Now, instead of constructing the 15-storied building at the cost of BDT

15,83,67,500/0046 if navy would fixed deposit the same amount of money in any

reputed bank and hire the entire Gulf Height building or a similar building it would be

still beneficial.

Base Maintenance

69. A considerable number of manpower is employed in the various bases of

Bangladesh Navy for base maintenance and other administration functions. The

base maintenance such as cleaning, grass cutting, gardening, admin job etc is done

by these personnel but in many armed forces like US defence, the private company

does these jobs. Because they experienced that the private company can do this job

with less money but more efficiently. Employing service people for base

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maintenance who all are highly trained on military matter is just misusing of assets

and degrades their real performance.

70. For the purpose of analysis, let us take the example of NHQ. There are total

13 service personnel and 12 civil employees dedicated for NHQ office area

cleanliness and maintenance47. In addition, there are more service personnel

directly or indirectly involved with this job. The detail of the personnel with their

salary structure is given in the following table:

71. Normally, the job is accomplished by the civil employee and the service

personnel take charge and assist them. From the above figure it is distinct that

though the ratio of employee is almost equal but still the salary of the service

personnel is nearly three times than that of civilian. Again, if the task could be

outsourced to a private company they would probably employ lesser manpower than

present strength which would reduce the cost.

47

? Data collected from Executive Officer at NHQ.

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Ser Service Employee No. Yearly Salary (BDT)

1 Leading Topass 01 1X6800X12=81,600

2 Topass-1 08 8X5900X12=5,66,400

3 Topass-1 04 4X6800X12=3,26,400

Total = 13 9,74,400/00

Ser Civil Employee No. Yearly Salary

4 UDC 1 1X6500X12=78,000

5 Gardener 5 5X6500X12=39,000

6 Khakrob 5 5X2800X12=1,68,000

7 Civil Labour 1 1X3200X12=38,400

Total = 12 3,23,400/00

Grand Total = 25 12,97,800/00

Table 4 : Base Maintenance Expenditure

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Military Engineering Services (MES)

72. MES is responsible for maintenance, repair and construction of building,

road, air-conditions, furniture and also provide electricity, gas and water supply.

MES is also authorized of limited work at its own and most of the job especially

major works costing over BDT 1,50,000/ is done through enlisted contractors48. MES

provides all these services through other primary service providers such as WASA,

DESA, City Corporation etc. It is not a difficult job to get such facilities directly from

the primary sources like other civil consumer. It is therefore an additional

organisation in between the defence and the primary service providers.

73. The ratio between consumer and maintainer in BN is approximately 1:9.2 if

considered the total no of Bangladesh Navy personnel and MES staff. A total

amount of Tk 19, 36,00,100/00 was spent in the MES sector in last fiscal year, out of

which 35% was spent on pay and allowances of all MES staff against maintenance

and repair works allocation of 65%. This analysis does not include other overhead

costs such as ration, medical facilities, accommodation of MES staffs etc. The

existing MES organisation is therefore not cost effective comparing with the services

it provides. The better services can be availed from any service provider with less

expenditure. Many of the European countries, Malaysia, Singapore and the US have

already outsourced most of their MES services49.

Base Security

74. Outsourcing for defence base security services is a growing practice in the

developing countries to achieve cost savings and management efficiencies.

Bangladesh Navy has number of bases and installations around the country. All of

those installations require security and which is mostly done by the service

personnel or by MODC personnel. There is no need of extra specialised training like

military training for this security guard duty. Now a day, a lot of private security firm

came into business. Most of the civil corporate organisations including the banks

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and multinational companies are availing their service. The practice has also been

introduced in our armed forces but in a very small scale and not in an organized

manner. It may be possible to guard all the posts by the private company other than

the key and vital post of the Bangladesh Navy bases.

Other Miscellaneous Sectors

75. Apart from the units, sectors and areas mentioned there is enormous scope

for Bangladesh Navy to consider for outsourcing of its services. However, the area

of sectors will much depend on the capability and reliability of the outsourcing

vendors and also the armed forces desire and scope. In light of our personal

experience in the service and practices of the other armed forces, the other sectors

considered viable for outsourcing include shore mess services, issue of ration,

procurement of clothing items, medical services ashore etc.50

Possible Sectors of Outsourcing

76. Transportation. Transport services in Bangladesh Navy other than those

utilized purely for operational purpose can be outsourced. A good number of “Rent a

Car” and other form of privatized organisation has all ready been set up in and

around the country. Outsourcing of transport sector would not only make it profitable

but also relieved the organisation from the burden of extra manpower, their

administration and maintenance. As a result the efficiency will go up due the

competitiveness in the system.

77. Housing Project. Hiring private houses on long time basis is considered a

viable and cost effective option for providing accommodations to service personnel.

Alternately, it could be purchasing of constructed building from the civil firm or long

term lease from them. Civil entrepreneurs are willing to construct multi-storied

buildings upon requirements. Experience of other countries and study reveals that it

is beneficial for defence and in addition it would be relieved from the huge burden of

repair and maintenance, expenditure and administration of MES personnel.

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78. Base Maintenance. Handing over of base maintenance task to

the outsourcing vendor would be a suitable option. The vital and key points of the

base may be kept out side their jurisdictions but the other general area may be

given under the private company for maintenance. It would not only save manpower

and cost but also enhance the morale of the troops since they are not very

comfortable with that task.

79. MES. Management of basic MES services such as water supply,

electricity, sewerage and other day-to-day maintenance functions may be

considered for outsourcing. A minimum number of personnel from the MES may be

tasked for financial and major supervisory functions. Such outsourcing is likely to

reduce expenditures and administrative burden drastically.

80. Base Security. Except few supervisory posts, all the bases and

residential area of Bangladesh Navy may be kept under outsourced security system.

There are instances of such practice in countries like USA and our neighbour India.

USA even outsourced there security arrangement in war zones like Iraq and

Afghanistan. So Bangladesh Navy is expected to get this security job outsourced

without difficulty.

81. Other Sectors. There are number of sectors in Bangladesh Navy, which

can be outsourced. All of those need detail study case by case and further

examination. In light of personal experience in the service and practices of the other

armed forces, the other sectors considered viable for outsourcing includes shore

mess services, issue of ration, procurement of clothing items, Medical services etc.

The private company at a lower cost can provide all these facilities and in addition it

would relieve us from the extra burden of infrastructure and man management. For

example, Bangladesh Navy can run their shore messes in the similar manner as

army is running their mess service with civil staff. Issuance of clothing and ration

needs huge infrastructure and involvement of large number of personnel.

Specialised and costly treatments of the armed forces hospital may be outsourced.

Long time contracts with private, semi governmental or even with foreign hospitals

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may provide medical services cost effectively. Outsourcing of such events would

relieve the armed forces from the extra load and expenditure.

SECTION-3APPROACHES TO BANGLADESH NAVY OUTSOURCING

Benefits of Outsourcing in Bangladesh Navy

82. Earlier discussion unveils number of benefits to any organisation out of

outsourcing process. All of them may not be applicable to the particularity of

Bangladesh Navy. However, followings are the expected benefits if outsourcing is

implemented in Bangladesh Navy:

a. Commanders Get Freed to Focus on Core Functions. It

is a commonly accepted fact that the naval commanders at all levels spend

nearly 80% of their time and attention on routine administrative and logistic

tasks. By outsourcing less important functions to service providers;

commanders get freed to concentrate on their operational tasks. They can

focus on their primary responsibility of training and preparing their commands

for operational activities.

b. Supplements Uniformed Manpower. The size of navy is limited in

our country due to many reasons like budget constrain. It is left to

Bangladesh Navy to make do with the sanctioned manpower to fulfill their

assigned operational responsibility. There is ; thus, a need to ensure that

sailors are not wasted on logistic job. This can only be achieved by off

loading non fighting functions to service providers. Thus, outsourcing

provides a way to utilize manpower at the maximum effectiveness.

c. Improves “Teeth to Tail” Ratio. This ratio is generally

described as a proportion of active duty combat personnel to the number of

personnel engaged in overhead and logistic functions in the armed forces. As

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the fighting efficiency of any military is dependent on the manpower available

to engage an enemy, it has always been the endeavour of all military to

reduce tail. Outsourcing is considered an ideal alternative for non combat

‘Tail’ function which is applicable for Bangladesh Navy.

d. Cost effective option. Outsourcing has been found to be a highly

cost effective option. Creation of integral capability to undertake logistic

functions is a costly proposition for two reasons. One, there are huge

establishment costs involved and , secondly, employing a trained sailor to do

what a civilian can be tasked to do costs a great deal more. So developing

option by outsourcing non core functions will save budget for Bangladesh

Navy.

e. Modern Technology warrants expert handling. Modern wars

are technology intensive. To serve the trend Bangladesh Navy is also

procuring many modern equipment, machineries and platforms. In-house

maintain ace and operation of complex hi-tech systems requires extensive

commitment of resources. In case the responsibility is outsourced to the

developers and producers of such equipments, their participation in ensuring

optimum performance of the equipment is assured. Bangladesh Navy will

neither need to train there manpower nor maintain inventories. Additionally

in-house competence can never match those producers of that equipment.

f. Exploitation of developed facilities. Over a period of time large

scale logistic infrastructure facilities have come up in the civil sector.

Bangladesh Navy should utilize these facilities and not duplicate them.

Stockholding depots and transportation services can easily be integrated in

operational plans. If required, certain resources cab be taken lease as well.

These are highly economic and viable options.

g. Utilization of Expertise of Ex Service Men. Sailors retire at a

comparatively younger age. They still have a considerable numbers of useful

years left to serve their country. Outsourcing of noncore functions provides

an excellent avenue to tap their potential. Most service providers prefer to

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employ ex service men as their conversant with normal functional of the navy

and relate very well to their requirements. Even navy will feel more

comfortable dealing with ex servicemen as they can communicate with them

effectively.

Probable Impediments of outsourcing i in Bangladesh Navy and Ways out

83. Operational consideration. Outsourcing of certain functions to entities

not directly under the command of field force curtails commanders’ liberty to employ

them as per the changing ground situation. Especially the area and domain of

operation of any navy like Bangladesh Navy poses considerable amount of

uncertainty in such affair. A sound planning of outsourcing strategy will reduce such

risk. The functions should be monitored keeping the possible uncertainties in mind

so that can be managed without organisational collapse.

84. Traditional military values. Making sailors work alongside service

providers upsets traditional military values, morale and functioning. It degrades the

professions of arms. Service personnel take pride in their honour and ideals. They

value their exclusivity. Outsourcing and consequent presence of civilians in their

midst runs counter to their long cherished naval traditions. In such issues the new

practice to be conveyed by motivation and reasoning to all. It is not new that

organizations changed the practices over time due to the need of change.

85. Security Hazard. Presence of civilians in an operations scenario may

compromise security and distract attention to ensure safety of the unarmed civilian.

Trend to become an irreversible process are dependence on service providers

becomes permanent. The vendors to be selected under strong scrutiny and

screening process to eradicate such problems.

86. Non profit organisation. Logic of cost effectiveness cannot be applied to

an organization whose purpose, attitude and functioning have been conditioned by

management of violence in national interests. Thus argument can be raised against

outsourcing in Bangladesh Navy.

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87. Bureaucracy. As far as our practice goes, our administrative

culture is not conducive to any changed or innovative scenario. Thus the venture of

outsourcing in Bangladesh Navy may ace tremendous bureaucratic impediment.

However, well persuasion of valid requirement may ease the situation.

SECTION-4

THEORETICAL FRAMEWORK - BANGLADESH NAVY OUTSOURCING

Success of Outsourcing

88. To make an outsourcing effective and purpose oriented numerous

consideration and efforts are needed. However survey among 1410 corporate

worldwide reveals a list of factors behind the success of outsourcing according to

their experience. it is understood that a survey within defence forces practicing

outsourcing would serve better purpose but the rationales and causes of success in

this process irrespective of field of utilization mostly matches. the broad framework

suggested for Bangladesh Navy will be attempted to ensure the core reason s of

outsourcing success .

