Strategic Management of Outsourcing. Klemen Kavèiè - PDF

Strategic Management of Outsourcing Klemen Kavèiè Strategic Management of Outsourcing Faculty of Management Koper Monograph Series issn Strategic Management of Outsourcing Klemen Kavčič Management

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Strategic Management of Outsourcing Klemen Kavèiè Strategic Management of Outsourcing Faculty of Management Koper Monograph Series issn Strategic Management of Outsourcing Klemen Kavčič Management Strategic Management of Outsourcing Dr. Klemen Kavčič Reviewers Dr. Mirko Markič in Dr. Maja Meško Published by University of Primorska, Faculty of Management, Cankarjeva 5, 6000 Koper Design and Typesetting Alen Ježovnik Koper University of Primorska, Faculty of Management The monograph received financial support from the Slovenian Research Agency from the state budget fund for financing scientific monographs. cip Kataložni zapis o publikaciji Narodna in univerzitetna knjižnica, Ljubljana (075.8) 658.7(075.8) kavčič,klemen,1975 Strategic management of outsourcing [Elektronski vir] / Klemen Kavčič. El. knjiga. Koper : Faculty of Management, 2014 Način dostopa (url): isbn (pdf) Contents List of Tables 7 List of Figures 8 1 Introduction Description and Definition of the Research Problem The Purpose, Objectives and Research Hypotheses Major Contributions to Science Conceptual Framework of Qualitative Research Research Methods for Reaching Set Goals Book Layout 19 2 Outsourcing The Definition of Outsourcing Global Development Development in Slovenia 29 3 General Theoretical Premises Company Policy as the Framework for Outsourcing Company Policy Model Selection for the Purpose of Outsourcing A Framework for Company Policy Auditing as an Approach for Managing Complexity Benchmarking as an Approach for Managing Complexity in Policy Creation Scenarios as an Approach for Managing Complexity 60 4 Theories and Paradigms Related to the Placement of Outsourcing 63 5 Dimensions of Company Alliances and Control Introduction Managing Organizational Risk by Hierarchy Managing Organizational Risk by Market 74 6 Empirical Research Literature Review Research Framework 87 7 Pilot Qualitative Research The Purpose of Pilot Qualitative Research 89 5 Contents 7.2 Description and Research Methods The Results of Pilot Qualitative Research Conclusion 95 8 Quantitative Research The Goal of Preliminary Quantitative Research Research Description and Results The Analysis of Research Results Temporal Framework for Collaboration in Outsourcing Conclusion Conclusion Confirmation of Hypotheses Research Goals Further Research 115 Literature 117 6 List of Tables 2.1 Expected Benefits with Regard to Short-Term and Long-Term Company Policy Framework Policy Model in the Form of Questionnaire for Integral Audit of Company Policy A Memo for Comparative Audit of Core Policy A Memo for Benchmarking Development Policy A Memo for Benchmarking Current Policy Short-Term Current Policy Audit with Regard to the Memo Mid-Term Current Policy Audit with Regard to the Memo Long-Term Current Policy Audit with Regard to the Memo Sample Characteristics of Structures in the Hierarchy Concept Sample Considerations upon Transitions among Control Structures Selected Characteristics of Structures in the Market Concept Risk Management in the Hierarchy Concept Sample Considerations upon Transitions among Control Structures The Assessment of Long-Term Audit According to Answers Provided Questionnaire and Responses of Respondents Surveyed Enterprises Main Activities Arithmetic Means and Standard Deviation for the Assessment of Importance of Outsourcing Reasons Reasons for Not Entering Outsourcing Relationship The Readiness of Enterprises to Bring Back the Outsourced Activity 104 7 List of Figures 5.1 Market vs. Hierarchy Surveyed Enterprises According to the Number of Employees Outsourced Activities The Duration of Outsourcing Relationship 103 8 1 Introduction 1.1 Description and Definition of the Research Problem Outsourcing as a special cooperative strategy which involves important strategic decisions of a company is discussed in this book. Outsourcing is dealt with as a transfer of a business activity, which has previously been carried out by the company, to an external supplier. Outsourcing is defined as a strategy for managing company complexity, in which a company outsources some of its activities, which could also be carried out by the outsourcing company, by more or less preserving its core competences. In literature (Lamming 1993; Quinn and Hilmer 1994; Olsen and Ellram 1997; Lonsdale and Cox 1998; Mantel, Tatikonda, and Ying 2006, 822), the following related terms can be found: supply chain management, outsourcing and vertical alliances. More and more emphasis is put on cooperative relationship among partners suppliers and customers. When dealing with outsourcing we should distinguish between cost-oriented and most often short-term and strategic, long-term outsourcing. Outsourcing is one of the strategic tools for achieving business goals. Commons (1931), Coase (1937) and Williamson (1975) believe that companies choose outsourcing when the cost of activity carried out within the company would exceed the cost of buying the product or service on the market. Outsourcing represents the transfer of some business activities, which had been carried out by the company itself, to external suppliers. Kubr (2002, 509) and Greaver (1999, 27) define outsourcing as a contractual handing over of some business activities, for which the company decided not to carry them out itself, to an external company, i. e. the decision to find an external (a number of definitions of outsourcing according to various authors can be found in section 2.1). Further on, I define outsourcing as a special cooperative strategy of a company and as a transfer of certain business activities carried out by the company itself to an external supplier. At the same time I try to 9 1 Introduction explain the terminology of two concepts, which are often used inaccurately as a substitute for the term outsourcing. The first concept is outtasking which does not represent the transfer of a business activity, but a transfer of a task, or only a part of a process. Various tasks carried out through outtasking are usually data entry, internal research activities, technical drawing, etc. The second concept, often used in American literature, is offshoring, which is here defined as transfer of business activities to another country and which can have two different forms: as a transfer of business activity within a corporation to a foreign country or a transfer of a business activity to a foreign supplier. In the second case we can speak about offshore outsourcing. The scientific field of the discussed topic is dealt with within research in management, a narrower field would be research of outsourcing as an important component of company policy and as a strategy for managing company through the synthesis of both interest and instrumental aspects, technocratic and humanistic concept of management in creating integrated company strategy for long-term cooperation between partners in outsourcing relationships. The basic problem, which motivated me for this research activity in marketing deals with outsourcing as an important component of company policy and emphasises the problem of one-way, often poor quality relationships between outsourcers and suppliers in Slovenia. Our approach to the research problem exceeds partial treatment of outsourcing from the point of view of production, purchasing and marketing among companies. Temporally limited cooperation between participants in outsourcing is dealt with as a problem of company alliances formation, i. e. as inadequate strategic consideration of outsourcing in Slovenian enterprises. The main research area is the study of power relations and interests of participants in outsourcing relationships. We focus on the problem of short-term, one-way relationships between outsourcers and suppliers and showed the advantages of long-term approach. Literature on outsourcing outlines the strategy, opportunities and risks of outsourcing in an integrated manner. On the other hand, studies describing the transition to outsourcing and vice versa are extremely rare. Our research will show that managements rarely conduct thorough analysis of the transition to outsourcing or of the return to the production within the company. This is why a number of recommendations will be made in the end. 10 The Purpose, Objectives and Research Hypotheses 1.2 Outsourcing is one of the ways of managing company complexity, ranging from hierarchy to marketplace. Hierarchy represents managing with the power of ownership, marketplace with the power of interests. On the marketplace participants promptly align their interests and usually conclude short-term agreements, whereas relationships in hierarchy tend to be more sustainable and rigid. This book is based on a thorough review of literature about the complexity of basic management activities (planning and design, governance and alliances, leadership and management, measuring and assessment), the complexity of enterprises, supply chain management and the concepts of integrated company policy creation. The contents of articles, research activities and publications mostly from the recent period was connected with basic management concepts in accordance with the Faculty of Management doctrine with the synthesis between the so-called technocratic and the so-called humanitarian concept of as the extremes within the scope of possibilities for company management. The decision to outsource can be of long-term and strategic importance for a company. In deciding about outsourcing it is of utmost importance for the management to base its decision thorough study and analysis of all possible outcomes, benefits and, above all, risks involved in outsourcing activities. It happens much too often that the management of a company arrives at a false conclusion that finding an appropriate supplier and entering the outsourcing relationship will, without a shadow of a doubt, bring benefits. 