© Malmgren 2014, all rights reserved Outsourcing from a Theoretical perspective Dr. Mike Malmgren & Docent Daniel Nordigården Ashridge Business School & Linköpings Universitet

© Malmgren 2014, all rights reserved Dr. Mike Malmgren PhD – Linköping MBA – London Business School MSc – Royal Institute of Technology 12 years experience as Managing Director of technology companies in the US, Australia and the UK 15 years at Ashridge Business School (75%) – Director of Executive MBA – Head of Strategy & Innovation department Associate Professor – Linköping (25%)

© Malmgren 2014, all rights reserved

We increasingly live in a global world The international export has trippled since the 70s Exports are growing faster than production More and more companies and products can be seen as multinational However, remember outsourcing does not always imply offshoring World’s export as a share of the world’s GDP Source: Ekonomifakta

© Malmgren 2014, all rights reserved What is outsourcing? What does it imply? What is outsourcing? Outsourcing can be defined as transferring an activity from internal to external control and is widely employed by firms in many different industries Here, outsourcing becomes a central tool for organisations’ business process reengineering to access world class techniques (Rothery and Robertson, 1995; Quinn, 2000) It has been comprehensively researched in, for instance, the automotive and high-tech industries Companies have embraced outsourcing as an important means to becoming more competitive in their business processes As a result of firms applying “me too” outsourcing strategies, new sub-sectors with new types of firms have even been developed Managed right, outsourcing will provide opportunities for companies to develop their core competencies while at the same time lower overall costs by transferring activities to suppliers who perform them at a lower cost (Quinn and Hilmer, 1994; McIvor, 2005).

© Malmgren 2014, all rights reserved Outsourcing is still reported heavily in media Source: Financial times; New York Times;

© Malmgren 2014, all rights reserved Driving Forces for Outsourcing* Cost reduction Financial leverage; Operational quality, Focus on core competencies Accessing external competencies Focus on fewer activities Risk reduction Adapted from Nordigården, 2007 * More than one driving force per respondent

© Malmgren 2014, all rights reserved Driving Forces for Outsourcing* Cost reduction Financial leverage; Operational quality, Focus on core competencies Accessing external competencies Focus on fewer activities Risk reduction %33 %61%11%33 %22 %17 % %53 %60 % 7 %33% Adapted from Nordigården, 2007 * More than one driving force per respondent

© Malmgren 2014, all rights reserved There are several challenges and risks when contemplating outsourcing Geographical Costs Outsourcing the wrong things Distance, localisation and availability Staring Blind on Costs Reduction/ insuffienct cost analysis Outsourcing Problematic or long-term critical activities Accompanying outsourcing strategies are several intrinsic risks that need to be handled to ensure that expected benefits of outsourcing can be materialised Supplier failureSupplier performance based on quality, delivery, service and ability to reduce costs and also culture aspects

© Malmgren 2014, all rights reserved Complexity & Asset Specificity LOW - Asset SpecificityHIGH – Asset Specificity LOW Product & Activity complexity HIGH Product & Activity complexity Source: Vining & Globerman 1999

© Malmgren 2014, all rights reserved Complexity & Asset Specificity LOW - Asset SpecificityHIGH – Asset Specificity LOW Product & Activity complexity Standard products Several possible suppliers Detailed contracts possible Supplier holds the Asset Supplier is vulnerable to opportunistic behaviour by the Outsourcer Outsourcer holds the Asset Similar to LOW asset specificity HIGH Product & Activity complexity Source: Vining & Globerman 1999

© Malmgren 2014, all rights reserved Complexity & Asset Specificity LOW - Asset SpecificityHIGH – Asset Specificity LOW Product & Activity complexity Standard products Several possible suppliers Detailed contracts possible Supplier holds the Asset Supplier is vulnerable to opportunistic behaviour by the Outsourcer Outsourcer holds the Asset Similar to LOW asset specificity HIGH Product & Activity complexity Often applies in outsourcing of professional services High cost of contracts negotiation due to difficulties in specifying the service outcome Supplier holds the Asset Opportunistic behaviour by the supplier Outsourcer holds the Asset Costly arbitration when performance is difficult to describe Source: Vining & Globerman 1999

© Malmgren 2014, all rights reserved Business Critical Outsourcing (1)

© Malmgren 2014, all rights reserved Business Critical Outsourcing (3)

© Malmgren 2014, all rights reserved Competence Trust- building Information collection Bench-marking Goodwill trust-building Establishing mutual interest Individual & team level trust Joint dispute resolution Social control Decision-making processes Rituals & networking Behaviour control Policies & procedures Reporting structure Staffing & training Output control Setting objectives Planning & budgeting Performance Risk MitigationRelational Risk Mitigation Hi Lo Social control Decision-making processes Rituals & networking Hi TSIC case Hutchison case Competence Trust- building Information collection Bench-marking Goodwill trust-building Establishing mutual interest Individual & team level trust Joint dispute resolution Social control Decision-making processes Rituals & networking Behaviour control Policies & procedures Reporting structure Staffing & training Output control Setting objectives Planning & budgeting Performance Risk MitigationRelational Risk Mitigation Hi Lo Social control Decision-making processes Rituals & networking Hi Lo TSIC case Hutchison case

© Malmgren 2014, all rights reserved Recommendations for practitioners Managers considering outsourcing of business critical activities and resources should recognise that there is limited risk mitigating possibilities to manage risks related to human asset specificity Actions taken using non-contractual actions such as single source negotiations using open book and a cooperative approach may offer risk mitigation for human asset specificity Managers should not forget the importance of human asset specificity and the lack of contractual safeguards in business critical outsourcing.

© Malmgren 2014, all rights reserved Q&A