outsourcing–insourcing · 2016-08-11 · case study: the european chewing gum company (identity...

JWBK006-FM JWBK006-Jenster January 19, 2005 7:42 Char Count= 0

Outsourcing–InsourcingCan vendors make moneyfrom the new relationshipopportunities?

Per Jenster, Henrik Stener Pedersen,Patricia Plackett and David Hussey

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Outsourcing–Insourcing

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Outsourcing–InsourcingCan vendors make moneyfrom the new relationshipopportunities?

Per Jenster, Henrik Stener Pedersen,Patricia Plackett and David Hussey

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Copyright C© 2005 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,West Sussex PO19 8SQ, England

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Library of Congress Cataloguing-in-Publication Data

Outsourcing–insourcing : can vendors make money from the new relationshipopportunities? / Per Jenster, Henrik Stener Pedersen, Patricia Plackett and David Hussey.

p. cm.Includes index.ISBN 0-470-84490-6 (alk. paper)1. Contracting out. 2. Industrial procurement. I. Jenster, Per V.

HD2365.O9435 2005658 .7′23—dc22 2004025691

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN 0-470-84490-6 (hb)

Typeset in 11/16pt Garamond by TechBooks, New Delhi, IndiaPrinted and bound in Great Britain by Antony Rowe Ltd, Chippenham, WiltshireThis book is printed on acid-free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper production.

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http://www.wiley.com


Contents

Preface ix

Introduction xiii

1 Understanding the opportunities 1

Introduction 1

What is outsourcing? 1

The origins of outsourcing 2

Trends and pressures 6

Influential concepts 10

Outsourcing today 15

Traditional activities 16

Peripheral activities 18

Critical activities and processes 20

Strategic and problem-solving activities 22

Summary 24

References 24

2 Moving to supplying total solutions 27

Introduction 27

Management issues for outsourced activities 27

Traditional activities 28

Peripheral activities 29

Critical activities and processes 31

Case study: The 1999 crisis at the UK Passport Agency 32

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vi Contents

Strategic and problem-solving activities 43

Case study: The European Chewing Gum Company

(identity disguised) 44

Summary 46

Reference 46

3 Retooling marketing and the sales force 47

Introduction 47

The search for a better way to trap mice 47

Market segmentation variables 51

Segmentation approaches 53

Criteria for initial screening 55

Evaluating potential segments 56

Defining the market 58

Timing, niche markets and global considerations 59

Sales force management in a changed environment 61

Sales force development for supplying total solutions 62

Building sales force capabilities 63

Summary 65

References 66

4 Managing buyer/supplier relationships 69

Introduction 69

The challenges for suppliers 69

Case study: Timex Dundee (after Martin and

Dowling, 1995) 72

Case study: IBM Denmark 77

Supplier Challenge 1 – The need for additional

competencies 79

Supplier Challenge 2 – Managing the entry phase 82

Supplier Challenge 3 – Running the contract 90

Case study: Driver and Vehicle Licensing Agency

(DVLA), UK 92


Contents vii

The challenges for buyers 97

Buyer Challenge 1 – The pre-bid phase 99

Buyer Challenge 2 – Identifying the key suppliers 100

Buyer Challenge 3 – Awarding the contract 101

Buyer Challenge 4 – Running the contract 102

Summary 102

References 103

5 Pricing solutions and managing risks 105

Introduction 105

The value of strategic pricing 105

Fundamental pricing concepts 106

Pricing the bundle of goods and services 109

Pricing when distributors are involved 111

Price administration 111

Understanding the risks to suppliers and buyers 115

Mechanisms for bridging uncertainties 117

Summary 118

References 119

6 ‘Transitioning’ human resources 121

Introduction 121

Setting the scene 121

The fundamentals 124

Strategies for employee transfer 126

Pitfalls and critical factors 130

Summary 132

References 133

7 Structuring ‘next generation’ IT solutions 135

Introduction 135

The changing role of IT departments 135

The real problem with IT investments 136

What ROI? 138


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IT: Overadministrated and undermanaged 140

The IT paradox 142

The ‘next generation’ approach to IT 145

Summary 149

References 150

8 Achieving quality in outsourcing 153

Introduction 153

Understanding the role of quality management 153

Defining quality for integrated products and services 157

Challenges: Leadership and strategy 160

Challenges: Processes 162

Challenges: People 163

Factors conditioning quality management 163

Summary 166

References 167

9 Getting a good slice of a larger pie 169

Introduction 169

The outsourcing pie 169

How good are we at making larger pies? 171

How sellers can make the pie larger 175

How buyers can make the pie larger 176

In the final analysis 178

The Claimpower story 178

Summary 181

References 181

Index 183


Preface

Outsourcing started to become fashionable in the late 1980s. How-

ever, it very much came of age in the 1990s, and certainly became a

normal part of corporate life by the turn of the century. It is built on

three long-established principles – corporate focus on core compe-

tencies, ‘make or buy’ make or buy cost analysis and the preferred

supplier concepts of total quality management. And now global out-

sourcing is on everyone’s mind.

