Outsourcing Matrix Revisited
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This document outlines three perspectives on outsourcing using matrix models. Perspective I uses a matrix to show that outsourcing makes most sense for non-core activities that are complex, not critical to the business, and involve costs and risks. Perspective II looks at requirements for outsourcing providers using a matrix of flexibility, efficiency, knowledge, and reliability. Perspective III outlines a path for providers to develop competitive advantages through improving business processes, knowledge bases, economics, and investments.
Outsourcing Matrix Revisited
- 2. Customer’s view (service system choice criteria) We do only things that give us competitive advantage – all the rest we outsource ra tSense fC Perspective I
- 3. Perspective I Any company, explicitly or implicitly, distinguish the main business (the “CORE COMPETENCE” in the Matrix I), and supporting activity. In theory, any supporting activity may be outsourced. In practice, though, functions most important for the main business will always be kept inside the organization (“CRITICALITY” axis of the Matrix I) At the opposite end of priorities there are activities so unessential that outsourcing services for them become commodities (lower left corner of the Matrix I with the minimal values along all four axes). ra tSense fC
- 4. Matrix I ra tSense fC CORE COMPETENCE OUTSOURCING PARTNERSHIP VERTICAL INTEGRATION – CRITICALITY + – COSTS + –UNCERTAINTY+ +COMPLEXITY– COMMODITY
- 5. Perspective I So there are three reasons to outsource: - a wish to unload part of commercial risks onto the service provider (axis “UNCERTAINTY” of the Matrix I) - a wish to unload part of costs onto the service provider (axis “COSTS” of the Matrix I) - lack of the own employees’ competence (axis “COMPLEXITY” of the Matrix I) ra tSense fC
- 6. Perspective I As such, the outsourcing of some activity (upper left corner of the Matrix I) makes sense when the following conditions are met: - the activity is not on the list of your company core competencies - the activity is too complex (i.e. it needs special knowledge and skills) - The costs of the activity account for a minor part of overall operational costs - the activity is not critical for the main business - there are risks associated with uncertainty (business scale fluctuations, change of environment, customer preferences shift, etc.) ra tSense fC
- 7. Requirements to the supplier (maturity level) The set of competitive advantages needed by a company entering the outsourcing market is a mirror reflection of your requirements to this supplier ra tSense fC Perspective II
- 8. Perspective II Relevant tool for selection and evaluation of needed characteristics is Matrix II (let’s call it the Outsourcer’s Matrix): - high degree of operating flexibility (axis “FLEXIBILITY”) to cope with the uncertainty - large economy of scale and/or firm control of operating expenses (axis “EFFICIENCY”) to absorb part of the customer’s costs - specific knowledge (axis “KNOWLEDGE”) to cover the complexity of outsourced activity - extra resources to assure quality and terms of service (axis “RELIABILITY”) that may be replaced by the reputation along with the development of partnership ra tSense fC
- 9. Matrix II ra tSense fC OUTSOURCING PARTNERSHIP VERTICAL INTEGRATION – RELIABILITY + + EFFICIENCY – –FLEXIBILITY+ +KNOWLEDGE– COMMODITY
- 10. Provider’s view (market entry conditions) To enter the outsourcing market one should choose the following path for gradual development of competitive advantages: ra tSense fC Perspective III
- 11. Matrix III ra tSense fC OUTSOURCING PARTNERSHIP – INVESTMENTS + – ECONOMICS + –BUSINESSPROCESSES+ +KNOWLEDGEBASE– COMMODITY
- 12. Perspective III 1. Business processes description and tuning to provide necessary flexibility (axis “BUSINESS PROCESSES”) 2. Employees teaching and training; transforming human capital into organizational capital trough creating and maintaining the corporate Knowledge Base (axis “KNOWLEDGE BASE”) 3. Managing the economic efficiency (axis “ECONOMICS”) 4. Upfront capital investment to assure service quality and to realize the economy of scale (axis “INVESTMENTS”) ra tSense fC
- 13. Thank you! © 2003 Сергей Хромов-Борисов khromov@sensecraft.ru ra tSense fC