1 Introduction Global competition requires a continuous quest for efficiency improvements. Out- sourcing IT and/or business processes pro- mises efficiency improvements by rearran- ging the value chain [GiRa00]. Outsour- cing of non-core parts of the business is frequently proposed to lead to a stronger focus on core competencies [DRMP95; Venk89]. In general, cost savings from out- sourcing are driven by the trade-off be- tween economies of scale, scope, and skill [Lamm04]. Besides those economic drivers, there is not much research on the antece- dents of the outsourcing evaluation, in par- ticular the impact of the outsourcer’s prior experience with evaluating and managing outsourcing engagements. Our main re- search question thus is: what is the impact of outsourcing experience on the percep- tion of economies of scale, scope, and skill? As outsourcing experience has so far re- ceived only little academic attention and plays a minor part in the outsourcing re- search debate, we identify its relevance by a preliminary descriptive survey and pro- pose ways to further empirically investi- gate the impact of experience on the ex- ante evaluation and the ex-post success of sourcing activities. As unit of analysis we chose financial processes in non-banks that account for a quarter of the entire IT budget. As a typical secondary process, this Financial Chain is still not as streamlined as most core pro- cesses. As a consequence, there is a sub- stantial efficiency potential that might be exploited in outsourcing arrangements [PfSW04]. Based on an empirical survey with the CFOs of Germany’s Fortune 1,000 enter- prises, in this paper it is shown that out- sourcing as part of a systematic Financial Chain Management can offer a substantial source of value. In contrast to the large body of literature discussing ex post suc- cess factors of outsourcing projects [e.g. LaHi93; LSSS03; LoVe92] we argue that using external process competence as a val- ue source for a firm’s Financial Chain re- quires, among others, a cultural readiness to accept that a prospective sourcing provi- der has higher competencies than the firm. We particularly analyze if there is an im- pact of outsourcing experience on outsour- cing evaluation by managers in charge. Our empirical analysis shows that besides WIRTSCHAFTSINFORMATIK 47 (2005) 6, S. 431 – 440 The Authors Daniel Beimborn Jochen Franke Tim Weitzel Dipl.-Kfm. Daniel Beimborn Dipl.-Kfm. Jochen Franke E-Finance Lab J. W. Goethe University Institute of Information Systems Mertonstr. 17 60325 Frankfurt am Main {beimborn | jfranke } @wiwi.uni-frankfurt.de Dr. Tim Weitzel Bamberg University Chair of Information Systems, esp. IS Services Feldkirchenstraße 21 96052 Bamberg An earlier version of this article was winner of the best paper award / best outsourcing paper at the Tenth Americas’ Conference on Information Systems (AMCIS 2004), New York, USA [WeBF04]. The Role of Experience for Outsourcing Evaluation Executive Summary How can outsourcing be used to improve financial processes and what role does managers’ experience with outsourcing play for outsourcing decisions? An empirical survey with CFOs of Germany’s Fortune 1,000 firms (non-banks) reveals that & there are substantial efficiency potentials in the financial chain of many firms, & outsourcing these secondary processes is still quite rare, and & prior outsourcing experience of managers has a strong impact on the evaluation of the competencies of external service providers: an experienced manager is more likely to appreciate the provider’s skills, someone without outsourcing experience presumes the higher competencies inhouse. Keywords: Outsourcing, Experience, Financial Chain, Competence, E-Finance, Economies of Scale, Skill, Scope WI – State-of-the-Art
Transcript
1 Introduction
Global competition requires a continuousquest for efficiency improvements. Out-sourcing IT and/or business processes pro-mises efficiency improvements by rearran-ging the value chain [GiRa00]. Outsour-cing of non-core parts of the business is
frequently proposed to lead to a strongerfocus on core competencies [DRMP95;Venk89]. In general, cost savings from out-sourcing are driven by the trade-off be-tween economies of scale, scope, and skill[Lamm04]. Besides those economic drivers,there is not much research on the antece-dents of the outsourcing evaluation, in par-ticular the impact of the outsourcer’s priorexperience with evaluating and managingoutsourcing engagements. Our main re-search question thus is: what is the impactof outsourcing experience on the percep-tion of economies of scale, scope, and skill?As outsourcing experience has so far re-ceived only little academic attention andplays a minor part in the outsourcing re-search debate, we identify its relevance bya preliminary descriptive survey and pro-pose ways to further empirically investi-gate the impact of experience on the ex-ante evaluation and the ex-post success ofsourcing activities.As unit of analysis we chose financial
processes in non-banks that account for a
quarter of the entire IT budget. As a typicalsecondary process, this Financial Chain isstill not as streamlined as most core pro-cesses. As a consequence, there is a sub-stantial efficiency potential that might beexploited in outsourcing arrangements[PfSW04].
