Benchmarking knowledge gaps through role simulations for assessing outsourcing viability

Abstract

PurposeWith an increase in global outsourcing, there is a need for risk mitigation strategies for outsourcing partner selection. Most outsourced services are getting commoditized, making it difficult to clearly differentiate capabilities of service providers. Also, the move towards knowledge process outsourcing (KPO) services is an area where the risks of failure are perceived to be higher. Since the knowledge dimension is a critical one for any outsourced activity, an objective assessment of knowledge gaps is important in the overall process of evaluation of the external provider. This paper aims to address the issues involved.Design/methodology/approachThe paper builds the linkage between the measurability of the knowledge dimension and outsourcing project success through a set of propositions. It proposes a formal process of “knowledge gap assessment” as an input to assessing partner viability. It also identifies two important dimensions that are specific to an outsourcing relationship. Finally, the paper outlines a conceptual framework that takes these dimensions into account through a process of benchmarking using role simulations that could be used as a generic tool for performing such an assessment.FindingsSuch an assessment can help to classify prospective service providers as exhibiting low‐, moderate‐ or high‐knowledge gaps in different knowledge categories. Depending on the cost of bridging these gaps the associated risks can be classified as low, medium or high, facilitating appropriate managerial decisions.Research limitations/implicationsThis paper proposes a conceptual model and a set of propositions which will need to be tested and refined through further empirical research.Practical implicationsThe framework can be a useful tool for partner selection by firms who are looking to outsource activities. A simulation‐based benchmarking approach is likely to provide a more objective assessment of a firm's knowledge‐based capability, both when compared to the parent (outsourcing) organization as well as other short‐listed service providers.Originality/valueThis paper fulfils an identified need for minimizing risk in both business process outsourcing as well as KPO projects by focusing on the knowledge dimension and offers a practical framework to enable the same.

ISM Approach to Model Offshore Outsourcing Risks

“…The offshore service provider can stop investing in training or employ people who aren't as qualified as the agents they presented during negotiations. (Henderson & Clark, 1900), (Quélin & Duhamel, 2003), (Aron & Singh, 2005), (Ellram et al 2008), (Shekhar, 2008), (Lacity et al, 2008) 8 Financial risk Risks, such as unexpected transition and management costs, switching costs, costly contractual amendments, disputes and litigation. (Overby, 2003), (Pfannenstein & Tsai, 2004), (Ellram et al 2008), (Lacity et al, 2008), (Chou & Chou, 2009), (Hertah & Kishore, 2009), (Fel & Griette, 2012), (Sambharya & Rasheed, 2012), (Tjader, et al, 2013) 9 Loss of core professionals…”

Consequences of outsourcing for organizational capabilities

“…The motive for outsourcing primarily tends to be an economic one (Shekar, 2008). That is, firms outsource to save money.…”

“…These relate in particular to the outsourcee's delivery capabilities and ambitions/strategies and policies. Although this can be difficult to evaluate a priori (Shekar, 2008), a fundamental question is whether the supplier is really able to handle the outsourced processes effectively and efficiently. In line with previous literature (Armistead and Clark, 1991; Loomba, 1996; Nordin, 2005), the respondents mentioned that this depends, among other things, on the maturity and complexity of the service process being outsourced.…”

“…By definition, outsourcing refers to the purchasing from an external supplier of a function previously carried out within the company (Axelsson and Wynstra, 2002;Shekar, 2008).…”

“…Economic and financial effects, however, are not the only outcomes of outsourcing. By definition, outsourcing refers to the purchasing from an external supplier of a function previously carried out within the company (Axelsson and Wynstra, 2002; Shekar, 2008). When a firm no longer carries out an activity formerly undertaken in‐house, logically that firm risks losing competencies, knowledge and skills related to that function.…”