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7 Tips for Peace, Profit, and Productivity in Outsourcing

by: Admin

Monday, June 28, 2010 |

An Economist's Take on 7 Tips in Outsourcing

Dr. Oliver Williamson, Professor Emeritus of business, economics, and law at the University of California-Berkeley, outlines “7 Tips for Peace, Profit and Productivity”.  Although it does not look dissimilar to a lot of lists that we have encountered regarding the outsourcing and offshoring industry in the past, Dr. Williamson did win the Nobel Prize in Economics in 2009. Here is the gist on the seven tips:

1.)    Build cooperation into the contract -Williamson believes that the partnership can be much more rewarding if both customer and supplier implement measures to preserve cooperation throughout the deal. Williamson writes that "efficiency gains from trade go back to when our ancestors traded nuts for berries on the edge of the forest, [in] which exchanges were both transparent and simple."

2.)    Factor in hidden transaction costs - This is due to the well-known fact that many offshoring projects never cost the same as initially written in the contract. It is therefore essential to figure out the long-term cost beforehand, as difficult as that may be.

3.)    Use the contract as a framework, not a weapon - Outsourcing customers who may have been victimized have a tendency to create overly detailed contracts to prevent any possibility of contingency, which is a mistake.

4.)    Make end-of-life arrangements early - Many forget that outsourcing and offshoring deals don’t last forever. The proactive approach would be to plan for defection early on and figure out how to mitigate its effects. After all, changes in a business relationship are most assuredly subject to change as the market changes. Contracts, therefore, need an exit management plan that is well-thought out and fair for both sides.

5.)    Create a shared vision statement - Having strategic points that align with your outsourcer will always minimize additional transaction costs throughout the deal.

6.)    Play nice (but not too nice) - You can gain the upper hand on your supplier, or let the supplier gain the upper hand on you. Either way, you are in for what Williamson refers to as “one-sided muscular contracting” which will only yield short-term gains.
7.)    Always leave money on the table - Many are quick to dismiss this strategy as foolish. However, working towards getting the cheapest price can, according to Williamson, cost both parties in the long-run. Leaving money on the table can instead be a “signal of constructive intent to work cooperatively”, which in turn minimizes “concerns over relentlessly calculative strategic behavior”.

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