Slide 1

Outsourcing

Part 2 - Evaluation & Management

Section 2 –Analysis of the Strategic Sourcing Options

• The Capability / Importance Matrix

Stage 4 of the Outsourcing Framework

Slide 2

Stage 4 Analysis of the Strategic Sourcing Options• Evaluates the implications of the strategic sourcing options based upon the

importance level and capability of the organisation in the activity under scrutiny in comparison to external sources.

• The sourcing options must be considered in the context of the following detriments:– disparity in performance– technology influences– external considerations– supply market risk– behavioural considerations

Source: McIvor (2005)

Slide 3

Outsource

Outsource

Invest to PerformInternally

Or

Strategic Outsourc

e

Perform Internally& Develop

Strategic Outsourc

e

Or

Keep Internal

Or

Stage 4 - Analysis of the Strategic Sourcing Options

Not Critical to CompetitiveAdvantage

Critical toCompetitive Advantage

Less Capable More Capable

Relative Capability Position

ActivityImportance

Q1

Q4

Q2

Q3

Source: McIvor (2005)

Slide 4

Quadrant 1 – Invest to Perform Internally or

Strategic OutsourceThere are external sources that are more capable than internal ones for a critical activity. The key questions are:

• How significant is the disparity in performance between the sourcing organisation and potential external sources?

• How much investment is required by the sourcing organisation to equal and surpass the capabilities of external sources?

• What are the behavioural influences on attempting to bridge the disparity in performance?

• Is it possible to outsource the activity and leverage the capabilities of external suppliers?

• Are there internal and external constraints on pursuing such an outsourcing strategy?

• Will customers of the sourcing organisation recognise a difference in its end products if the activity is outsourced?

Source: McIvor (2005)

Slide 5

Quadrant 1 – Invest to Perform Internally• Involves investing the necessary resources to bridge the disparity between

the sourcing organisation and the more competent external providers.

• Selecting this option will depend on:– the significance of the disparity– type of disparity

• Most appropriate when the sourcing organisation is in a strong position to bridge the disparity in performance:– may have no choice – i.e. when there is considerable risk in using an

external supplier for such a critical activity.

• Internal constraints (e.g. workforce resistance) may force the organisation to attempt to improve performance through an internal improvement initiative.

Source: McIvor (2005)

Slide 6

Quadrant 1 – Invest to Perform Internally

Most appropriate when:• Type of disparity – potential to replicate competitor / supplier

performance.• Significance of disparity – low.• Technology – stable. • External factors – stable.• Supply market risk – high.• Behavioural factors – significant barriers to outsourcing.

Cont’d

Source: McIvor (2005)

Slide 7

Quadrant 1 – Strategic Outsource

• Most likely when it is not possible to attempt to bridge the disparity in performance.

• May consider outsourcing such an activity which is likely to diminish in importance in order to focus resources and effort on activities that promise to be a source of competitive differentiation in the future.

• Strategic outsourcing is most appropriate when the organisation feels the advantage the external source has in the activity is too difficult to replicate.

Source: McIvor (2005)

Slide 8

Quadrant 1 – Strategic Outsource

Most appropriate when:• Type of disparity – difficult to replicate competitor / supplier

performance.• Significance of disparity – high.• Technology – rapidly changing. • External factors – highly competitive environment.• Supply market risk – low.• Behavioural factors – manageable

Source: McIvor (2005)

Slide 9

Quadrant 2 – Perform Internally & Develop or Strategic OutsourceThe organisation is more competent than any other potential external sources in a criticalactivity. The key questions are:

• Should the organisation strive to maintain and build upon its superior capabilities in the activity concerned?

• What are the behavioural influences on maintaining and building the activity internally?

• How significant is the disparity in performance between the sourcing organisation and the potential external suppliers?

• Does the organisation possess the necessary resources to provide the activity on an on-going basis?

• Is it possible to outsource the activity and leverage the capabilities of external suppliers?

• Are there internal and external constraints on pursuing such an outsourcing strategy?• Will customers of the sourcing organisation recognise a difference in its end products

if the activity is outsourced?

Source: McIvor (2005)

Slide 10

Quadrant 2 – Perform Internally & Develop

• It is important to consider both the significance and type of disparity in performance in the activity (as in quadrant1).

• Keeping an activity internal is most appropriate when the sourcing organisation is in a strong position to sustain its performance advantage over time.

Source: McIvor (2005)

Slide 11

Quadrant 2 –Perform Internally & Develop

Most appropriate when:• Type of disparity – difficult for competitors to replicate.• Significance of disparity – high.• Technology – relatively stable. • External factors – relatively stable.• Supply market risk – high.• Behavioural factors – manageable.

Cont’d

Source: McIvor (2005)

Slide 12

Quadrant 2 – Strategic Outsource

• Ideally an organisation wants to have superior performance in as many critical activities as possible, ultimately:– it is only possible to possess leadership in a limited number of

activities due to the resources required to maintain such a position.

