Firms pursue various strategies to exploit resources and capabilities and gain a competitive advantage (Porter, 1996). Interfirm relationships are collaborative agreements between organizations (Chakrabarty, 2006a; Whetten, 1981), and firms need to be careful in adopting suitable strategies to deal with interfirm relationships (Chakrabarty, 2007b). Interfirm relationships represent a sort of trade-off that organizations must make, whereby, in order to gain resources of other organizations, an organization must relinquish some its independence because the relationship also brings certain obligations with it (Whetten, 1981). Top management strategists might find their commitments to other firms as a sort of liability, and therefore, a serious evaluation of whether the benefits from the interfirm relationship outweigh the inevitable costs is needed before entering into interfirm relationships (Whetten, 1981).
This section will provide some basic background information on outsourcing. Lacity and Hirschheim (1995) categorized the primary strategies of sourcing work into a continuum that ranges from total outsourcing at one extreme to total insourcing at the other extreme, and had selective sourcing as an intermediate strategy. Total outsourcing strategy is the strategy of a customer firm to outsource at least 80% of its information technology (IT) budget to suppliers. Total insourcing strategy (the opposite of outsourcing) is the strategy where a customer firm formally evaluates outsourcing but selects its own internal IT departments’ bid over external supplier bids, and thereby allocates over 80% the IT budget to its internal IT department. Selective outsourcing strategy is the strategy whereby the customer firm opts to use suppliers for certain IT functions (representing around 20 to 60% of the overall IT budget, typically around 40%), and retains the remaining work for its internal IT department (Lacity & Hirschheim, 1995).
Further, Gallivan and Oh (1999), categorized the strategies for outsourcing on the basis of number of customers and suppliers into dyadic, multisupplier, cosourcing and complex outsourcing as follows. In a dyadic outsourcing strategy, there is just one customer and one supplier, that is, a customer firm uses only one supplier for a given activity, and the supplier in turn performs the given activity only for that customer firm. In a multisupplier outsourcing strategy, there is only one customer but many suppliers, that is, a customer firm uses many suppliers for a given activity. In a cosourcing strategy, there are many customers and only one supplier, that is, many customer firms jointly sign an outsourcing contract with a single supplier firm. In a complex outsourcing strategy, there are many customers and many suppliers; that is, it involves combining multiple customer firms and multiple supplier firms into a single contract (Gallivan & Oh, 1999).
Key Terms in this Chapter
Outsourcing: Interfirm relationship between a customer firm and supplier firm, where the customer firm is in need of services and the supplier firm provides those services.
Body Shop Outsourcing: Using contract personnel.
Selective / Smart / Right / Flexible / Modular Sourcing: Outsourcing and insourcing optimally and selectively; A customer firm uses suppliers for certain IT functions which represents between 20 and 60% of the IT budget (typically around 40%) and therefore retains substantial work for its internal IT department.
Multisupplier Outsourcing / Dual Sourcing: A customer firm uses many suppliers for a given activity.
Benefit Based Relationships / Business Benefit Contracting: Linking payments to realization of benefits; customer’s performance determines supplier’s revenue.
Distributed Consulting: Supplier has teams both at onshore and offshore.
Managed Offshore Facilities: Outsourcing the process of setting up a subsidiary abroad.
Transitional Outsourcing: Outsourcing during a major changeover; Helping the customer’s IT department mature.
Offshore-Outsourcing (A Form of Global Outsourcing): Chosen supplier is located in a country that is geographically far away from the customer’s country.
Cosourcing: Many customers and only one supplier: Many customer firms jointly sign an outsourcing contract with a single supplier firm.
Tactical Outsourcing / Contracting-Out / Out-Tasking: Outsourcing for short term access to skilled professionals.
Application Service Providing / Net-sourcing / On-Demand: Accessing remotely hosted information technology (IT) applications
Global Delivery: Large supplier delivering services from various global locations to customers at various global locations.
Nearshore-Outsourcing: Chosen supplier is located in a country that is geographically close to (but not the same as) the customer’s country.
Onshore-Outsourcing / Domestic Outsourcing: Both customer and the supplier are located in the same country.