Case Study: Outsourcing for the first time

Case questions: 1. If you were Cindy, where would you begin? Outline the key steps and questions to be asked in this process. A carefully devised outsourcing strategy allows organizations to meet institutional objectives more effectively. Developing a sound strategy requires a cost-benefit analysis that takes into consideration financial costs, quality expectations and relationship risks. The following are steps for developing an outsourcing strategy: i. Examine the needs of your organization. a. Define organizational objectives. Your goal may be to help a start-up get off the ground. Alternatively, your organization may be wellestablished and focused on innovating and developing new products. b. Pinpoint your reasons for outsourcing. Accessing tools and skills that are not available in-house, reducing operational costs and accelerating organizational change are a few examples c. Outline a plan for achieving organizational goals. Your company may be in the process of offering a new service to existing clients or expanding the range of services to attract new clients. Your detailed plan might include hiring outside consultants, buying parts from a thirdparty vendor or training in-house personnel to deliver services.

ii.

Research outside resources. a. Contact outside vendors and service providers to inquire about their expertise. One of the most important reasons to outsource a particular service is to benefit from the knowledge and experience of outside individuals and/or firms. Ask for cost estimates. Gathering cost estimates early on in the process will aid you in conducting a cost-benefit analysis and competitive pricing studies.

Check references to ensure quality of services. Ask to speak to other organizations that have been served by the vendor or service provider

iii.

Assess the costs and risks of outsourcing. a. Calculate the financial costs and savings. Training in-house staff and funding office space and equipment for new staff may result in higher costs than outsourcing tasks to a third-party. Consider contract maintenance costs. In-house personnel must oversee outsourcing contracts, which might involve an investment of time, equipment and travel expenses. Determine if necessary skills exist in-house. Salaried employees might possess required skills, making it unnecessary to hire outside vendors or consultants b. Evaluate quality needs. Outsourcing can be risky if an outside vendor, contractor or consultancy firm does not meet quality expectations. In these cases, organizations typically incur greater costs because they must have the work revised by another vendor or hire in-person staff to correct issues. Establish quality standards by talking to clients and holding internal meetings to develop a list of must-have qualities. Distribute quality requirements. Make sure that your outside vendors and consultants receive a clear explanation of quality standards, both verbally and in writing. c. Analyze cultural and communication dynamics. The nature of the work might dictate that you outsource to domestic firms that understand the culture of your clients. Alternatively, your needs may be technical in nature, making it more affordable to outsource offshore d. Evaluate legal considerations. Examine tax laws, contract language, data protection responsibilities and other factors relevant to your industry and workplace before signing an outsourcing agreement. e. Examine relationship risks. Consider internal relationships. Outsourcing a significant portion of the responsibilities of in-house staff should be accompanied by an

explanation. Always communicate openly with personnel to avoid misunderstandings and low employee morale. Examine relationships with clients. Determine how your clients will be affected by your outsourcing plans. For example, a client who is accustomed to receiving blog posts written by your in-house staff might not want the content to come from another vendor or a different part of the world. Discuss outsourcing plans with existing clients. Keep clients informed about upcoming outsourcing plans before implementation.

iv.

Hire in-house personnel who have necessary expertise. While you might outsource large quantities of work, having someone in-house who understands how to oversee the outsourced tasks is essential for ensuring that your organization's needs are met and services are delivered as promised.

v.

Avoid becoming locked into a contract with a single vendor. Include language in your contract that allows you to exit the business relationship after a trial period. This allows you to properly evaluate service quality, reliability and communication practices.

2. Who (functions, levels) should Cindy enlist on the cross-functional team to investigate the possible reorganization and outsourcing?

Cindy should use multifunctional teams. Effective strategies for sourcing result from multifunctional collaboration within the firm. A sourcing strategy from the purchasing group is likely to be relatively narrow and focus on purchase price. A strategy developed with the collaboration of purchasing, manufacturing, engineering and planning is much more likely to identify the correct drivers of total cost. The collaboration must be continued beyond strategy formulation to the procurement phase, because that is where manufacturing and engineering are most likely to realize the full benefits of good sourcing strategy. 3. What is Red Mountains core competency?

Red Mountain Lab is an independent testing service that serves the pharmaceutical companies and the FDA. Its business is to test pharmaceuticals for purity, following strict Food and Drug Administration (FDA) guidelines. Their core competencies are: i. ii. Fast turnaround of tests Accuracy in their test results whereby they use high technology testing equipment iii. iv. Specialty in testing all types of antibiotics Excellent computer interfaces with customers, allowing rapid access to data. They have good customer data management. v. Good working relationships with the FDA whereby the meet the FDA standard.

4. Consider the following four potential outsourcing candidates. For each one, indicate The potential risk to be considered What type or types of outsourcing arrangements would be the best fit What type of management oversight is best suited for each of the following situations:

Option A: Outsourcing all standard lab supplies to a full-service supplier rather than using 20+ suppliers as is done today.

Option B: Outsourcing the development and ongoing updates/maintenance of a software system to track the results of all tests for government analysis, and provide a data base for statistical analysis.

Option C: Outsourcing some unique tests that customers request on average of 3 times a year in total.

Option D: Outsourcing the payroll processing and management, including time cards; tracking vacation, sick days and holidays; issuing regular paychecks, bonuses, and all employee reimbursement.

Option

Potential Risks

Type of Outsourcing Arrangements

Type of Management Oversight

Shortage

in Total

outsourcing

Vendor

Management

supplies if supplier company deal with a System Supplier and failed to deliver; Inability to single supplier. Red customer share control a as

meet Mountain Lab should strategic develop a strategic one

demand on time

organization. risks and

partnership with the Faces supplier. B Direct access to Advisable companys insourcing to

benefit mutually. do Enterprise Project

for Management- Develop

confidential

confidentiality

IT department as a Red business unit that

informations such purposes.

as employees and Mountain Lab should serves the company customer information keep their IT as its vendor.

department in-house.

services

Possibility of loss Involves in business research, Loss and

advanced Knowledge analytical outsourcing skills management that Usually,

process

knowledge. of

technical means

intellectual which

specialists

property.

suppliers expected to

are are given managerial work control.

independently. D Lack of belonging Administrations and Business process

spirit / team spirit financial outsourcing. outsourcing which would affect Specific tasks can be management

productivity due to outsourced to a third Managed by HR and lack of motivation. party firm especially financial specialists. those outside the core competency company. of a