Figure 10: Factors for Outsourcing Success51

Policy Considerations of outsourcing process

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89. Bangladesh Navy needs to outsource the non-core functions where it is

practical and cost-effective. But the discussion in previous chapters brought out two

main guiding principles in this respect; it must not affect operational readiness and

efficiency and secondly it must be economic. Operational readiness and support

must never be compromised when activities are contracted out. To ensure this, the

various measures to help integrate the contractors into support systems are:

a. Accountability. Clear lines of accountability must be established

for contracted out work. For example, ground commanders would retain

some command and control over contractors, as a part of the system.

b. Competence. It is of prime importance that commercial

contractors have the skills and expertise to provide the support, especially for

highly technical jobs.

c. Sustainability of Support. It must be ensured that there is

sustainability of the expertise in the market, especially when such skills are

specialised and take a long time to nurture.

d. Surge Requirement. Surge capacity for emergency needs must

be catered for when we contract out the function.

Conceptual Steps of Bangladesh Navy Outsourcing Process

90. To materialize the suggested policy considerations it is imperative to frame a

conceptual theme of entire outsourcing process for Bangladesh Navy. The basis is

mostly guide by the corporate practice of such process. The process starts with the

progression of strategic planning for the logistics management system. Thus the

driving would rise from top level of decision making hierarchy of Bangladesh Navy.

The foremost requirement is to identify the functions which are said to be noncore-

viable for outsourcing. A number of sectors in this regard is suggested and argued

as probable sectors in Bangladesh Navy to be outsourced. However, this process

needs continuous review and any standing proposition cannot be formulated. Next

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steps suggest the identification of non core activities cannot be outsourced due to

operational contingency or any valid reason. The policy considerations will guide the

outsourcing process in this step.

Figure 11: Conceptual Steps of Outsourcing Process52

91. The goals and requirement is needed to be determined at this point. Before

approaching to any vendor or consulting their capability it is required to set the

bottom line performance according to the expectation and requirement of

Bangladesh Navy. Thereby it is ensured that the attainable standard will not fall

short. After selecting the vendors through standing practices the performance

monitoring is the foremost task. This task demands continuous monitoring and

control over the entire process. And evaluation of performance and feedback of user

end to be substantiated for furthermore review of the system. Bangladesh Navy

must have robust performance measurement systems in place in order to effectively

evaluate and manage the outsourcing process. Effective performance measurement

can assist in identifying causes of poor performance in outsourcing. Furthermore,

outsourcing processes without developing effective performance measures means

Bangladesh Navy will not know whether service providers are executing

processes better or worse than the internal departments.

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Figure12: The Outsourcing Framework53

28

? A Royal Navy officer who is just completing three years as chief military adviser to the international administration running Bosnia29

? Eric A. Orsini and Lt Col Gary T. Bublitz, “Contractors on the Battlefield: Risks on the Road Ahead?” , http://www.almc.army.mil/alog/JanFeb99/MS376.htm, entered on 03 Nov 2009.30

? Joint Publication (Pub) 4-0, “Doctrine for Logistics Support of Joint Operations,” October 99, V-8.31

? Leiphart Dr. Kristine Lee, Creating a Military Supply Chain Management Model, ‘ARMY LOGISTICIAN’ Professional Bulletin of United States Army Logistics, VOLUME 33, ISSUE 4 Jul–Aug 2001.32

? ‘Improving the Combat Edge through Outsourcing’, A US DoD report, http://www.defenselink.mil/speeches/speech.aspx?speechid=890, entered on 12 Nov 2009.

33 Hartley Professor Keith, Director Centre for Defence Economics, University of York, ‘Military Outsourcing: UK Experience’, www.york.ac.uk/depts/econ/research/documents/outsourcing.pdf, entered on 23 Oct 2009.

