Outsourcing and Insourcing in an International Context

Marc J Schniederjans, Ashlyn M Schniederjans, Dara G Schniederjans

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317463337
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Designed for upper-level undergraduate or graduate courses in production-operations management, management information systems, international business, and strategic management, this text focuses on concepts, processes, and methodologies for firms planning to undertake or currently involved in outsourcing-insourcing decisions. "Outsourcing and Insourcing in an International Context" is the only available text that includes coverage of the international risk factors associated with this strategy. The book presents a balanced view of the positive and negative aspects of outsourcing, and provides essential coverage of the fundamental techniques involved in any outsourcing-insourcing decision. In addition, it discusses the ethical ramifications of outsourcing for companies and governments around the world. Each chapter includes learning objectives, discussion questions, and sample problems. An Instructor's Manual, Test Bank, and PowerPoint presentation are available to teachers who adopt the text.

Part 1

Introduction to Outsourcing-Insourcing in an International Context

1

Introduction to Outsourcing-Insourcing

Learning Objectives After completing this chapter you should be able to:

• Describe outsourcing and insourcing.

• Describe what is meant by an international context in outsourcing and insourcing.

• Explain the relationship between subcontracting and outsourcing.

• Describe various types of outsourcing-insourcing.

• Explain why businesses use outsourcing-insourcing as a balancing strategy.

• Explain the relationship between core competencies and outsourcing-insourcing.

• Describe theories used to justify outsourcing-insourcing.

• Describe outsourcing trends.

• Describe risks in the outsourcing-insourcing process.

• Explain the importance of considering risk in an outsourcing-insourcing decision.

What Is Outsourcing-Insourcing?

Outsourcing is defined by Chase et al. (2004, 372) as an “act of moving some of a firm’s internal activities and decision responsibilities to outside providers.” Lankford and Parsa (1999) similarly state “outsourcing is defined as the procurement of products or services from sources that are external to the organization.” These and other definitions agree that outsourcing involves allocating or reallocating business activities (both service and/or manufacturing activities) from an internal source to an external source. Conversely, insourcing can be defined as internal sourcing of business activities. So, insourcing can be viewed as an allocation or reallocation of resources internally within the same organization, even if the allocation is in differing geographic locations.

For clarity, we will distinguish between the two basic organizations that make up an outsourcing arrangement as follows: (1) the firm that seeks to outsource their internal business activities will be referred to as the outsourcing client firm, and (2) the firm providing the outsourcing services to the client firm will be referred to as the outsource provider. The services or manufacturing activities, tasks, and jobs to be outsourced can vary substan-tially with the firm, but genetically will be referred to in this book as business activities.

Figure 1.1 Balancing Outsourcing and Insourcing Benefits and Costs

Early in their life cycle, most businesses insource their activities. As businesses mature and grow, however, they may find limitations on labor/services, materials, or other economic resources in a particular geographic location. This can force them to subcontract services or procure materials from external sources. Sometimes these are geographically distant sources. Those labor/service or material procurements represent the act of outsourcing if they are acquired from a source external to the organization (i.e., not owned by the outsource provider). As Figure 1.1 depicts, today’s modern organization has to balance the potential benefits of outsourcing with its potential costs in order to determine the proportion of outsourcing to insourcing that will best achieve the organization’s objectives. The wrong proportion of outsourcing to insourcing can result in business failures. But planning out-sourcing-insourcing based on some calculated ideal proportion also involves risk because the benefits and costs used in the calculation are potential and not certain; they may never materialize and actually have only a probability of materializing.

The idea of outsourcing-insourcing (O-I) can become confusing as it applies to large organizations that operate plants in differing locations. For example, if a corporation owns two plants, A and B, and they reallocate production activity from Plant A to Plant B, are they outsourcing? The answer is no, if the corporation considers itself one organization (i.e., they have simply insourced production activity from Plant A to Plant B within the same corporation). In outsourcing, as we are defining it here, the allocation must be “external” to the organization. All other transfers of production activity (e.g., between departments, divisions, or companies within a single corporation) can be viewed as insourcing.

What Is Outsourcing-Insourcing in an International Context?

