Case Analysis

Case: Outsourcing
Source: Abridged from M. Brown, Outsourcing, Management Today, January
1997.
Book: Exploring Corporate Strategy: Text and Cases by Gerry Johnson and Kevin
Scholes

Mary Jane G. Maravilla

Master in Information Systems
Silliman University

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Case Analysis: Outsourcing

The Case
When British Airways' chief executive Bob Ayling introduced the airline's millennium restructuring
plan last autumn he suggested that some of the 1 billion savings BA needs to make over the next
three years to retain its competitive edge might come from a modest amount of outsourcing.
Activities such as baggage handling and refuelling would be scrutinised to see whether they were
being done as well by BA staff as they could be by outside contractors. If they weren't,
subcontracting would be considered. Some commentators, in provocative mood, thought Ayling
much too tentative. He should go for broke, they suggested, and turn BA into a 'virtual airline',
retaining its marketing function but outsourcing everything else up to and including flying the
aircraft. The journalists was clearly exaggerating for effect but were nevertheless reflecting the
currently popular belief that outsourcing (in which companies concentrate on the bits of their
business that give them their competitive advantage and farm out the peripheral, non-core bits to
others) is by and large a good thing.
Recent research suggests it may not be. The PA Consulting Group's report, Strategic Sourcing,
provides, for the first time, quantitative evidence of a positive correlation between high levels of
outsourcing and share price performance (demonstrating, says PA, that well-run companies, which
usually perform well in the market, are likely to see effective outsourcing as part of good
management practice). But it also makes very plain that the magic of outsourcing is not working for
many (perhaps most) corporations. Only 5% of more than 300 companies and public sector
organisations investigated by the PA researchers had found outsourcing high on benefits and low
on drawbacks. For many of the rest, the outcome of such subcontracting was either mediocre or a
total flop.
Traditionally, outsourcing has concentrated on activities which are remote from the heart or nerve
centre of the company. Classical outsourcing theory says that a company should decide which of
its functions give it competitive advantage (its core competencies in management-speak) and which
don't. Non-core functions can be farmed out to specialists if they conduct them more cheaply or
better or both, but core functions never.To outsource core functions, say the theorists, is to hand
over the things which made the company what it is - and which make its profits.
Increasingly, however, this rule is being questioned. It is now argued that there has been a
confusion between core activities (things that are central to what one does) and core competencies
(the central things that one does well). Those who take this line now talk about outsourcing
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Case Analysis: Outsourcing

functions like customer care, an activity which most outsourcing theorists would consider so central
to a company's success that only a lunatic would hand it over to a third party. If you cannot look
after your customers, say the traditionalists, should you be in business at all? Aren't customers the
raison d'etre of every business?
Mark Astbury, sales and marketing director of Ventura, a company which handles customer service
management for companies like Kingfisher, Cellnet and the Co-operative Bank, understands
people's surprise that organisations should be prepared to entrust such sensitive work to outsiders,
but the practice is not as odd as it first seems, he says. 'Cellnet, for instance, have said to
themselves, "What are out core competencies?" and they've come down firmly and said their core
competency is in running a mobile phone network, that there are other things they don't regard as a
core competency and one of those is customer service. Customer service is a core activity but
they've decided to find a partner who can help them manage customers better than their
competitors do and, crucially, better than they believe they can do themselves.'
Mike Webb, managing director of Mondial Assistance which provides claims hotlines for a number
of insurance companies, also argues for a redefinition of the concept of a core business. If you take
an insurance company, he says, the instinctive thing to say is that a company which can't
administer its own hotline can't be relied on to carry out its business effectively.'But that's obviously
nonsense. The company's responsibility is to assess the risk that each customer represents and
provide them with the most appropriate and cost-effective package of cover. It is also the
company's responsibility to ensure that its spread of risk leaves it in a position to pay out claims
where necessary. Investing in these skills is a cost-effective use of resources, but staffing the
claims hotline is not.'
The outsourcing of areas of the business which are close to the customer raises the issue of what
to do when a service provider underperforms. The thing about outsourcing is that to the customer,
the whole operation is invisible. If the service provider does something that hurts the customer, it
isn't the provider who gets it in the neck, it is the company which farmed out that part of its work.
Several banks, including the Co-operative, are outsourcing cheque clearance, for example. It
makes sense for the banks to outsource this particular process since the volume of cheques written
is actually in steady decline, making it hard to justify spending time and money keeping the required
technology up-to-date. For service providers, like Unisys, on the other hand, technology like image
processing systems can be used across a range of businesses and a range of customers so it does
not matter that the cheque processing business of the individual bank is declining.

