Accounting Blog for Business
Posted by D&V Accounting Services
Aug 5, 2014 1:34:00 PM
Although outsourcing has many advantages, such as lower production costs, business expansion, obtain external scarce resources, due to the development and implementation of the outsourcing process, companies will be faced with many uncertainties, and business risks.
Therefore, to avoid the hazards of outsourcing, it is essential to fully consider and analyze its impact of.
Negligence of any one could, trap enterprises with risks that will not only greatly revenue; it can even lead to loss of control and core competencies. Overall, the factors that affect outsourcing mainly have the following aspects:
1. The overall strategy of the enterprise
Outsourcing strategy must match its overall strategy. The overall strategy is the basis of the enterprises in developing specific initiatives. This not only determines the outsourcing decisions, but also affects the outsourcing object and model, as well as the choice of suppliers. A Harvard Business School Professor identified three basic types of strategies that can be used, namely cost, leadership, and differentiation.
Corporate pursuit of cost leadership strategy is always best to reduce costs through economies of scale. A differentiation strategy through unique products and services provided to the user obtain premium rewards. Obviously, the overall strategy of enterprises also differs accordingly.
2. Nature of business
In order for enterprises to successfully implement outsourcing, they must determine which business is for outsourcing, and which business must be homemade. Resource inputs require in different business activities a degree of competitive advantage, which enterprises divide into core business and non-core businesses. Core business (such as software companies, R & D, manufacturing enterprises manufacturing) invest resources up, and has a key role in the survival of enterprises; often an enterprise can create a high-yield, development potential and market prospect business activities. The strategic importance of non-core businesses to focus on core businesses is relatively low. For example, manufacturing financial activities, human resources, as well as logistics business, belongs to the non-core business.
Theoretically, the more complex the nature of the business is, the more important the competitive strategy becomes, and the greater the possibility of asymmetric information. Therefore, enterprises tend to be internal, rather than outsourcing more. This view has been proof of empirical research. Masten (1991) found that in the aircraft manufacturing industry, the more complex the parts are, the greater the likelihood of its internal production. Core business from the point of view of the core competencies, must be retained within the enterprise.
3. The degree of asset specificity
The nature of the business inputs require assets and also restrict the choice of outsourcing strategies. The transaction cost theory is that the higher the degree of asset specificity, the higher the costs of market transactions, and thus the greater the investment risk. The so-called dedicated assets refer to assets investment in support of a particular transaction. The parties to a transaction have a strong dependence breach and will allow the other party to generate huge trading risks. The ideal choice for this type of market transactions is a special degree of a low asset that is easy to obtain. For medium degree of asset specificity, the product or business can be outsourced to external suppliers in order to achieve economies of scale.
4. Outsourcing vendor selection
Outsourcing vendors and external suppliers actually form a partnership, outsourcing vendor performance largely affect the level of service of the manufacturer on the market. Therefore, the choice of the outsourcing provider occupies an important position in the development of the strategy business managers need to seriously consider when choosing the most suitable suppliers. Vendor selection is fairly difficult. Generally, when you choose to outsource, a supplier must first have a clear purpose – is it to access resources, or reduce costs? Different purposes, selected on the basis of outsourcing vendors. When the company decides to adopt a cost-saving program, hoping for cheap suppliers is not surprising. Follow this with a scientific evaluation system to evaluate the potential of outsourcing suppliers, such as the quality of inputs, the transaction price, delivery time, technical capacity, service levels, and satisfaction in terms of potential outsourcing provider assessment. Clearly, the ability of the outsourcing provider is the key to enterprise evaluation and selection of suppliers; the blind pursuit of low prices would damage the quality of the outsourcing business, and ultimately affect the performance of the market.
5. The outsourcing process of management
Because outsourcing is a boundary between the intermediate forms of market transactions and vertical integration, vendors and outsourcing suppliers is actually a principal – agent relationship. Suppliers and manufacturers have more information about the quality of products and services, costs and other information, which leads to information asymmetry. In addition, with cooperation philosophy and cultural differences, ineffective communication mechanism may lead to the failure of outsourcing. Therefore, it is very necessary to strengthen the management of the outsourcing process; do this through the establishment of appropriate management coordinating body. Build open channels of communication to solve the problems and contradictions in the outsourcing process in order to prevent accidents. Also by thinning out the contract, the establishment of quality assurance system and management control means to strengthen the supervision of the outsourcing process to reduce the risk of information asymmetry.
Want to read about outsourcing in action? Find out how we analysed, contemplated, and finally implemented a solution to bring our client closer to their goals through this case study: