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Case Study: Outsourcing for the first time
Case questions:
1. If you were Cindy, where would you begin? Outline the key steps and questions
to be asked in this process.
A carefully devised outsourcing strategy allows organizations to meet institutional
objectives more effectively. Developing a sound strategy requires a cost-benefit
analysis that takes into consideration financial costs, quality expectations and
relationship risks. The following are steps for developing an outsourcing strategy:
i. Examine the needs of your organization.

2. a. Define organizational objectives. Your goal may be to help a start-up
get off the ground. Alternatively, your organization may be well-
established and focused on innovating and developing new products.
b. Pinpoint your reasons for outsourcing. Accessing tools and skills
that are not available in-house, reducing operational costs and
accelerating organizational change are a few examples
c. Outline a plan for achieving organizational goals. Your company
may be in the process of offering a new service to existing clients or
expanding the range of services to attract new clients. Your detailed
plan might include hiring outside consultants, buying parts from a third-
party vendor or training in-house personnel to deliver services.
ii. Research outside resources.
a. Contact outside vendors and service providers to inquire about
their expertise. One of the most important reasons to outsource a
particular service is to benefit from the knowledge and experience of
outside individuals and/or firms.
 Ask for cost estimates. Gathering cost estimates early on in the
process will aid you in conducting a cost-benefit analysis and
competitive pricing studies.
 Check references to ensure quality of services. Ask to speak to
other organizations that have been served by the vendor or service
provider
iii. Assess the costs and risks of outsourcing.
a. Calculate the financial costs and savings. Training in-house staff
and funding office space and equipment for new staff may result in
higher costs than outsourcing tasks to a third-party.
 Consider contract maintenance costs. In-house personnel must
oversee outsourcing contracts, which might involve an investment
of time, equipment and travel expenses.

3.  Determine if necessary skills exist in-house. Salaried employees
might possess required skills, making it unnecessary to hire outside
vendors or consultants
b. Evaluate quality needs. Outsourcing can be risky if an outside vendor,
contractor or consultancy firm does not meet quality expectations. In
these cases, organizations typically incur greater costs because they
must have the work revised by another vendor or hire in-person staff to
correct issues. Establish quality standards by talking to clients and
holding internal meetings to develop a list of must-have qualities.
 Distribute quality requirements. Make sure that your outside
vendors and consultants receive a clear explanation of quality
standards, both verbally and in writing.
c. Analyze cultural and communication dynamics. The nature of the
work might dictate that you outsource to domestic firms that
understand the culture of your clients. Alternatively, your needs may be
technical in nature, making it more affordable to outsource offshore
d. Evaluate legal considerations. Examine tax laws, contract language,
data protection responsibilities and other factors relevant to your
industry and workplace before signing an outsourcing agreement.
e. Examine relationship risks.
 Consider internal relationships. Outsourcing a significant portion of
the responsibilities of in-house staff should be accompanied by an
explanation. Always communicate openly with personnel to avoid
misunderstandings and low employee morale.
 Examine relationships with clients. Determine how your clients will
be affected by your outsourcing plans. For example, a client who is
accustomed to receiving blog posts written by your in-house staff
might not want the content to come from another vendor or a
different part of the world.
 Discuss outsourcing plans with existing clients. Keep clients
informed about upcoming outsourcing plans before implementation.

4. iv. Hire in-house personnel who have necessary expertise. While you
might outsource large quantities of work, having someone in-house who
understands how to oversee the outsourced tasks is essential for ensuring
that your organization's needs are met and services are delivered as
promised.
v. Avoid becoming locked into a contract with a single vendor. Include
language in your contract that allows you to exit the business relationship
after a trial period. This allows you to properly evaluate service quality,
reliability and communication practices.

5. 2. Who (functions, levels) should Cindy enlist on the cross-functional team to
investigate the possible reorganization and outsourcing?
Cindy should use multifunctional teams. Effective strategies for sourcing result
from multifunctional collaboration within the firm. A sourcing strategy from the
purchasing group is likely to be relatively narrow and focus on purchase price. A
strategy developed with the collaboration of purchasing, manufacturing,
engineering and planning is much more likely to identify the correct drivers of
total cost. The collaboration must be continued beyond strategy formulation to the
procurement phase, because that is where manufacturing and engineering are
most likely to realize the full benefits of good sourcing strategy.
3. What is Red Mountain’s core competency?
Red Mountain Lab is an independent testing service that serves the
pharmaceutical companies and the FDA. It’s business is to test pharmaceuticals
for purity, following strict Food and Drug Administration (FDA) guidelines. Their
core competencies are:
i. Fast turnaround of tests
ii. Accuracy in their test results whereby they use high technology testing
equipment
iii. Specialty in testing all types of antibiotics
iv. Excellent computer interfaces with customers, allowing rapid access to
data. They have good customer data management.
v. Good working relationships with the FDA whereby the meet the FDA
standard.

6. 4. Consider the following four potential outsourcing candidates. For each one,
indicate
 The potential risk to be considered
 What type or types of outsourcing arrangements would be the best fit
 What type of management oversight is best suited for each of the following
situations:
Option A: Outsourcing all standard lab supplies to a full-service supplier rather
than using 20+ suppliers as is done today.
Option B: Outsourcing the development and ongoing updates/maintenance of
a software system to track the results of all tests for government analysis, and
provide a data base for statistical analysis.
Option C: Outsourcing some unique tests that customers request on average
of 3 times a year in total.
Option D: Outsourcing the payroll processing and management, including
time cards; tracking vacation, sick days and holidays; issuing regular
paychecks, bonuses, and all employee reimbursement.
Option Potential Risks Type of Outsourcing
Arrangements
Type of Management
Oversight
A Shortage in
supplies if supplier
failed to deliver;
Inability to meet
demand on time
Total outsourcing –
company deal with a
single supplier. Red
Mountain Lab should
develop a strategic
partnership with the
supplier.
Vendor Management
System – Supplier and
customer share a
strategic control as
one organization.
Faces risks and
benefit mutually.
B Direct access to
company’s
Advisable to do
insourcing for
Enterprise Project
Management- Develop

7. confidential
information’s’ such
as employees and
customer
information
confidentiality
purposes. Red
Mountain Lab should
keep their IT
department services
in-house.
IT department as a
business unit that
serves the company
as its vendor.
C Possibility of loss
in business
knowledge. Loss
of intellectual
property.
Involves advanced
research, analytical
and technical skills
which means that
suppliers are
expected to work
independently.
Knowledge process
outsourcing
management–
Usually, specialists
are given managerial
control.
D Lack of belonging
spirit / team spirit
which would affect
productivity due to
lack of motivation.
Administrations and
financial outsourcing.
Specific tasks can be
outsourced to a third
party firm especially
those outside the core
competency of a
company.
Business process
outsourcing
management –
Managed by HR and
financial specialists.