Initially much of outsourcing was at the easily definable end of the

spectrum – such as having a supplier make a component previously

manufactured in-house, taking over management of the company

cafeteria, or using a fleet of rented trucks for services previously

carried out internally. Such activities remain a part of the outsourc-

ing spectrum today, but the big opportunities for suppliers lie at the

other end of the spectrum where suppliers become strategic part-

ners of the organization for a specific, but not always easy-to-define,

slate of activities that might, for example, add product improve-

ment and development to the supply of a subassembly for which

not even the components were previously bought outside the firm.

It is not uncommon now for entire departments such as accounting

and R&D to be fully outsourced.

Questions of relevance for outsourcing activities at the strategic

partnering end of the spectrum include the following:

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x Preface

� What form of relationship or strategic alliance should be estab-

lished between the buyer of outsourced services and the seller

of those services?� What are the scope, scale and importance of the outsourced

activities?� What pricing strategy should be used and what risk-sharing is

involved?� What are the changes to organizations that lead to decisions to

seek more service outsourcing?

The literature on outsourcing has grown rapidly, and there is an

increasing number of books on this subject. Much of the work on

outsourcing has taken the perspective of the buying organization,

and the specific strategic and operational difficulties that buyers

face. However, there are at least two organizations in every out-

sourcing decision: What, for the buying organization, is a strategic

decision involving benefits, risks and organizational change, is for

the selling organization a strategic opportunity, which has a related,

but different, series of benefits, risks and organizational implica-

tions. Unlike the majority of publications on outsourcing this book

takes the perspective of the seller of outsourcing services spe-

cifically in terms of outsourcing strategy and implementation. In

so doing, this book fills a gap in the business studies literature.

Today, one can hardly open a newspaper or switch on the tele-

vision before the topic of global outsourcing appears; however, the

issues are more concerned with the international trade aspects of

outsourcing. It is less the business aspects and more the outsourc-

ing of jobs that raises eyebrows. The themes of this book are less

concerned about this ‘flavour of the month’, as the concerns about

vanishing jobs to overseas vendors have been around for centuries.

What this book does focus on are the firm-specific business aspects

of outsourcing and the complexities being imposed as firms engage


Preface xi

in new business areas focusing on delivering complex business

solutions.

The foundation of this book is three years of research activity at

Copenhagen Business School, funded by the school and the Danish

Industrial Mortgage Foundation, as well as the Confederation of

Danish Industry. The research project included the participation

of 12 companies that provided active participation and funding for

the research. The firms and their industries are listed below:

� Diversey-Lever cleaning system� Berendsen Textil A/S textile management� Berendsen PMC A/S compression technology� Bossard Group fasteners� NEG-Mikron A/S windmills� PostDanmark transport systems� BP/Mobile/Exxon lubricants� Quest International flavour systems� IBM Danmark information technologies� Sjællandske Kraftværker utility management� Oxford Research business research services� Canon office equipment

Most of the participating companies are international, if not global,

players in their respective industries. One area of focus was the tran-

sition from the provision of a narrowly defined product and service

portfolio to a dramatic shift in scale to more complex solutions. The

combination of research on the companies studied as well as case

studies and the study of participant contributions has provided a

much fuller picture of outsourcing from the supplier side.

The research project was organized around a number of PhD

studies, clinical studies of specific companies and issues, surveys,

literature reviews, research colloquiums, management workshops

and a large international conference. The contributing researchers,


xii Preface

apart from the authors of this book, included Mikael Lynnerup,

Michael Ahern, Kim Møller, Mogens Bjerre, Jens Geersbro, Trine

Erdal, Carlos Cordon (IMD professor) and Tom Vollmann (IMD pro-

fessor) – we thank them all for their valuable contribution.

For managers at various levels in organizations who are already

involved in outsourcing, or who see the need to become involved

in supplying value-added outsourcing products and services, this

book offers a range of practical management insights. We feel that

the book is particularly valuable for those who currently offer out-

sourcing services but who have not as yet moved to the strategic

partnering end of the outsourcing spectrum. For participants in

MBA programmes and in executive management courses this book

offers comprehensive coverage of a topic of increasing relevance in

this era of ever-increasing economic globalization.

Finally, we would like to make a special tribute to David Hussey, a

close friend and colleague and a significant contributor to business

literature over many years, who died in January 2003.


Introduction

If you are competing with the rest of the world, you had better

focus on what you are good at.