Another potentially confusing dimension of O-I is the fact that it is often conducted in an international context. An international context means activity between nations or between the boundaries of two or more countries. For example, moving production from a plant in Country A to a plant in Country B can be either outsourcing or insourcing. It is outsourcing if the plants in the two countries are owned by different organizations. It is insourcing if the plants in the two countries are owned by the same organizations (i.e., just transferring the same organization’s production activity but to a different country). What if a U.S. firm located in the United States allocates production activity to a European firm located in the United States? Is that outsourcing in an international context? It is outsourcing if the U.S. firm does not own the European firm, but it will not be in an international context unless the production activity crosses a border (because the production activity is staying within the U.S.). If the non-U.S.-owned European firm does the work for the U.S. firm in a foreign country, however, it is outsourcing in an international context. Outsourcing in an international context also includes global outsourcing. While international outsourcing involves at least one foreign firm, global outsourcing involves many international, external firms.

Another source of confusion in discussions of the international context relates to the term offshoring (i.e., the process of moving business activities to a foreign country). A company can offshore some of its business functions by starting its own business in a foreign country. This is an example of offshoring, not outsourcing. Some companies prefer to offshore rather than outsource (“U.S. Companies to Shift Jobs…” 2004). If a client company outsources some of its business activities outside the country to a provider firm that the client firm does not own, it is engaging in offshore outsourcing. Some client firms actually want their outsourcing partners to possess offshore outsourcing capacity because partners with such capabilities may offer them lower costs and other international context advantages (“Outsourcing Expectations Surpass…” 2004).

According to James and Weidenbaum (1993, 42), outsourcing is not a new concept; it is simply another name for the longstanding practice of subcontracting production activities. The use of external lawyers, accountants, and consultant provider firms can be viewed as outsourced services. Purchasing manufactured parts and assemblies from external organizations domestically or internationally can also be viewed as outsourcing. Indeed, the classic “buy-or-make” decisions concerning products, processes, and facilities that companies have been making for many decades are examples of the outsourcing-insourcing decision (Russell and Taylor 2003, 126).

This textbook takes the position that O-I in an international context is a logical evolution for busi-ness organizations that originates from the concept of subcontracting. That is, it is not a revolution but an evolution of the business organization, as depicted in Figure 1.2. Why has O-I in an international context recently become a major driving force in business the world over? Partly it is due to the rapid development and deployment of technology, particularly advancements in telecommunications and personal computers. The Internet and World Wide Web permit firms anywhere in the world to provide services previously limited geographically, supplying the connectivity necessary to support the growth of O-I in an international context.

Figure 1.2 Evolution of Business Organizations and Outsourcing

Paralleling the growth of O-I is the growth of in-ternational business. With the passage of landmark international trade agreements like the 1993 North American Free Trade Agreement (NAFTA), and the work of the World Trade Organization, the European Union, and other international trade zones established throughout the world, governments have been setting the stage for the greatest expansion of international business in history Combined with the availability of inexpensive computer and communication technology, it has resulted in enor-mous growth in international business. In the early 1990s, Cateora (1994, 419) reported that “service operations” were the fastest growing sector in in-ternational trade, and as we will see later in this chapter, the international outsourcing of services has continued to grow at an increasing rate.

It is not just the parallel growth between O-I and international business that supports this textbook’s combination of these two areas of business planning. Any O-I business decision must be considered in an international context if it is to be optimized (because the economic advantages of outsourcing are chiefly available only in an international context). For purposes of this textbook we will refer to outsourcing-insourcing (O-I) as a “project” type of management involving a discrete time period (i.e., start and end dates) and requiring a decision to implement the balancing of resource allocation or reallocation.

Types of Outsourcing-insourcing

A general contractor in the construction industry that subcontracts various construction activities required to build a home is a perfect example of an outsourcer. Every component of the building process, includi...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Brief Contents
• Detailed Contents
• List of Tables and Figures
• Preface
• Part 1. Introduction to Outsourcing-Insourcing in an International Context
• Part 2. Methodologies for Different Types of Outsourcing-Insourcing Decisions
• Index