Focus strategies that seek to leverage company skills, capabilities and resources have become a dominant paradigm in business strategy planning and implementation. As a consequence, firms increasingly seek to reduce investments in non-core business processes and functions while freeing up resources and management attention for core competency development to achieve competitive advantage and provide unique value for customers. Activities for which companies do not have critical strategic needs or special capabilities are considered for external sourcing. Combining the two approaches can yield significant benefits. Outsourcing business processes can give access to provider economies of scale and learning thereby reducing operating costs and enhancing the quality of the activities outputs. The expected value of an outsourcing initiative is constituted by the aggregate projected benefits – both efficiency and effectiveness gains within the externalised process and strategic rewards – that flow from the exercise of the option. Strategic fit of the sourcing strategy with the current competency profile of the firm plays a key role in securing the success of vertical dis-integration policies and to obtain the highest value contribution from outsourcing initiatives. Corporate planners who are involved in firm boundary and competitive business policy decisions have to understand the market and service characteristics of outsourcing service provision, the relevant strategic linkages between non-core and core processes as well as the various types of interaction and governance models that are available to fulfil the needs of the organisation. Empirical evidence suggests that corporate planning procedures and externalisation strategies could be integrated more comprehensively.
KEYWORDS
Outsourcing, value contribution, corporate planning, core competencies, make-or-buy decision, interaction costs, business process re-engineering, interconnected value system, information technology, activity costs, standardisation, relative cost differentials, strategic sourcing, total cost of ownership
Table of Contents
1. INTRODUCTION
1.1 THEORETICAL CONSIDERATIONS AND PROJECT METHODOLOGY
1.2.1 Literature review
1.2.2 Project methodology
1.3 A BRIEF HISTORY OF OUTSOURCING
1.4 THE FOUNDATION: THE CORE COMPETENCY PARADIGM
1.5 OUTSOURCING: INDUSTRY STRUCTURE
1.5.1 Service provision and cost structures
1.5.2 Outsourcing industry growth and trends
2. DISAGGREGATING THE VALUE CHAIN – BUSINESS PROCESS OUTSOURCING
2.1 OUTSOURCING OF BUSINESS FUNCTIONS
2.2 THE ROLE OF INFORMATION TECHNOLOGY
2.3 BUSINESS PROCESS OUTSOURCING AND CORPORATE TRANSFORMATION
2.4 MODES OF COLLABORATION AND CONTROL BETWEEN SERVICE PROVIDERS AND CORPORATIONS
2.5 LINKS BETWEEN COMPANY PERFORMANCE AND OUTSOURCING
3. OUTSOURCING STRATEGY: COSTS AND BENEFITS OF OUTSOURCING
3.1 GETTING STARTED: RESOURCES AND CAPABILITIES
3.2 EXPERIENCE CURVES IN MAKE-OR-BUY DECISIONS
3.3 DECISION CRITERIA
3.3.1 Financial considerations
3.3.2 Process and quality improvements
3.3.3 Business risks and risk management
3.4 STRATEGIC ISSUES
3.4.1 Monitoring strategic alignment
3.4.2 Maintaining strategic flexibility
3.4.3 Termination and continuation decisions
3.5 KEY SUCCESS FACTORS
3.5.1 Strategic alignment – option identification, selection and choice
3.5.2 Relationship management – value creation and learning
3.5.3 Performance management – operational excellence
4. OUTSOURCING STRATEGY IMPLEMENTATION
4.1 GOVERNANCE: STRUCTURE, SYSTEMS AND CONTROL
4.2 PRELIMINARY PHASE
4.2.1 Vendor selection
4.2.2 Contract design
4.3 OPERATIONAL PHASE
4.3.1 Service level management: measuring performance and managing scope
4.4 VALUE EXPECTATIONS AND LEVELS OF SATISFACTION
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 CONCLUSIONS
5.2 RECOMMENDATIONS
Project Objective & Core Themes
This project analyzes the strategic role of business process outsourcing (BPO) initiatives within the context of corporate planning. It seeks to develop an analytical framework to evaluate the value contribution of outsourcing options, focusing on the interplay between core competency management, operational performance, and the strategic alignment of firm boundaries.
- Strategic assessment of make-or-buy decisions based on core competencies.
- Analysis of the outsourcing services industry structure and growth drivers.
- Evaluation of governance models, collaboration modes, and risk-return trade-offs.
- Integration of outsourcing strategy with corporate planning procedures.
- Key success factors for effective supplier management and operational excellence.
