chapter-ii conceptualization of outsourcing section-1 outsourcing -generalized concepts
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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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