Focusing on what you are good at in companies today means a care-

ful assessment of core competencies within a broader industrial

context and strategically outsourcing many other activities. Com-

panies are being transformed from highly integrated organizations

producing and delivering goods and services themselves to much

more specialized enterprises that contract out to the marketplace for

many goods and services. As a consequence, successful outsourcing

has become a key to competitiveness. Because the new relationship

opportunities for profitable business outsourcing are global in na-

ture, cross-cultural management issues are increasingly a factor that

adds to the complexity of the task.

In this book we examine the key issues of relevance to successful

outsourcing. Our focus is on profitable business strategies. A diverse

range of examples is used to illustrate the key features of outsourcing

success and failure.

Overview of key issues in this book

Each chapter addresses a specific aspect that is required for suc-

cessfully managing the supply of outsourcing services taking buyer

perspectives into account:

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xiv Introduction

1. Understanding the opportunities: Understanding what is driv-

ing customers. The changes taking place in purchasing organ-

izations. The supplier view of the impact of what is happening.

The spectrum of outsourcing arrangements that is possible.

2. Moving to supplying a total solution: Strategic and organ-

izational implications. The issues that have to be considered.

Lessons learned from companies that have managed the tran-

sition to total solution provision.

3. Retooling marketing and the sales force: Market segment iden-

tification. New ways of market segmentation (e.g., by customer

strategy). Mining the segment. Positioning the offer. Selling so-

lutions. Different requirements of the sales force. Managing and

motivating the sales force. Changing competency requirements.

4. Managing buyer/supplier relationships: Organizational

changes in both parties. Cultural shifts. Communication issues.

Information sharing.

5. Pricing solutions and managing risks: Pricing strategies for

solutions. Understanding the risks to both suppliers and buyers

and creating appropriate pricing. Avoiding risks.

6. ‘Transitioning’ human resources: Implications for employees.

Where competencies change. Training, recruitment, reward and

retention issues. Temporary employees.

7. Structuring ‘next generation’ IT solutions: Aligning systems

with the customers. Ensuring that systems give the strategic and

control information needed for the new arrangements. Where

information may add value.

8. Achieving quality in outsourcing: Meeting quality require-

ments. Cooperating with customers and other vendors. Philos-

ophy of continual improvement.

9. Getting a good slice of a larger pie: Working with buyers

to make the overall pie larger. Getting a larger slice of the

pie from seller and buyer perspectives. Enhancing outsourcing

profitability.

JWBK006-01 JWBK006-Jenster January 15, 2005 14:51 Char Count= 0

1Understanding theopportunities

Introduction

Outsourcing – that is, the process of shifting tasks and services pre-

viously performed in-house to outside vendors – is hardly a new

idea in management. But the volume, extent and character of out-

sourcing have been changing rapidly. The challenges are not merely

simple ‘make or buy’ decisions, but also responses to what some

have declared as the new round of globalization in which not only

typical manufacturing jobs are being sent offshore, but also upscale

tasks, such as research projects, technical service support functions,

engineering and even financial analysis, are being placed in so-called

developing countries. In this chapter we look at the historical devel-

opment of outsourcing and current trends. We also introduce our

classification system for four key types of outsourcing activities. The

decision drivers for each are presented both from the perspective

of the seller of the outsourced solution and from the perspective of

the buyer of the solution.

What is outsourcing?

Outsourcing is now high on the list of the things that many savants

believe well-run organizations must consider, so that it is now as

much a management fad as a reasoned decision, offering important

augmentation to the current organizational design, or even giving

rise to new enterprise designs. It can offer great opportunities to

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2 Understanding the opportunities

both the buyer and supplier when used wisely. However, when it

becomes a mantra, used without thought, it can do great damage to

both parties.

According to the Wall Street Journal, Indian labour in banking

costs about one-tenth as much as comparable banking personnel

in Europe and the U.S. However, employing someone in back

office processing in India is only about 50% less expensive once

other costs are factored in. Wages in India are also rising rapidly

each year, a factor that could make the savings short-lived.1

What is outsourcing? One definition is the market procurement

of formerly in-house produced goods and services from legally

independent supplier firms (Semlinger, 1991). Like all definitions,

it gives the scope of the topic but conceals the infinite variety of

outsourcing possibilities. It makes it clear that there are two parties

to an outsourcing arrangement, but is really a definition from the

buyer viewpoint. The supplier may have decisions to make that are

as tough as any faced by the organization taking a decision to out-

source. In fact, outsourcing can be an opportunity for both parties,

but it may also do damage to one or both of the parties. We hope that

we can show in this book some of the pitfalls and the principles on

which good outsourcing decisions should be taken, and also look

at the issue from the viewpoint of both parties.