Excerpt from the Book
1.1 THEORETICAL CONSIDERATIONS AND PROJECT METHODOLOGY
The majority of experts view outsourcing as a strategic management tool to restructure and re-organise current operations. The key rationale for outsourcing is a focus on core competencies and corresponding core processes. As such, outsourcing belongs to a family of affiliated concepts such as subcontracting or out tasking, shared corporate services, venturing and joint endeavours, and alliances and partnerships. These instruments help company management to concentrate on processes and capabilities that provide unique value to customers. The relevant differences between these tools are the relative degree of externalisation of resources and business risk, the decision rights retained or foregone and the respective cost versus revenue orientation.
In definitional terms outsourcing can be characterised as: The permanent movement of a business activity outside the firms’ boundaries, whereby the firm incurs transaction costs as a consequence of transferring decision rights to a third party responsible for managing the activity according to agreed specifications.
This definition remains neutral about the specific reasons for outsourcing. At a general level, outsourcing should be considered when the total costs of owning specific factors of production are consistently and significantly higher than the total costs of using the specific factors of production. The factor inputs can be both direct – i.e. to generate revenue by providing inputs to a product or service – or indirect, i.e. as input for a support process within a corporate function. In addition, there are strategic factors to be considered which cannot easily be quantified such as availability of skilled resources, costs of developing resources in-house, and projected capability gaps between current strategy and market trends, business model stability, and degrees of dependency on external inputs.
Summary of Chapters
1. INTRODUCTION: Sets the stage by defining the strategic importance of outsourcing and outlining the report's theoretical and empirical approach to firm boundary re-definition.
2. DISAGGREGATING THE VALUE CHAIN – BUSINESS PROCESS OUTSOURCING: Explores the nature of BPO relationships, the role of IT as an enabler, and how companies transform through externalizing non-core functions.
3. OUTSOURCING STRATEGY: COSTS AND BENEFITS OF OUTSOURCING: Analyzes the fundamental strategic principles of make-or-buy decisions, including financial considerations, risk management, and the identification of key success factors.
4. OUTSOURCING STRATEGY IMPLEMENTATION: Focuses on the practical execution of outsourcing, covering governance structures, the preliminary vendor selection phase, and operational management through service level agreements.
5. CONCLUSIONS AND RECOMMENDATIONS: Synthesizes the core research findings into a strategic framework for management and provides recommendations for both service buyers and providers.
Keywords
Outsourcing, value contribution, corporate planning, core competencies, make-or-buy decision, interaction costs, business process re-engineering, interconnected value system, information technology, activity costs, standardisation, relative cost differentials, strategic sourcing, total cost of ownership.
Frequently Asked Questions
What is the core focus of this management project?
The project investigates how business process outsourcing can be utilized as a strategic tool within corporate planning to re-define firm boundaries and enhance overall value creation.
What are the central themes discussed in the work?
The central themes include the core competency paradigm, the disaggregation of the value chain, the alignment of outsourcing strategies with corporate goals, and the management of long-term supplier relationships.
What is the primary research objective?
The primary objective is to develop an analytical framework that allows managers to reliably assess outsourcing options, evaluate their value contribution, and manage the associated strategic and operational risks.
Which scientific methods are applied in this research?
The study combines theoretical analysis grounded in the core competency paradigm with empirical insights from market research, industry reports, and a questionnaire-based exploratory study of eleven high-level executives in large German firms.
What topics are covered in the main body?
The main body examines the categorization of outsourcing models, the integration of IT in business processes, the strategic decision criteria for make-or-buy choices, and practical implementation phases like vendor selection and operational governance.
How can this work be characterized by its keywords?
The work is characterized by terms such as strategic sourcing, core competencies, total cost of ownership, business process re-engineering, and governance models for outsourced services.
How do "captive" outsourcing arrangements differ from market-based models?
Captive arrangements typically involve a former internal department serving the parent firm, often characterized by budget-based links rather than balance sheet-based performance, which limits their potential for sustainable business innovation compared to independent third-party providers.
Why is the "management of the provider-user interface" considered a critical success factor?
Effective management of this interface is vital because inadequate supervision can lead to increased agency costs, suboptimal strategic alignment, and the failure to capture projected effectiveness gains, often resulting in hidden costs and unplanned insourcing.
- Quote paper
- Goetz Erhardt (Author), 2003, The Strategic Contribution of Business Process Outsourcing to Corporate Planning, Munich, GRIN Verlag, https://www.grin.com/document/39554
