Monday, February 27, 2012

When not to consider outsourcing

In the last blog, we looked at the risk of possible opportunistic behavior in an outsourcing scenario. In the current blog, we look at some of the reasons why the organizations would have attempted to avoid outsourcing of tasks in spite of the economic benefits that the company would gain.

We can identify 3 possible reasons for companies to stick to carrying out these tasks in-house instead of outsourcing:

  1. Knowledge Spillover
  2. Poor performance by the supplier 
  3. Retain and Build competency for long term competitiveness

Companies generally use contracts to ensure that the outsourced tasks could be forced, however there are many scenarios where some tacit and complex knowledge would have to be revealed to the supplier - the company that has outsourced the activity incurs the risk of such information being leaked to the competitor - this is one reason where outsourcing is not preferred. However making a sweeping statement wouldn’t be appropriate - it is again dependent on the industrial context. While in the Indian advertisement industry companies do not engage the same agency, it is pretty common for the large competing companies to engage the same consulting firm (obviously for reasons the teams working would be different on these projects)

Companies would also consider doing the task in house when poor performance by the supplier has the potential to damage other organizational resources. If companies find that food served in the cafeteria has been the reason of displeasure of its employees, there have been instances where the change of these companies has been extremely frequent and in some cases the company has initiated the step of getting the cafeteria managed in-house!

The third point of retaining and building the resources that the company feels are important for the long term survival is pretty obvious. It doesn’t need any great depth of explanation. The critical interdependence of the tasks of a company is important considerations that a company would consider while making an outsourcing decision.

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