LECTURE 2 MOTIVATION AND THEORY

Lecture 2: Motivation and Theory

Basic definition

Outsourcing: The transfer or delegation to an external service provider the operation and day-to-day
management of a business process or function

In-sourcing: The transfer of business function to an internal department to be managed entirely by own
employees

Back-sourcing: The process of bringing outsourced function back in-house after they have been outsourced as
the outsourcing contracts expired or terminated (In reality there is lock-in effect)

Co-sourcing: When a business function is performed by both internal staff and external resources such as
consultants or vendors with specialized knowledge of the business culture (Share risk)

Off-shoring vs Near-shoring:

Off-shoring
Sourcing organization’s activities at a location outside
the company’s home country
Constraints
- Time lag between parties
- Difference in local employment laws and
practices
- Different languages and culture
- Different time zones and long distances
- Spending more time and effort in
establishing trust and long-term
relationships
- Oversight due to reduced face contact 
less control over project, greater
vulnerability to IP theft and fraud
Near-shoring
Off-shore outsourcing to nearby territory, often
sharing a border with own company
Note
Doesn’t necessarily overcome the constraints of off-
shoring but the proximity allows more flexibility to
align organizations
Sources of economies of scale (long run concept – refers
to reductions in unit cost as the size of facility and usage
levels of other inputs increase)  Purchasing in bulk,
increasing specialization of managers, lower interest
charges when borrowing from banks, greater access to
greater range of financial instruments

Benefits
- To reduce cost (low cost of operation in other country)  wage differential, reduce telecom costs
- To access talent pool for innovation

Motivation (innovation, quality, cost)

1. Cost reduction (manpower and training cost, cost of chasing technology)

2. Focus on core capability (free up resources, reduce overhead, eliminate investment on infrastructure)
3. Access to expertise/skills (manpower, management expertise, IT resources/infrastructure)
4. Business/process performance improvement
5. Technical reasons (avoid cost of chasing technology, reduce risk of technology obsolescence)
6. Political reasons (eg. when both vendors about same competency, relationship matters)
7. Access global markets (reduce time to market)
8. Flexibility enablement
9. Commercial exploitation
10. Change catalyst

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