Some of the advantages of selective outsourcing include relatively lower switching costs and lower probability of failure. It is also suggested that it is suited for processes which are smaller in scope. The disadvantages, however, include the lowered ability of the supplier to affect the buyer’s business objective or leverage economies of scale. This appears as a low-risk, low-return strategy; it would also lack the strategic perspective and benefits of outsourcing. Examples include sole-sourcing and individual out-tasking.
Keiretsu
So far the concepts and models of outsourcing have focused on observations from Western-type cultures. The practice of maquiladora between the United States and Mexico involves work being outsourced to factories in a location where the cost of labour is low. A hybrid concept, which is found to be closely related to the concepts of relinquishing or handing over control of a function, found in an Eastern-type culture, is Keiretsu.
Keiretsu refers to a uniquely Japanese form of corporate organization. Although keiretsu is not, strictly speaking, an outsourcing model, it is discussed here for the sake of completeness. A grouping or family of affiliated organizations that form a tight-knit alliance to work toward each other’s mutual success, forms a keiretsu. The keiretsu system is also based on an intimate partnership between government and businesses. A keiretsu represents an intricate web of relationships that links banks, manufacturers, suppliers and distributors with the Japanese government. The keiretsu model mirrors many outsourcing partnership models that have been put together. From here, however, the concepts seem to diverge.
Horizontal keiretsu are headed by major Japanese banks and include the ‘Big Six’, i.e. Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-Ichi Kangyo Bank groups. The two models 29
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most often described are the vertical and horizontal keiretsu. The vertical keiretsu are industrial groups connecting manufacturers and parts suppliers or manufacturers, wholesalers and retailers.
Examples of the vertical keiretsu include Toyota, Nissan, Honda–Matsushita, Hitachi, Toshiba and Sony. Distribution keiretsu, a subgroup of vertical keiretsu, control much of Japanese retailing, determining what products will appear in stores and showrooms and at what price.
These organizations would engage in cost-sharing with smaller suppliers much akin to the outsourcing model discussed. The sharing of costs is via various types of investment in customizing assets and supplier support services and training.
Unlike vertically integrated organizations which deploy certain skills from market to market, Japanese automotive organizations are structured around ‘mother organizations’. The participating organization aims to design and assemble products through a number of independent suppliers and alliance partners, but without owning such satellite organizations. This long-standing and successful subcontracting culture is based on inter-organizational co-operation. The model, however, does reflect the outsourcing structure that is practised outside Japan.
The relationship, however, carries expectations, as the group of
‘buyers’ and ‘suppliers’ work in a keiretsu in symbiosis, involving mutual gain. This relationship is cultivated at a subsequent stage in an outsourcing relationship.
The divergence in concepts merely demonstrates and confirms that diversity in hybrid models exist. The range of options is theoretically unending. What remains central in the theme of outsourcing, however, is the commercially viable arrangement between the buyer and supplier of these services. In the case of IT this is complicated by the fact that the very nature of IT is evolving so quickly.
1.11
Outsourcing partnerships
Again, the ability to connect quickly and meaningfully with business partners and customers in order to rapidly improve the quality of goods and services is becoming the competitive imperative. Consequently, organizations are rapidly ‘devolving’ from being self-contained and vertically integrated to being more virtual entities that rely on business partners to fulfil major parts of their supply and value chain requirements.
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Common Terms and Concepts Used in Outsourcing While partnership arrangements vary considerably in their operations, from flexibly defined, formal contacts, to loose strategic initiatives, they also encompass the provision of shared risk and benefits. Organizations with large, centralized departments that undertake most of the work in-house may also outsource specific applications to specialist suppliers. Alternatively, other organizations may seek to enter into multiple/selective sourcing contracts with a range of external suppliers to seek to reduce their internal facilities over time. The relationships so formed are described as ‘strategic alliances’ or ‘strategic partnerships’.
