Modern Outsourcing Practices

This chapter presents the review of literature that has been accessed by the researcher on the subject. It was focus on the relevant theories advanced towards outsourcing, a conceptual review of outsourcing as well as contracting procedure and its perceived impact on the project.

Theoretical review

The outsourcing phenomenon has been grounded in many theories, some of them are complementary and the others are contradictory (Paunovic& Pedersen, 2007). Various authors have identified significant numbers of theories that could explain the outsourcing phenomenon, however this study founded on two important theories namely; the transaction cost economics theory and the core competences theory.

Further (Paunovic& Pedersen 2007) found that transaction cost economic theory (TCE) relies on a single transaction as a unit of analysis, neglecting the contemporary industrial collaborative arrangements and that itis static, which doesn't correspond to dynamism of current business environment.

Transaction cost economic theory (TCE) is incapable of recognizing the need for the firm to focus on its core competences and to conserve its strategic resources (Prahalad& Hamel 1990), and so does not study the capabilities of the organization or its potential partners or suppliers when outsourcing decisions are analyzed.

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The Transaction cost economics theory was relevant to this study because it has been the most utilized theory of outsourcing, it is perceived to provide the best decision making tools to help organizations to decide to outsource and to prepare themselves for forthcoming outsourcing arrangements and it provides an explanation of contractual complexity (Paunovic& Pedersen, 2007).

Empirical review

Practically outsourcing have varied a lot over the past two decades, spanning from the externalization of support activities to some core processes, from primarily service-based activities to productive processes, such as in the case of modular production (Brusoni&Prencipe, 2001; Prencipe, Davies, &Hobday, 2003).

Today, firms manage a portfolio of outsourced activities that may include relatively low-skill activities (e.g., call centers) as well as knowledge-intensive services (e.g., market research and analysis). The present scenario sees the flourishing of information technology (IT) outsourcing (Tettelbach, 2000), the increasingly widespread of finance and accounting outsourcing (FAO) and medical outsourcing, and the emergence of knowledge process outsourcing (KPO), a very promising niche within the broader concept of business process outsourcing.

Moreover, although outsourcing practices have once been embraced with a general favor, the widening of their span has inevitably clashed with some pressures by internal and external stakeholders. The generally auspicated strategic focalization around firms' core businesses is not any more the sole explanation for outsourcing, while globalization is enabling multiple sourcing, global outsourcing, and offshoring. As a consequence, firms are not exposed to the mere coordination of value chain activities at an inter-organizational level. More and more, they have to face issues related to knowledge management, lack of specialization, know-how, labor protection (Slack, Chambers, & Johnson, 2004; Staiger&Antr?s, 2008; Ruiz-Torres &Mahmoodi, 2008), and even protectionism aims. The described enhanced complexity of the supplier-customer relations in outsourcing calls for a deep reflection on its definition and actual span of action. Broadly speaking, outsourcing refers to the acquisition from outside the firm of inputs, services, or processes (Amiti& Wei, 2005; Boldea&Brandas, 2007).

Outsourcing as the procurement of supplies or services related to whatever value chain activity from legally independent firms (outsourcers). More specifically, outsourcing is defined as domestic, if firms' source from suppliers from the same (home) country, whereas offshoring refers to the practice of outsourcing business functions in another country in order to reduce costs, typically where the costs of labor are lower.

The empirical analysis taking into consideration various aspects relevant for outsourcing: business performance, costs structure, labor force, business performance compared with the reference industry, and financial structure of the company.

Conceptual framework

According to Tomas & Victor, (2006); Outsourcing is a strategic decision that entails the external contracting of determined non-strategic activities or business processes necessary for the manufacture of goods or the provision of services by means of agreements or contracts with higher capability firms to undertake those activities or business processes, with the aim of improving competitive advantage.

Dominic, (2014) explains that contracting out typically involves a competitive bidding process in which requests for proposals are disseminated to eligible vendors. Proposals are then evaluated, and a decision is made based on either a cost or "best value" basis. Contractor performance is then monitored and managed in view of predetermined service goals (Schniederjans, Schniederjans&Schniederjans2005). The theoretical framework and presents a critical analysis of the main explanatory theories which have been used for dealing with outsourcing, namely, transaction costs economics (TCE) and resource-based view (RBV).

Outsourcing contract clearly state the deliverables and results expected, including any knowledge transfer from the seller to the buyer. Anything not in the contract cannot be legally enforced. When working internationally, project managers should keep in mind the effect that culture and local law have upon contracts and their enforceability, no matter how clearly a contract is written.

A purchasing contract includes terms and conditions and may incorporate other buyer specifics as to what the sellers to perform or provide. It is the project management team's responsibility to make certain that all procurements meet the specific needs of the project while working with the procurement office to ensure organizational procurement policies are followed.