Based on an empirical survey with theCFOs of Germany’s Fortune 1,000 enter-prises, in this paper it is shown that out-sourcing as part of a systematic FinancialChain Management can offer a substantialsource of value. In contrast to the largebody of literature discussing ex post suc-cess factors of outsourcing projects [e.g.LaHi93; LSSS03; LoVe92] we argue thatusing external process competence as a val-ue source for a firm’s Financial Chain re-quires, among others, a cultural readinessto accept that a prospective sourcing provi-der has higher competencies than the firm.We particularly analyze if there is an im-pact of outsourcing experience on outsour-cing evaluation by managers in charge.Our empirical analysis shows that besides
WIRTSCHAFTSINFORMATIK 47 (2005) 6, S. 431–440
The Authors
Daniel BeimbornJochen FrankeTim Weitzel
Dipl.-Kfm. Daniel BeimbornDipl.-Kfm. Jochen FrankeE-Finance LabJ. W. Goethe UniversityInstitute of Information SystemsMertonstr. 1760325 Frankfurt am Main{beimborn | jfranke }@wiwi.uni-frankfurt.de
Dr. Tim WeitzelBamberg UniversityChair of Information Systems,esp. IS ServicesFeldkirchenstraße 2196052 Bamberg
An earlier version of this article was winnerof the best paper award / best outsourcingpaper at the Tenth Americas’ Conferenceon Information Systems (AMCIS 2004),New York, USA [WeBF04].
The Role of Experiencefor Outsourcing Evaluation
Executive Summary
How can outsourcing be used to improve financial processes and what role does managers’experience with outsourcing play for outsourcing decisions? An empirical survey with CFOsof Germany’s Fortune 1,000 firms (non-banks) reveals that
& there are substantial efficiency potentials in the financial chain of many firms,& outsourcing these secondary processes is still quite rare, and& prior outsourcing experience of managers has a strong impact on the evaluation of the
competencies of external service providers: an experienced manager is more likely toappreciate the provider’s skills, someone without outsourcing experience presumes thehigher competencies inhouse.
technical integration challenges, there arecultural problems in that managers tend tosystematically overestimate the quality oftheir in-house processes and especiallytheir process competencies compared toexternal providers, thereby establishingbarriers to a potentially advantageous valuechain redesign.We have chosen a two-fold approach to
evaluate the impact of experience on out-sourcing evaluation. First, we analyze thestatus quo and the outsourcing potential inthe Financial Chain to investigate whetheroutsourcing might be an appropriate stra-tegic instrument for industrialization. Sec-ond, the actual impact of experience onoutsourcing evaluation in the FinancialChain is investigated.Following this structure, first a brief in-
troduction into the industrialization of theFinancial Chain, representing the researchdomain, is given (section 2). Second, re-lated research on the core constructseconomies of scale, scope, and skill is sum-marized and the role of managers’ prioroutsourcing experience is reviewed (sec-tion 3). The Financial Chain as unit of ana-lysis is introduced and some general statis-tics are given. In particular, industrializa-tion of financial processes as a drivingfactor for outsourcing is discussed (sec-tion 4). Subsequently, the interdependen-cies of outsourcing evaluation and indivi-dual experience are analyzed (section 5).The final part encloses a summary of thefindings (section 6), explicates limitations,and gives a first conceptualization of po-tential further research on the impact ofsourcing experiences (section 7).