The options range from handing over complete IT operations, to pay-as-you-go for single application outsourcing. Notwithstand-ing the options, deep business ties and dependencies are often forged between the two organizations, and while partnerships can solve some workload issues, the biggest problem they face is how to make these relationships more painless and more collaborative. However, there exist several disadvantages to adopting outsourcing strategies. These include becoming dependent on outside suppliers for services, failing to realize the expected hidden cost savings, losing control over critical functions, having to face the prospect of managing relationships that go wrong and lowering the morale of permanent employees.
Figure 1.4 summarizes the range and intensity of relationships.
In the illustration, the intensity of the relationship is plotted Strategic
partnership
Equity/JV
IT
Economic
partnership
development
Co-investment
Managed
operations
Community
supplier
Risk reward
Preferred
(multi-asset)
supplier
Economies of
(single asset)
scale
Community
supplier
Degrees of economic freedom
Service levels
Cost
Supplier
Partner
Intensity of relationship
Figure 1.4
Variations in relationships in the outsourcing of the IT function 31
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against the type of partnership both the supplier and buyer have agreed on. The type of partnering relationship is often also described by suppliers as the degree of economic freedom. This could be a loose arrangement at one end of the scale, such as a price for service or cost model. At the other end of the scale, the supplier could be linked to the buyer in the form of a joint venture (JV) where both parties have a stake in the arrangement.
The partnership agreement controls the degree of economic freedom that either the buyer or supplier has during the period agreed at that time. There are multiple options available, of which six variations are listed in Figure 1.4. The idea behind the illustration is that in a strategic partnership arrangement, there are also often very tight economic arrangements that bind both parties into delivering high levels of service and that have very significant economic considerations. At the other end of the scale, where it is very much like a contracted situation (see Contracting versus Outsourcing), the model is that of a community supplier that provides single services for a fee.
To this end, service levels are occasionally used to manage supplier operations. As the partnership relationship develops and more trust exists in the relationship, a preferred supplier status materializes with either one or multiple assets. It is common to see a risk–reward type compensation structure materialize as the supplier is trusted to deliver and can occasionally act on its own initiative. Economies of scale arise as the resources and processes are controlled by the supplier. At this point, there is joint investment and joint responsibility for the outcomes of the function that has been outsourced. In a partnership situation, at the far right of the figure, there is equity in the outcomes and an integrated delivery effort by both the supplier and buyer comes into being. At this stage, almost all the benefits are observed in a synergistic business environment.
A ‘potential contract’ relationship model addresses the organizational needs of control and flexibility. Many new arrangements have emerged in the late 1990s, exemplified by multiple supplier contracts, joint ventures, individual and joint venture spin-offs, consortia and shared service structures. The importance of the quality of supplier–client relationships has been receiving attention for some time, both in the general management literature and in operations management research.
The quality of the relationship will also depend on the quality of information sharing and the attitudes and dispositions as well as the social climate within which relationships are pursued.
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Common Terms and Concepts Used in Outsourcing It is the balance between relationship requirements and relationship capabilities that promotes the growth of outsourced arrangements. While it is critical to find the supplier/partner with the same values and principles in order to build a healthy outsourcing relationship, it is more critical to understand how suppliers deliver ‘better’ than the organizations they serve.
Ignorance and a lack of collaborative experience often take the blame as the main source of alliance problems and failures. This carries a unique risk in the ITO relationship. The transparency of the organization and the information available between partners can be achieved through active means, including the adopting of policies that enhance information sharing, or the deployment of shielding mechanisms in order to protect key competencies. This leads also to the point that complete integration is often neglected because of political or selfish reasons.
Outsourcing has evolved from spot-contracting to relationships where service providers offer products and services that advance the organization’s strategic business goals and enhance the provider organization’s position in the value chain. Organizations are observed to resort to consortia-based sourcing, namely, sourced service consortia, for the purposes of outsourcing key functions, particularly the IT function. Organizations are choosing from niche and speciality shops such as ASPs, Web hosting, and e-commerce providers, as well as network integration experts.