• The organisation may feel that it is not able to sustain superior performance in an activity in the future and therefore may decide to outsource the activity to the most competent external source.

Source: McIvor (2005)

Slide 13

Quadrant 2 –Strategic Outsource

Most appropriate when:• Type of disparity – straightforward for competitors to replicate.• Significance of disparity – low.• Technology – rapidly changing. • External factors – highly competitive.• Supply market risk – low.• Behavioural factors – manageable.

Source: McIvor (2005)

Slide 14

Quadrant 3 – Outsource

There are external suppliers that are more capable than internal

sources for an activity not critical to business success. The key

questions are:

• Is there a sufficient number of suppliers in the supply market to ensure adequate competition for the sourcing of the activity?

• To what extent do potential external suppliers of the activity possess proprietary technology that gives them an advantage over other suppliers?

• Is there the potential to outsource the activity and leverage the capabilities of external suppliers?

• Are there internal and external constraints on pursuing such an outsourcing strategy?

• Will customers of the sourcing organisation recognise a difference in the end product if the activity concerned is outsourced?

Source: McIvor (2005)

Slide 15

Quadrant 3 – Outsource

• The most significant influences are the level of supply market risk and the constraints that impact upon the freedom of the organisation to outsource.

• For example: if there are only a limited number of capable suppliers in the supply market, the organisation may decide to continue to perform the activity internally.

• For example: internal constraints such as the threat of industrial action may impinge upon the freedom to outsource.

Source: McIvor (2005)

Slide 16

Quadrant 3 – Outsource

Most appropriate when:• Type of disparity – difficult to replicate.• Significance of disparity – very significant.• Technology – • External factors – • Supply market risk – low.• Behavioural factors – manageable.

The key issues that will prevent OS in this case will be a high

level of internal resistance and / or high supply market risk.

Source: McIvor (2005)

Slide 17

Quadrant 4 – Outsource or Keep Internal

The organisation is more competent than potential external sources

in an activity that is not critical to business success. The key

questions are:

• Is there the potential to outsource the activity and leverage the capabilities of external suppliers?

• Are there internal and external constraints on pursuing such an outsourcing strategy?

• Will customers of the sourcing organisation recognise a difference in the end products if the activity concerned is outsourced?

Source: McIvor (2005)

Slide 18

Quadrant 4 – Outsource or Keep Internal

• Although the sourcing organisation is more competent than external sources the activity is not central to competitive advantage:– should consider outsourcing the activity & focus resources on

building capabilities in activities that are more critical to the success of the organisation E.g. Vickers.

– may decide to maintain the activity in-house (avoiding internal constraints: cost, staff resistance)

• If outsourcing is chosen the organisation must develop the capabilities of a supplier to the level achieved internally.

Source: McIvor (2005)

Slide 19

Quadrant 4 – Outsource

Most appropriate when:• Type of disparity – straightforward for suppliers to perform.• Significance of disparity – low.• Technology – rapidly changing. • External factors – highly competitive environment.• Supply market risk – low and possible to develop the

capabilities of suppliers to undertake the activity.• Behavioural factors – manageable.

Cont’d

Source: McIvor (2005)

Slide 20

Quadrant 4 –Keep Internal

Most appropriate when:• Type of disparity – difficult for suppliers to perform.• Significance of disparity – very significant.• Technology – • External factors – • Supply market risk – no capable suppliers available and no

potential for supplier development.• Behavioural factors – manageable.

The key issues that will influence this sourcing option will be the

lack of available suppliers and internal resistance to outsourcing.

Source: McIvor (2005)

Slide 21

Required Reading

• Jones, W. (1997) Outsourcing Basics, Information Systems Management, vol. 14, pt. 1, pp.66-69.

• Lee, M. (1996) IT Outsourcing Contracts, Industrial Management and Data Systems, vol. 96, pt. 1, pp. 15-

20.

• McIvor, R. (2005) The Outsourcing Process, Cambridge University Press, pp.12-14, 35-36, 66-67, 86-88.

Slide 22

ReferencesThe following texts were used in the preparation of this material.

Barthelemy, J. (2003) The Seven Deadly Sins of Outsourcing, The Academy of Management Executive, vol. 17, no. 2, pp.87-98.

Barthelemy, J. & Geyer, D. (2000) IT outsourcing: findings from an empirical survey in France and Germany, European Management Journal, vol. 19, no. 2, pp.195-202.

Jones, W. (1997) Outsourcing Basics, Information Systems Management, vol. 14, pt. 1, pp.66-69.

Lee, M. (1996) IT Outsourcing Contracts, Industrial Management and Data Systems, vol. 96, pt. 1, pp. 15-20.

Slide 23

References (Cont’d)The following texts were used in the preparation of this material.

McIvor, R. (2005) The Outsourcing Process, Cambridge University Press.