Transformational outsourcing

From CEOpedia | Management online

Transformational outsourcing is the most developed form of cooperation with the service provider in outsourcing. Service carried out by the provider involves the radical redesign of ways of the implementation of outsourced tasks resulting in major improvements in the company's processes. This type of outsourcing was presented in the work of D. Brown, S. Wilson and J.C. Linder. Such form of cooperation is used to achieve results in a short time, and enables incremental, sustainable and significant improvement in terms of the results of the entire operation. It should be noted it is essential to involve all employees in cooperation to achieve these improvements.

The basic assumptions of the presented type of outsourcing can be present by comparisons with the outsourcing in the traditional approach, which is reflected by tactical outsourcing. Such comparison is presented in following table.

Table 1. A comparison of the main features of tactical outsourcing and transformational outsourcing

Tactical outsourcing Transformational outsourcing
focusing attention on the benefits obtained by entrusting the implementation of tasks to the service provider emphasis on performance of company
primary goal is cost reduction of outsourced tasks primary goal is increase in market value of company
investment risk-sharing between company and service provider risk-sharing involves strategic assumptions of tasks performed by service provider
service providers performs various ancillary activities adapting to the existing solutions for the processes carried out by the customer role of service provider involves redesigning its business in line with the strategic objectives of the customer
active use of potential of service provider to ensure the agreed level of quality implementation of outsourced tasks partnership networks with specialized service providers changes in response to changing market conditions
focus on providing agreed level of quality of outsourced activities focus on permanent improvement of outsourced processes
relative ease of determining the level of the expected results of outsourced services determination of the expected quality is difficult because it is impossible to separate processes performed by service provider and the company
getting additional capital by eliminating selected support processes from organization of the customer and sale of equipment used so far in this processes cost optimization and reengineering is the primary factors to facilitate the permanent increase in the market value of the company
changing service provider due to changing conditions does not require transferring additional equipment to service provider changing of the service provider is difficult change due to need to adapt the processes and provide additional equipment by the company

Capital outsourcing as transformational outsourcing

It relates to, transfer of auxiliary processes carried out by company to external contractor. This method requires a restructuring of legal form of company. It involves creating a new business entity (affiliated company), in which the parent company has majority of shares (M. Trocki, 2001, p. 134). New entity performs processes transferred to it on the basis of the corresponding agreement. Ownership of majority of shares by the parent company, allows the elimination of one of the main disadvantages of contract outsourcing, which is limited possibilities of inspection of performed tasks. Condition for the application of such a solution, however, is the ability of the company to perform division and extraction of business functions.

The solution presented is used primarily when the parent undertaking decides to gain an additional capital from the outside.

Capital outsourcing also allows a new operator to service other companies, which is designed to ensure greater independence and possibility of the additional revenue. Goal of subsidiary is to achieve a permanent position in the market and ensure profitability.

Advantages of transformational outsourcing

This form of outsourcing is a response to weakness of the contract outsourcing. Its basic advantages are:

  • avoiding staff reductions by employment in the newly formed entity,
  • easier supervision of tasks in subsidiary thanks to ownership of majority of shares,
  • greater precision in the strategic planning for the parent company,
  • close cooperation in the field of development and maintaining the market image,
  • significant impact on the level of prices of services offered,
  • parent company acquires additional income thanks to the new external customers.

Disadvantages of transformational outsourcing

The main disadvantages of capital outsourcing include:

  • the threat to the dominance of individual goals of senior management of the parent company in the business unit created,
  • relatively high cost of creation of subsidiaries,
  • full responsibility for the economic performance achieved by the new entity,
  • inability to make a choice among the other providers offering a similar range of services, possibly at lower cost.

Examples of Transformational outsourcing

  • Business Process Outsourcing (BPO): Business Process Outsourcing (BPO) is a form of transformational outsourcing, where an organization outsources a process or a set of processes to a third-party provider, which then takes over the responsibility of managing and improving those processes. An example of a BPO would be a company outsourcing its customer service operations to an external provider. The external provider would then take over the responsibility of managing and improving the customer service operations for the company.
  • Cloud Computing: Cloud Computing is a type of transformational outsourcing, where organizations outsource the hosting of their data, applications, and services to a third-party cloud service provider. The cloud service provider is responsible for managing, monitoring, and improving the performance of the applications and services hosted in the cloud. An example of Cloud Computing would be a company outsourcing its data storage to a cloud storage provider. The cloud storage provider would then take over the responsibility of managing, monitoring, and improving the performance of the data stored in the cloud.
  • Knowledge Process Outsourcing (KPO): Knowledge Process Outsourcing (KPO) is a form of transformational outsourcing, where an organization outsources a high-value knowledge process to a third-party provider, which then takes over the responsibility of managing and improving the process. An example of a KPO would be a company outsourcing its research and development process to an external provider. The external provider would then take over the responsibility of managing and improving the research and development process for the company.

Other approaches related to Transformational outsourcing

  • Strategic outsourcing - It is a form of collaboration, which is used to make more strategic decisions about the outsourcing process and its results. The main goal of this type of outsourcing is to create a partnership between the provider and the customer, with the aim of achieving the desired outcomes for both parties.
  • Shared services outsourcing - This type of outsourcing involves the transfer of certain business activities to a service provider. The provider will then be responsible for delivering the services in a cost effective manner, while the customer remains responsible for managing the services.
  • Business process re-engineering - It involves the redesign of core business processes with the aim of improving the performance of the organization. The main goal is to identify and eliminate redundant processes, which can lead to improved efficiency and cost savings.
  • Managed services outsourcing - This type of outsourcing involves the transfer of certain tasks to the service provider. The provider will then be responsible for managing the delivered services and ensuring that the customer receives the desired outcomes.

In summary, other approaches related to Transformational outsourcing include Strategic outsourcing, Shared services outsourcing, Business process re-engineering and Managed services outsourcing. These approaches can help organizations achieve greater efficiency and cost savings by redesigning core business processes and transferring certain tasks to service providers.


Transformational outsourcing — recommended articles
Outsourcing — Strategic outsourcing — Relations between supplier and customer — Revenue center — Functional strategy — Innovation management — Tactical outsourcing — Management company — Strategic cost management

References

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