2 Industrialization ofFinancial Processes
Given that competition will increasinglyoccur between networks of enterprisesrather than between singular firms[LaCo00], optimizing the secondary pro-cesses can be a source of substantial com-petitive advantage. “Classical” SupplyChain Management (SCM) describes thesuccessful philosophy of an integratedplanning, execution and fulfilment of phy-sical goods and services production[BaGM00], enabling real time productionand avoiding cost and error intense mediadiscontinuities [SKCU77; Wate95]. Whiletraditional SCM is mainly focused at or-chestrating physical and information logis-tics associated with the primary flow ofgoods, there is a substantial optimization
potential associated with the often ne-glected financial processes [PfEH03]. Ac-cordingly, the financial flows encapsulatedin the Financial Chain have rarely been ad-dressed in the literature as an autonomoussource of competitive advantage.General goal of a systematic Financial
Chain Management are cash flow improve-ments by integrating internal and externalsoftware systems. Thereby, the cash cyclecan be accelerated, reducing the days salesoutstanding (DSO) (i.e. the number of daysbetween invoicing and payment) and there-fore costly working capital [PfSW04, 108–109]. How can firms systematically broad-en their range of process optimization toalso include these important yet secondaryprocesses?An important trade-off is between devel-
oping competencies and designing pro-cesses in-house and sourcing processes toexternal partners. Analogous to the re-nowned success stories in supply chainmanagement, efficiency improvementsonly partially result from internal systemsintegration. This is rather a first step to anoverall value chain redesign. The resultscan be seen in the automotive industry asvery open cooperation concepts like con-tinuous replenishment or vendor managedinventories [FWKL02]. The research meta-phor of industrializing financial processesdescribes the approach to learn from thesesuccesses and transfer and adapt them tothe Financial Chain, i.e. the flow of cashthat is associated with all production pro-cesses. As in traditional supply chain man-agement, both an efficient application ofinformation and communication technol-ogy as well as the managerial readiness toengage in modern cooperation networks iscrucial. Technical requirements includesystems integration and standardizationwhile organizational challenges result fromheterogeneous incentives and different atti-tudes of partners in cooperation networks.In both areas, again analogous to earlier de-velopments in the primary processes of theautomotive, textile or consumer electronicsindustry, there is a trend leading away frominternal and closed towards open strategies.The basic challenges remain the samethough. They can be described as the sys-tematic rearrangement of the entire valuechain in order to exploit mostly specializa-tion advantages and economies of scale.This can be achieved by selectively sour-cing services and products from internal orexternal providers where service improve-ment, reliability, scalability and cost reduc-tion result from superior process skills andfocus on core competencies.
3 Related Research
As this paper explores the economic factorsdriving outsourcing and their perceptionby key executives, in the following, relatedresearch on the basic economic drivingforces of outsourcing is presented. Gener-ally, three interdependent factors play amajor role in determining whether an out-sourcing arrangement is advantageous ornot:Economies of scale are usually considered
to be one of the main reasons for outsour-cing. The service provider is expected toprovide services at lower costs by bundlingsimilar processes of many firms thereby re-ducing average costs per unit [CaHa02;GuWh91]. In contrast, it can also be arguedthat especially very large organizations can-not realize additional economies of scale asthey have already exploited all availablescale economies [Earl96; LaWF96]. A ne-cessary condition for economies of scalefrom business process outsourcing (BPO)and at the same time a key driver for hiddentransaction costs is the need for standardiz-ing the business process or accepting a stan-dardized reference process which is pro-vided by the sourcing provider [RoCo04].Another reason for beneficial outsour-
cing arrangements are economies of skill re-sulting from core competencies and learn-ing effects of the provider [Lang95;PrHa90]. Economies of skill can be rea-lized by the service provider because (fromthe provider’s perspective) the insourcedbusiness process represents a primary pro-cess [DiHe01]. Firms also outsource parti-cular business functions to overcome inter-nal management and control deficits inthese processes [Gran91]. The service pro-vider might thus be able to proceed on thelearning curve and to provide a given ser-vice at lower costs (even when “produ-cing” the same quantities).Economies of scope refer to the advan-
