2. directly contributes to its strategic competitive advantage.

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2. Spill-over Risks:

Contracting with a supplier can expose a company to the possibility that confidential information might leak, perhaps even to competitors.

Spill-over risks are exacerbated (aggravated) when the interface between the outsourced activity and other internal functions is complex, requiring a company to reveal proprietary information to ensure a good fit between the two.

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3. Trust:

To protect against dependency and spill-over risks, a company can rely on detailed legal contracts with vendors. But such documents are time-consuming and expensive to negotiate, and enforcement is uncertain and costly, thus discouraging outsourcing.

4. Relative Proficiency:

Outsourcers can take advantage of economies of scale and scope by aggregating the needs of several clients. Thus companies need to examine their proficiency relative to that of vendors on a case by case basis.

5. Strategic Capabilities:

A company should not outsource an activity that directly contributes to its strategic competitive advantage. If a company believes it can build a sustainable lead in an activity that offers long term competitive advantage, then it should refrain from outsourcing that function and instead devote efforts to building superior capability even if its current relative proficiency is modest and other factors make outsourcing attractive.

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