34 ‘Defence’, Australian Government Department of Defence official magazine, April 2005. http://www.defence.gov.au/defencemagazine/editions/20050401/default.htm#groups, entered on 22 Nov 2009.35

? Australian Army to outsource its intelligence and security services, 14 Nov 2007. http://www.thaindian.com/newsportal/, entered on 20 Nov 2009.36

? Squadron Leader Leanne J. Woon, Loc cit.

37 Behera Laxman Kumar, Outsourcing Possibilities in Defence: Some Impressions, April 11, 2007, http://www.idsa.in/index.htm, entered on 4 Oct 2009.

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The Outsourcing Framework

92. Although extensive process analysis is time consuming and difficult, it is a

crucial element of outsourcing. Redesigning processes will enable Bangladesh Navy

to define clear boundaries between processes that should be internalized and

those that should be outsourced. The suggested framework to determine the

priority and order of functions to be outsourced can be visualized through a matrix.

Point to be noted that importance of the process and Bangladesh Navy capability to

perform such function in-house will be the dominant parameters in the selection

process. Furthermore, detailed requirements analysis can be derived from process

analysis, which will facilitate the development of an effective service level

agreement, which can be used to measure service provider performance. Linking

process importance and performance capability dimensions is a central element of

outsourcing. Identifying critical and non-critical processes ensures that

processes that are deemed crucial to the overall performance and success of

38 Summary of Bangladesh Navy budget collected from D Budget NHQ Dhaka.39

? Ibid.41

? Interview with the Indian Naval Officer Lt Cdr Peter Varghese, Student Officer DSCSC, and own practical experience while doing course in India.42

? Commodore Commanding Khulna Temporary Memorandum no. 400/2002 dated 30 Sep 200243

? Uddin Cdr M Ashraf, Privatisation Prospect of Possible Sectors in Bangladesh Armed Forces, Research Paper, Defence Services Command and Staff College, Mirpur, November 2004.44

? Ibid.45

? All navy related figures collected during interview with GE (Navy) and Director Works, NHQ and the data of Gulf Heights has been collected from the Manager of G&H.46

? This figure does not include pay, allowances, ration and medical expenditure of MES personnel.48

? Information collected from the office of GE(Navy), Dhaka.49

? Cdr S Sharif, (C), psc, BN, “Scope of Privatisation-Logistics services of the Bangladesh Armed Forces”, Individual Research Project, Armed forces War course, 2003.50

? Interview with Cdr Kudratullah,(S), psc, BN, Officer in Charge, School of Logistics And Management, BNS TITUMIR.51

? Outsourcing Essentials, Op Cit.52

? Marc J Schniederjans, Ashlyn M Schniederjans, Dara G Schniederjans, Op Cit, p14.

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the organisation are not lost to service providers. This analysis can also serve as a

valuable basis for prioritizing which processes require immediate attention through

either internal improvement or outsourcing.

Endnotes

3 Patel Alpesh B, Aran Hemendra, Outsourcing Success: The Management Imperative, (175 Fifth Avenue, New York, USA, PALGRAVE MACMILLAN, 2009), p 7.

21

? ‘Improving the Combat Edge through Outsourcing’, A US DoD report, http://www.defenselink.mil/speeches/speech.aspx?speechid=890, entered on 12 Nov 2009.

22 Squadron Leader Leanne J. Woon, Royal New Zealand Air Force, The New Zealand Defence Force—How Does It Stack Up? , Army Logistician Professional Bulletin of United States Army Logistics, Volume 36, Issue 2 March–April 2004 p 30.

23 Squadron Leader Leanne J. Woon, Loc Cit24

? Procházka Lt Col Josef, Op Cit.25

? Brown Douglas and Wilson Scott, The black book of outsourcing : How to manage the changes, challenges, and opportunities, (Hoboken, New Jersey, USA, John Wiley & Sons, Inc., 2005),p xi.53

? McIvor R, Humphreys P K, Wall A P, McKittrick A, Op Cit, p32.

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