tages resulting from the shared utilizationof common resources [PaWi81]. In con-trast to large parts of the literature, we usethis term in a process rather than productperspective. Drawing on [Knol94] we thusdefine economies of scope as task interde-pendencies between different businessfunctions that are connected within a busi-ness process. In contrast, product-basedeconomies of scope describe cost advan-tages from re-using resources in differentprocesses, creating different products orservices. Examples of process-based econo-mies of scope are different organizationalunits accessing centralized client data and
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432 Daniel Beimborn, Jochen Franke, Tim Weitzel
employee knowledge applied in differentprocess steps. These arguments can be inhi-biting factors for selective BPO as econo-mies of scope might get lost or result in se-vere coordination costs [Bruc98].Managers’ prior experience with out-
sourcing and their experience with thepartners’ service quality have only beenscrutinized in very few studies [e.g.BeRa02]. Recent research in outsourcinghas shown that managers learn from mis-takes in early engagements how to craftmore effective IT contracts and how tomanage the outsourcing relationship moresuccessfully [PoLa02]. These experienceswere often developed by means of incre-mental outsourcing [LaWi03]. [GrCT96]and [LHCP00] have empirically shown astrong influence of partnership experienceon the outsourcing decision. Accordingly,[LeKi99] found that partnership quality isa critical success factor of IS outsourcing.Featherman and Pavlou found empiricalevidence that positive experiences ad-versely influence the perceived risk[FePa03] and Aubert et al. showed thatlearning effects lead to decreasing probabil-ities of undesirable consequences as well asto an implementation of more effective riskmanagement strategies [AuRP02]. Further,an empirical study by Perkins and Raofound that experience affects decision mak-ing especially for non-programmed (i.e.new and little structured) decisions[PeRa90]. Nevertheless, the major part ofconfirmatory research on outsourcing doesnot explicitly consider the role of execu-tives’ prior experiences on outsourcingevaluation. One of the very few exampleswhere experience is indirectly reconsideredas a partial driving factor is Dibbern’s mod-el of the Sourcing of Application Services[Dibb04]. He applies the Theory ofPlanned Behavior which states that indivi-dual experience strongly influences the de-gree of perceived behavioral control[Ajze91] which in turn is hypothesized byDibbern to be a driving antecedent of out-sourcing. Nevertheless, the results are het-erogeneous.
4 A Generic Financial Chain
To systematically identify efficiency poten-tials in financial processes, we have devel-oped a generic Financial Chain (Figure 1).Based on this, an empirical survey disclosesimportant areas to improve upon and helpsto understand challenges and obstacles foroutsourcing (parts of) the Financial Chain.
In 2003, a questionnaire was sent to the1,000 largest companies in Germany (ac-cording to their revenue; excluding banksand insurance companies). Prior to mailingthe questionnaire, several pre-tests wereconducted to refine the questionnaire andreduce semantic ambiguities. Furthermore,each company was contacted by telephoneto identify the chief financial officer towhom the questionnaire was then directlyaddressed to enforce a high response rateand assure high data quality. After an initialmailing, a follow-up was conducted andthe questionnaire was mailed a secondtime. Furthermore, all addressees who didnot answer until then were contacted bytelephone and asked for participation. 103completed questionnaires were returned(10.3%) [SKGW04].The Financial Chain (Figure 1) begins
with the business partner qualification bychecking identity, credit worthiness andsolvency [ArYo01]. Then, the financingmodus (e.g. supplier credit, leasing) for thedeal is determined, followed by pricing(price negotiation and determination), salesoffer and risk assurance (currency risks,transportation risks, credit default risks).After this financial trade enablement phaseand the actual fulfillment, the processes ofthe financial settlement phase include in-voice generation, invoice delivery and pos-sibly dispute management [Land01]. TheFinancial Chain cycle terminates with thecustomer paying the bill. For a more de-tailed description of the Financial Chainsee [PfSW04]. All these processes utilizeboth internal and external data. For exam-ple, as part of the qualification process datafrom recent customer relations (CRM sys-tem) can be used for credit assessment aswell as data from external providers (e.g.Burgel, Creditreform, Dunn & Bradstreet).Although the sub processes of the Fi-
nancial Chain as described above can befound in almost all enterprises, a look atthe process ownership reveals a low extent