The origins of outsourcing

Because outsourcing has gained much in popularity, it is tempting

to think of it as new. Certainly it has changed shape and may have a

different form today, but the concept is centuries old. It is another

form of what economists call specialization, which has been defined

1 Wall Street Journal, 29 March, 2004.



as concentrating activity in those lines of production in which

the individual or firm has some natural or acquired advantage

(Pearce, 1983).

Imagine a primitive village of several thousand years BC in which

every family made its own pots, spears and arrows, and hunted

and gathered its own food. Since some people were naturally more

skilled at certain of these tasks than others, they began to concen-

trate on their core competencies (to borrow a phrase from Prahalad

and Hamel, 1990), such as weapon making, and to outsource the

other things that they used to do, such as hunting. They bartered

their knives, spears and arrows for the things they no longer pro-

duced. Later money became the medium of exchange, but the prin-

ciples of modern outsourcing can be said to have had their roots in

the recognition that there were economic benefits in specialization.

Hamel and Prahalad (1994, p. 219) state that a core competence

is a bundle of skills and technologies that enables a company to

provide a particular benefit to customers. Although the technology

of making flint-headed weapons is basic, the skill level is high. (Try

making some, if you do not believe us.) Flints have to be found,

selected, knapped, and the resultant blades and heads fixed to a

haft or shaft, which also required skill to make. The benefits of

specialization were in the increased quantity and quality of all the

needs of the village that could be gained if people concentrated on

doing the tasks for which they were most skilled.

But there was another benefit. The ‘learning curve effect’ meant

that the amount of time needed to produce a product would have

diminished as more experience was gained. This effect meant that

more thinking time could be freed up with the result that ideas

could be developed for improving the product and the processes

by which it was made.

Put another way, there was an opportunity cost when every family

tried to be self-sufficient in all respects. As long as people had to


4 Understanding the opportunities

spend a disproportionate amount of time on the things they were

not good at, they could not spend that time on tasks for which they

had comparative advantages. So, without specialization the overall

output and quality of what was produced would have been lower,

as would the rate of innovation. Although our primitive prehistoric

villagers would not have understood terms like core competencies,

outsourcing, productivity increases, opportunity cost, or learning

curves, the benefits were real and it is these that lie at the heart of

many of the modern arguments in favour of outsourcing. However,

our basic example shows something that is often overlooked today:

there have to be benefits for suppliers as well as for buyers.

Modern organizations are nurtured by another outgrowth from

the specialization roots – division of labour – which means that

the modern organization consists of individuals who have different

skills, attributes and competencies, and who are hired to fulfil a

specific task or role. Few organizations of the last century or so have

attempted to do everything themselves. There were always some

products and services that came from outside suppliers and were

never made in-house, and the boundaries between the two were

flexible. The main manifestation of outsourcing until the early 1980s

was the ‘make or buy’ decision. The focus of this activity was mainly

on cost reduction, and the main writing about this topic that we have

seen is in books on accounting. This quote from Anthony and Reece

(1978, p. 672) is typical of what has appeared in accounting books

before and since 1978:

Make or buy. Make or buy decisions are among the most com-

mon type of alternative choice problems. At any given time, an

organisation performs certain activities with its own resources,

and it pays outside firms to perform certain other activities. It

constantly seeks to improve the balance between the two types

of activities by asking: should we contract with some outside



party to perform some function that we are now performing

ourselves? Or should we perform some activity that we now

pay someone else to do?

Although in practice both opportunity cost and strategic implica-

tions were usually taken into account in the final decision, up un-

til the early 1980s most ‘make or buy’ decisions were cost-driven.

Although some services had been outsourced by this time, more

frequently outsourcing decisions applied to components. There

were already well-established specialist organizations providing in-

house catering and security services, so the concept of suppliers

whose main mission was to perform this type of work existed long

before the outsourcing of services became more common. At least

one modern book (e.g., Nohria, 1998, p. 276) appears stuck with the

erroneous idea that outsourcing is a ‘make or buy’ decision about

components and not about services:

Outsourcing. The purchase of parts from outside suppliers.

Many American small appliance manufacturers use a great deal

of outsourcing. The various parts and subassemblies for, say, a

toaster or a blender are manufactured by a number of different

companies, the so-called manufacturer does only the assembly

and selling. When a company is heavily outsourced it is referred

to as ‘hollow.’ Outsourcing is usually a good idea if the outsource

can provide the parts or components at lower cost or higher

quality. Outsourcing is an economic decision.

Starting in the 1980s services became a target for outsourcing.

One stimulus to this change in the UK, which overflowed into other

countries, was the move to privatize many of the organizations in

the public sector. An early manifestation of this trend was the re-

quirement for local authorities to market test many of the activi-

ties that they ran by having the current departments doing the job

outsourcing–insourcing · 2016-08-11 · case study: the european chewing gum company (identity...

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