1.2 The Purpose, Objectives and Research Hypotheses The purpose of this book is to on the basis of the analysis of the present outsourcing situation in Slovenia create the concept for the establishment of cooperative relationship among the participants in outsourcing and for the creation of integrated outsourcing strategy. The basic approach which has been chosen does not deal with outsourcing per se, but sees it as one of the possible outcomes within the company management scope from marketplace to hierarchy. We shall follow two basic objectives: 1. Within the possibilities of an individual researcher: (a) create the starting point for integrated analysis of strategic aspects of outsourcing from the point of view of Slovenian enterprises; (b) place 11 1 Introduction research results within the framework of scientific discipline management and in a more narrow sense within the management doctrine of the Faculty of Management. 2. Based on findings in 1: (a) discuss outsourcing as one of the possibilities for managing the complexity of enterprises within the scope from ad hoc collaboration or exchange (the so-called marketplace) to normative control (the so-called hierarchy); (b) design assessment tools to support managerial decision-making with regard to outsourcing as the most suitable tool for placing an enterprise within the dimension ranging from market to hierarchy and for making important assessments in deciding for outsourcing either by placing it closer to market or closer to hierarchy. Dealing with outsourcing by placing it in various dimensions represents a novelty in Slovenian literature. In addition, foreign literature also lacks similar studies in the field of outsourcing. In the empirical part of our research, the scope and features of outsourcing in Slovenian environment were analysed. Power relations between outsourcers and outsourcees in Slovenian enterprises were analysed from the point of view of collaborative and long-term strategies. Transitions between individual placements ranging from marketplace to hierarch were thoroughly analysed, because they are of utmost importance for understanding why enterprises discussed in our research decide to enter outsourcing relationships. The most important research question is how enterprises should behave in order to gain long-term benefits from both insourcing and outsourcing activities. This core research dilemma will be structured in two basic research questions: r1 Which operations should be studied and analysed before making any decisions regarding the placement in any of possible forms and levels of outsourcing or, alternatively, before the decision is made to stop outsourcing activities? r2 Through which measures and activities can enterprises materialise integrated outsourcing strategy for long-term and successful collaboration? The answer to these basic research questions is given in the form of this basic research thesis: Long-term strategic creation, implementation and management of outsourcing relations can be more beneficial 12 Major Contributions to Science 1.3 and less risky for both outsourcers and outsourcees from short-term and one-sided outsourcing relations. With regard to previous studies and findings and with regard to the basic thesis of this research activity the following hypotheses have been formed: h1 Slovenian enterprises, which outsource certain activities, make incomplete assessments regarding the use of resources and possibilities leading to long-term relationships and do not plan strategies for further collaboration after the initial relationship has ended. h2 An important part of assessments made by outsourcers is based on short-term economic advantages (lower cost) and does not aim at the formation of long-term partnerships. h3 The relationship between outsourcers and outsourcees is predominantly distributive and rarely cooperative, with the level of mutual trust being very low. The duration of the majority of discussed outsourcing relationships is temporally limited and does not exceed the framework of enterprise s developmental policy. Outsourcing is dealt with as: a placement within the dimensions of ad hoc exchange relations, in which the alliance is poorly controlled and in the so-called hierarchy, in which the alliance is very well controlled; a placement within a time frame ranging between short-term and long-term span; a placement within instrumental (technocratic) and interest (humanistic) aspect. 1.3 Major Contributions to Science The most important contribution to science of this research is in the research and analysis of interests of outsourcers and outsourcees, which represents the basis for the creation and planning of appropriate strategies. In outsourcing, one-sided and short-term economic aspects of outsourcers, usually in the form of large and strong enterprises, prevail. The established relationships are most frequently temporarily limited and distributive, often in favour of the stronger party, which is most often the outsourcer. This book is oriented towards the development and empirical investigation of integral creation of outsourcing policy with the analysis of 13 1 Introduction outsourcer and outsourcee interests. In addition to already known instrumental aspect factors, factors related to interest aspect of outsourcing are also analysed despite the fact that they are rarely dealt with in literature. The results of the analysis of interests and outsourcers were used in the formation of outsourcing policy in Slovenian environment. An important contribution of our work is the synthesis of interest and instrumental aspect, technocratic and humanistic concept of management in the formation of integral company strategy for long-term collaboration in outsourcing relationships. From the methodological standpoint, our main contribution lies in the complimentary use of qualitative and quantitative methods, which opens the possibility for a comprehensive approach to measuring and assessing, analysis and interpretation of results. Qualitative and quantitative parts that have been used in order to analyse interests and power relations of outsourcing participants in designing strategies are supplemental. Data gathered by one method investigate, explain and enrich data gathered by the other method. Furthermore, an added value of our research lies in managerial implications, related to company policy making and in the formation of strategic guidelines for the development of outsourcing in Slovenian environment. In a small economy such as Slovenian, such strategies can increase the possibility for a successful long-term collaboration of Slovenian enterprises in outsourcing relationships. The contents of this book can benefit enterprises, which are often entering in situations of distress or, more often, due to insufficient knowledge unequal and fatal relationships with outsourcers, which often terminate by damaging outsourcees. Such systematic research, based on company policy theory has,untilnow,beennon-existentinslovenia. Research outcomes can be of some importance for enterprises in more developed countries, which are entering outsourcing relationships by following short-term one-sided economic benefits, thus underestimating hidden transactional costs for establishing and terminating such relationships and which do not exploit strategic opportunities of further collaboration with outsourcees, in which outsourcers invested a considerable amount of their competences. Short-term and one-sided benefits do not take into account the possibilities offered by strategic placement of outsourcing within the dimensions from marketplace, where constant coordination is taking place, and hierarchy, where the environment is rather permanent and rigid. Such research activity is 14 Conceptual Framework of Qualitative Research 1.4 original and can contribute towards the reputation of the Faculty of Management, where it was carried out. Research limitations are the following: the scope and complexity of the topic; limited capability of an individual researcher; outsourcing is considered an activity, which was previously carried out by the outsourcing company; limitations regarding the research of sensitive pieces of information managers are usually reluctant to reveal certain sensitive pieces of information; limitations regarding the content and temporal capabilities of the researcher in studying numerous transitions between degrees of alliances and placing outsourcing within certain dimensions; selected companies in the central qualitative research were chosen according to the author s personal judgment, based on the basis of substantial managerial experience related to managing companies that were partners in unequal outsourcing relationships; the limitation of pilot study and central qualitative research to mainly electro-metal industry, because this line of business has an important and long tradition in the field of alliance formation and collaboration in Slovenia, both with domestic and foreign companies. 1.4 Conceptual Framework of Qualitative Research Enterprises form alliances in order to accomplish objectives. Alliances can be poorly managed (marketplace) or highly managed (hierarchy). Outsourcing represents one form of alliances between enterprises somewhere between the marketplace and hierarchy. Placement within the dimension marketplace-hierarchy is dynamic, and is changing due to the company initiatives or as a response to external influences. The nature of the analysis of interests and power relations between outsourcers and outsourcees in their efforts to create integral strategies requires a combined research approach. Qualitative and quantitative research approach was used in the analysis; whereas the synthesis was used in order to lower the weaknesses and retain strengths of the two research methods. Such research concept is in accord with many authors (Yin 2003; Seale et al. 2004, 5 6), who claim that it is sensible to introduce qualitative research methods in addition to quantitative methods
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