of process orientation. While the processesexist in 85–99% of the Fortune 1,000firms, they are surprisingly often not in theresponsibility of the CFO. This is a strongindication of a lack of integration of the Fi-nancial Chain. Generally, integration ofprocess activities and extensive IT-supportof the entire process are supposed to have apositive impact on organizational perfor-mance [GrBe99; Poll03]. Related researchon business process redesign (BPR) arguesthat designating an owner for an entire busi-ness process is crucial for a successful opti-mization [ArPM99; DaSh90]. Accordingly,our study reveals that firms where many or-ganizational units (instead of one in chargeof the Financial Chain) share financial pro-cess operations are significantly less con-tent with their processes (Pearson’s correla-tion coefficient of 0.381 with p � 0.01).Analogous to successful supply chain
management approaches, an industrializa-tion of financial processes by closely inte-grating the Financial Chain seems to be apromising optimization approach. Con-firming this hypothesis, the majority of theCFOs (77.1%) considers an integration ofthe related processes to yield a higher opti-mization potential than an optimization ofisolated sub processes. A case study con-ducted alongside the empirical survey givesan impressive example of the potential of asystematic Financial Chain Management.A large, multinational producer of consu-mer goods reported that up to 70% of allB2B invoices were (rightfully) complainedand returned by the recipients due to priceerrors. As a result, 30–50% of the entiresales force was solely occupied with disputemanagement due to wrongly stated pricesresulting from a lack of integration of thepricing and invoicing systems [PfSW04,112]. Generally speaking, pricing errors arethe main reason (83.3% according to[SpPf01]) for invoice disputes. And this is asevere problem, as a look at the invoicingvolume reveals: the German Fortune 1,000
The Role of Experience for Outsourcing Evaluation 433
generate an average of 67,687 invoices in theB2B and 230,294 invoices in the B2C do-main every month. Across all industries,8.24% of all invoices are incorrect withaverage costs ofa 128 per dispute.
The costs associated with financial pro-cesses can be substantial. Mostly, they aremeasured as fraction of overall IT costs.The mean IT budget in the responding en-terprises is a 35 million (ranging from
a 130,000 to a 1.5 billion). Half of themanagers could not precisely explicate thecosts for the Financial Chain. Among thoseanswering, the Financial Chain consumes22% of the annual IT budget.Only 6.1% of all responding CFOs are
“fully content” with their Financial Chain.About one third is somewhat content. Theremaining two thirds are either dissatisfiedor indifferent about their financial pro-cesses. Also, one out of two CFOs has al-ready identified areas to improve upon.Still, quite surprisingly two out of threeconsider the efficiency of their FinancialChain Management to be good or verygood compared to industry competitors.Despite the common dissatisfaction withthe Financial Chain, only 3.2% considertheir own Financial Chain Management tobe inefficient compared to industry part-ners. This overly optimistic self-evaluationcan also be found when self assessing thequality of the IT support for the primaryprocesses (supply chain) or of internal dataquality.Analogous to the self-assessment con-
cerning the Financial Chain Management,
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434 Daniel Beimborn, Jochen Franke, Tim Weitzel
process costs of the Financial Chain are ex-pected to rank good or very good in an in-dustry benchmark. Especially here, it issurprising to see that only 3.2% of all firmsexpect to be worse than competitors. De-spite the fact that only about one thirdtends to be at least somewhat content withthe processes of the Financial Chain, pro-cess costs are deemed dissatisfying by onlya very small fraction of the CFOs.The Financial Chain is usually a second-
ary process to support a firm’s core busi-ness [Port85]. Therefore, it is rarely de-signed and optimized to provide a compe-titive advantage on its own. Secondaryprocesses only account for 23% of all busi-ness process reengineering projects, coreprocesses account for 44%, the remainingare business network and managementprocesses [KSST99]. But outsourcing (partsof) the Financial Chain to a specialized pro-vider might offer the chance to employ ex-cellent services even for secondary pro-cesses (BPO). In contrast to informationtechnology and infrastructure outsourcing,BPO describes the sourcing of entire pro-cesses rather than the infrastructure and re-sources delivering the services.51.5% of the CFOs consider outsour-
cing of parts of the Financial Chain possi-ble. 32.3% answer that selective sourcing isnot an option. Those firms that have al-ready identified areas of improvement intheir Financial Chain are more likely toconsider selective sourcing an interestingoption (Pearson’s correlation coefficient0.292 with p � 0.01). Less than half of allfirms (49.4%) have already evaluated pos-sible outsourcing benefits in the FinancialChain.
