Motives and risks for outsourcing to low cost countries

Abstract

Outsourcing/off-shoring of a wide array of business areas, from western companies to low cost countries such as India, China, Vietnam, Taiwan or Eastern European countries has been predominant over the last years. As the name given to these new supplier countries implies, one of the main motives for moving production there is the search for lower costs. As outsourcing, as well as outsourcing countries, has matured though, companies have learned that other benefits than low cost can be gained. This has spurred a number of alternative motives for outsourcing. By outsourcing a company will face risks that it would not have been there had it kept the production of the good or service in-house. Furthermore, when outsourcing to low cost countries, there will be additional risks that would not have been there if outsourcing had been done locally. Motives and risks are also linked together. A company will face different risks depending on what their motive for outsourcing is. Basically there are two kinds of risk, the ones that can be identified even before actually taking the decision to outsource, and the ones that are caused by sudden disruptions in the external environment, and therefore not identifiable in advance. As the first kind of risks is possible to identify in advance these should be kept in mind when deciding whether to outsource or not. This is the revolving point of the first part of this paper, as companies often neglect to identify and take these risks into account, due to the rush to catch up with their competitors outsourcing initiatives. As the second kind of risks can not be predetermined in the same way as the first kind, they can not justifiably be drawn into the decision on whether to outsource or not. These risks are still significant though, and therefore a company that chooses to go through with the outsourcing decision should develop clear mitigation strategies for each of these possible risks. This paper seeks to develop a conceptual framework for companies who are about to engage in outsourcing relationships, to make them understand how important it is for them to be aware of the possible risks of outsourcing. Furthermore it will provide companies already engaging in outsourcing relationships with different approaches as how to mitigate possible risks that might arise due to sudden changes in the environment. The need for this kind of framework is illustrated by Kremic, who argues that outsourcing failures happens not because there is anything inherent wrong with outsourcing itself, but because managers need more tools for guiding them in the decision making process.1 As a background for the discussion on outsourcing risks, the paper will also shortly discuss how outsourcing relationships evolve over time.