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Case Analysis: Outsourcing

It is not just what is being outsourced that is slowly changing, however, but also the way in which
that outsourcing is conducted. Some pioneers are trying out variations, such as co-sourcing. For
while traditional outsourcing may be perfectly suitable for low-risk peripheral activities such as
cleaning or car fleet management, with higher risk strategic functions or processes, companies
want to retain more of a say in the way in which work is done. With co-sourcing, the client company
keeps responsibility for the management and strategic aspects of the outsourced activity, while the
outside provider supplies consultancy services and often experienced personnel to help the
business streamline the function or process. The financial group Societe Generale (SG) has a cosourcing (others might call it an in-sourcing) arrangement with Arthur Andersen, under which an
Andersen tax expert spends two days a week in the group's human resources office to advise
senior management and expatriates on taxation issues.
Even assuming a certain corporate confidence in the ability to outsource well (quite an
assumption), is there an irreducible core of activities which couldn't or shouldn't ever be
subcontracted?. Another way is to identify which parts of the company constitute the corporate
crown jewels. The definition of crown jewels may change over time, says Dr Chris Floyd, who runs
consultant Arthur D Little's technology and innovation management practice in the UK. 'In
computers,' he says, 'the crown jewel element was the hardware, so IBM outsourced the software,
the operating system, to the little known Microsoft because they thought the operating system was
a minor, peripheral technology. Then, over time, they found it was the operating system which
became the crown jewels and what they were left with, the hardware, was the peripheral
technology.
The best companies, Little says, take a strategic, top-down approach to outsourcing - he terms it
strategic sourcing - and are clear and disciplined in their decision-making and process
management. Most outsourcing is done in a fairly piece-meal fashion, often for tactical reasons.
Strategic sourcers, by contrast, outsource because they can see benefits for the wider
organisation.

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Case Analysis: Outsourcing

The Central Problem

The case focuses on the issue of effects of outsourcing in terms of the following aspects:
1. Improving value of the organization
2. Processes of big businesses
3. Core processes of the business
4. Managing treasury
5. Managing customer service

SWOT ANALYSIS for Outsourcing

Strengths

Quality of

Weaknesses

service

Confidentiality

Opportunities

To outsource

Threats

Lesser control

issues

experts to be

of the

Mistake of

the best in the

customers

focus on core

outsourcing

marketplace

activities of

service providers

the business

is seen by

investment in

Cost

customers as

skills and

reduction in

mistake of the

staffing

staffing skilled

company

Co-sourcing

personnel for

outsourcing

Focus on the

Ability to

the processes

Low cost

Shared

business

responsibility

main
functions for
innovation

As supported by statistics, only 5% of companies that take the outsourcing strategy actually reap
high benefits from doingso. This is alarming in the industry which shows that more and more
companies are engaging to outsourcing because of the success it gave to other business.
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Case Analysis: Outsourcing

Strategy Alternatives
Whilst the case provided different organizations, British Airways(BA) shall be taken into account for
the strategy alternatives.

1. Most of the processes of British Airways involve services by manpower, it is strategic to

outsource the personnel of specific required skills. However, it would give BA more of
control to its processes as if it was an inhouse manpower if BA would assign inhouse staff
to monitor, supervise and control the functions of each outsourced processes. In example,
the handling of baggage shall be performed by outsourced personnel whilst being managed
by assigned BA own personnel. In this manner, BA will have the eyes to all its functions.
This strategy will satisfy the BAs goal for cost efficiency in business. In terms of the
equipment, which is not stated to be included in the outsourcing or not, it is deemed
beneficial that BA would also outsource their airline equipment mainly to preserve the
accountabilities between BA inhouse and outsourced. The maintenance shall be handled by
the outsourced company, who also taking handson on the equipment.

2. As outsourcing strategy is also beneficial when analyzed with the companys strategies and
values, especially for BA that is restructuring the business, it would be tactical to analyze as
well previous cases of same business industry. Whereas, outsourcing may deem to be a
success in a company who studied first the success of same business in the previous. It will
significantly envision the possible drawbacks or gains if done with the same strategy. BA
should study the cases of airlines in the history who took initiative for outsourcing their
airline processes. BA may also look for cases of big businesses with atleast 75% of its
business processes are being outsourced. Taking into consideration, BA should closely look
on the effect of the outsourcing in customer service, and treasury management, as these 2
are very important in an airline service provision success. Customers may not know if BA is
outsourcing or not but the services they are reaching are what matter. Hence, BA success
lies on customers reception of their service quality.

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Case Analysis: Outsourcing

Implication of the Alternative

The first alternative focuses on cost efficiency and wise investment for BA. While BA will have sight
on every processes of the organization, the strategy may cause implication in terms of agreement
with the outsourcing service provider. Service provider may not agree with providing services while
management will still be by BA. The project management of outsources services is mostly handled
by the provider themselves. This will ensure that the contract is executed accurately with the control
of the provider. However, as the first alternative suggests that management is by BA, it will cause
hindrance in engaging with the providers.

The second alternative demand an indepth analysis and research of same business type, and
same business size who did outsourcing strategy in the history. The implication seen in this
strategy is that business, in what industry, is not consistent in giving results. Whilst patterns may be
provided as basis, the result of the business relies in several factors such as the sales market, the
marketing team, the product quality, corporate strategies, values, and others. Most of this aspects
are unique between companies even on same industry or of same size.

Recommendation

It is strongly recommended that BA look closely to its competition and previous cases of airlines
industry while taking most into consideration the reception of the customer of their service as
outsourcing is transparent and clients only see what they are interacting with. If BA find full
confidence in gaining success through outsourcing of almost all the business processes in terms of
customer inception, then it is wise to engage in outsourcing, preferably adding more of control
through BA inhouse management of every outsourced process.

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