5 The Impact of Experienceon Outsourcing Evaluation
To get a first indicative answer to our re-search question, we wanted to know if for-mer experiences with outsourcing mighthave an influence on the perception of
economies of scale, scope, and skill. Forthis purpose, we first determined the statusquo of BPO in the firms (Figure 4). Wefound BPO rates (realized/(possible þplanned þ realized)) between 11% (quali-fy) and 27% (invoice), depending on thesub process. Operational cost savings asso-ciated with the outsourcing of processes ofthe Financial Chain are 10.3%.More than half of the firms that already
had experience with Financial Chain out-sourcing reported these projects to havebeen completely (26.7%) or rather success-ful (26.7%). The remaining 46.7% evalu-ated their sourcing projects as indifferentor rather failed.. The firms who stated theirsourcing projects being successful achievedthe planned savings. For rather successfulprojects, expectations and realized savingsdeviated by 5.6% (on average). Projectsrated as failures by the CFOs performedon average 27.5% below expectations. Thisis in accordance with large parts of the lit-erature stating that the outsourcing success
can be measured as the difference betweenexpected and realized cost savings.
In contrast, keeping the processes in-house but using a shared service organiza-tion (SSO) to realize economies of scalecan be found in 41% (dispute) to 71% (fi-nance) of all responding enterprises, en-abling operational cost savings of 13.7%.
We can now take a closer look at the im-pact of actual outsourcing experience onthe perception of outsourcing drivers andinhibitors, namely economies of scale,scope and skill.
Economies of scale are frequently cited tobe one of the main reasons for outsourcing.For financial chain processes, 63.8% of theCFOs do not expect savings related toeconomies of scale from outsourcing (partsof) their Financial Chain; only 16.5% seecost savings potentials from economies ofscale. About one half of the CFOs (48.2%)consider the in-house transaction volumeto already exhaust possible economies ofscale (cf. Table 1).
WIRTSCHAFTSINFORMATIK 47 (2005) 6, S. 431–440
Business Process Outsourcing (BPO)40
35
30
25
20
15
10
5
0
qual
ifica
tion
finan
cing
prici
ng
risk
man
agem
ent
invo
icege
nera
tion
claim
man
agem
ent
paym
ent
num
ber
possibleplannedrealized
Figure 4 The status quo of Financial Chain Outsourcing in Germany’s Fortune 1,000
Table 1 Economies of Scale in the Financial Chain
CFOs opinions on economies of scale totally agree partly agree Indifferent partly disagree totally disagree
1.1 Outsourcing favorable due to economies of scale atservice provider (n ¼ 91)
1.1% 15.4% 19.7% 34.1% 29.7%
1.2 In-house transaction volume already exhausts possibleeconomies of scale, thus provider cannot realize furthersavings potential due to economies of scale (n ¼ 92)
8.0% 40.2% 23.1% 21.8% 6.9%
The Role of Experience for Outsourcing Evaluation 435
How does the perception whethereconomies of scale are realizable by the in-sourcer change with outsourcing experi-ence? CFOs who already had some out-sourcing experience are much less reluctantto accept that insourcers may be able to rea-lize economies of scale (cf. figures 5 and 6).The Mann-Whitney test, a non-para-
metric test to compare two independentgroups of sampled data that makes no dis-tribution assumptions, reveals a significantdifference between both groups (signifi-cance level: p ¼ 0.01). 68.9% of CFOswithout outsourcing experience do not seethe insourcer being able to realize econo-mies of scale. On the contrary, only 35.7%of the CFOs with outsourcing experiencedisagree to this proposal. Outsourcing ex-
perience fosters the perception that the in-sourcer is indeed able to realize economiesof scale.Economies of scope refer to the advan-
tages resulting from the shared utilizationof common resources [PaWi81]. Examplesare access to centralized client data in differ-ent organizational units with differentviews or knowledge of particular employ-ees that has to be applied within differentprocesses. More than two thirds (70.4%) ofthe responding firms claimed that there issuch high task interdependence within theFinancial Chain that outsourcing of selectedprocess parts cannot be efficient (Table 2).When analyzing the impact of outsour-
cing experience on the attitude towardseconomies of scope we do not find signifi-
cant differences among the two groups ofmanagers.Taking a closer look at the independen-
cies between the perceived economies ofscale and scope reveals an interesting rela-tionship: CFOs who agreed that the sour-cing provider is able to realize economiesof scale did not see economies of scope be-tween the own processes and vice versa(Pearson’s correlation coefficient 0.51 withp � 0.01). Economies of scale and scopeare frequently not considered in parallel.The trade-off between them doesn’t seemto be considered at all. Had it been consid-ered, CFOs would potentially have seenstrong economies of scope between theown processes as well as economies of scalerealizable by the provider.
Figure 6 Selective Sourcing Favorable Due to Economies of Scaleat Service Provider (CFOs with Outsourcing Experience)
Table 2 Economies of Scope in the Financial Chain
CFOs opinions on economies of scope totally agree partly agree Indifferent partly disagree totally disagree
1.1 Sub processes are closely intertwined, therefore selectivesourcing is not efficient (n ¼ 92)
17.6% 52.8% 13.1% 9.9% 6.6%
1.2 Selective sourcing of sub-processes would be efficient(n ¼ 92)
5.7% 12.5% 20.4% 36.4% 25.0%
Table 3 Economies of Skill in the Financial Chain
CFOs opinions on economies of skill totally agree partly agree Indifferent partly disagree totally disagree
1.1 The service provider has higher process competenciesthan the outsourcing firm (n ¼ 90)
2.2% 5.6% 30.0% 25.5% 36.7%
1.2 “You can’t outsource a problem”: for successful out-sourcing, in-house management must have detailedknowledge of outsourced processes (n ¼ 90)
21.8% 32.2% 12.7% 20.7% 12.6%
436 Daniel Beimborn, Jochen Franke, Tim Weitzel
Economies of skill can be realized by theservice provider because (from his point ofview) the insourced process represents aprimary process [DiHe01]. The serviceprovider is able to proceed on the learningcurve and to provide a given service withlower costs (even when “producing” thesame quantities). In contrast, the outsour-cer himself loses competence in the long-term. In our survey, most CFOs (62.2%)disagree that a service provider has higherprocess competencies. A detailed knowl-edge of the process subject to outsourcingis agreed to be a key success factor by54.0%, while 33.3% of the CFOs disagree.There is thus a trade-off between realiz-
ing economies of scale and skill by trans-ferring parts of the business versus econo-mies of scope that can be realized whenprocesses are kept in-house.An renowned argument in favor of out-
sourcing throughout the literature is ex-ploiting economies of skill by using thehigher competencies of the sourcing part-ner (provider) [DiHe01] or a lack of parti-cular competence in-house, respectively.Since outsourcing can be an importantmeans of improving a firm’s value chainwith regard to specialization and scale ad-vantages and therefore to utilizing the part-ners’ expertise, the question of the extentof appreciation of that competence be-comes crucial for a firm’s readiness to rede-sign its value chain. In the automotive in-dustry, there is the famous saying “don’traise the cattle for your leather seats”, de-scribing the experience that focusing oncore competencies and thereby a substan-tial reduction of the vertical range of inte-
gration can be a key source of value. Incontrast to these prominent examples, ourempirical study reveals that despite thewidespread dissatisfaction with their Fi-nancial Chain (section 4) the CFOs consid-er the core competence concerning Finan-cial Chain Management to be in-house andare therefore often reluctant to consideroutsourcing projects.Now we can take a look at the question
if the perception of who has the highercompetencies changes with outsourcing ex-perience. In fact we find substantial devia-tions (Mann-Whitney Test significance le-vel p � 0.05) especially concerning the ap-preciation of the process competence of thesourcing provider. Only 28.5% of theCFOs with outsourcing experience (in-stead of 68.4% without) consider theirown process competence superior to thatof the provider.
6 Summaryof the Empirical Findings
Outsourcing is a means to utilize corecompetencies and the scale of operations ofexternal experts to reduce the vertical rangeof integration and contribute to optimizedprocesses. In contrast to many primaryprocesses that are frequently the focus ofoptimization efforts, there are substantialefficiency potentials in the Financial Chainof many firms. A reason for this is that fi-nancial processes are rarely seen as a corecompetence by firms.
Our empirical study shows that outsour-cing of the Financial Chain is still quiterare. Yet, those firms that could gather ex-perience with it mostly report successesand could realize substantial operationalcost savings. The role of prior sourcing ex-perience on the outsourcing evaluation wasof core interest in this paper. It could beshown that managers with prior outsour-cing experience valued the advantages toresult from outsourcing more positive thantheir counterparts without prior experiencedid. More specifically, for economies ofscale and skill, a significant difference be-tween both groups has been observed,while for economies of scope, no signifi-cant difference was observed.
Furthermore, for the valuation of skilleconomies, one result though is that CFOstend to systematically overestimate thequality of their financial processes andespecially their competencies compared toexternal experts. This is surprising sincethe Financial Chain is not a core compe-tence for most firms and may be an indica-tor for an internal cultural barrier to valuechain redesign.
7 Limitations and FutureResearch
Our research results represent first insightson the impact that outsourcing experiencemight have on the perceived outsourcingpotential and the successful realization ofan outsourcing deal. Due to the explorativecharacter of this survey, the results are
Figure 8 The Service Provider Has Higher Process Competenciesthan the Outsourcing Firm (CFOs with Outsourcing Experience)
The Role of Experience for Outsourcing Evaluation 437
rather indicative and require a more pro-found development of the experience con-struct in future research. Nevertheless, thisstudy explicitly considers individual ex-perience while one of the major empiricalstudies which (among other questions) sur-veys the impact of experience only com-pares the success of outsourcing deals inthe 1980’s and in the 1990’s, assuming moreindividual experience to be found in thelatter period [PoLa02]. The authors them-selves mention the influence of other fac-tors such as the increasing expertise of con-sulting firms etc.A further limitation of this study is cer-
tainly the general notion of sourcing experi-ence that abstracts from possibly differentimpacts of individual and firm or good andbad experience, for example. Hence, oneshould closely investigate the sourcing his-tory of the firm and the individual managerin terms of sourcing success, number, size,and type of projects. As the sourcing litera-ture shows, different types of projects (e.g.selective vs. total outsourcing [LaWF96])may exhibit different probabilities of suc-cess. We propose an explicit incorporationof a sourcing type classification, e.g. follow-ing the scheme from Lacity et al. [LaWF96]who classify sourcing projects into rela-tionship vs. transaction based contracts andinto resource vs. result oriented engage-ments. The results are further limited toproduction type evaluations of outsourcingreferring to economies of scale, scope, andskill. In particular, we did not control fortransaction cost effects which may destroyany production cost advantages from out-sourcing. For example, relationship-relatedmanagement costs may exceed expectedproduction cost savings. Power, risk, andgovernance issues as well as agency prob-lems are further important factors thateventually need to be considered for amore in-depth analysis of the experienceconstruct.Nevertheless, constrained by the limita-
tions discussed above, the indicative resultsof the survey motivate for a closer investi-gation of the individual experience in out-sourcing evaluation. We expect insightfulresults from further research extendingconfirmatory outsourcing models as e.g.[DiHe03; Dibb04; AnSt98] by an experi-ence construct which controls for the eva-luation differences observed in this study.Experience can be incorporated as a mod-erating variable for the impact and volati-lity of transactions costs as well as for theperception of production cost advantages.The construct itself should address the lim-itations discussed above such as the differ-
ent characteristics of organizational and in-dividual outsourcing experience as well asthe dimensions of the formerly realizedoutsourcing projects.
Acknowledgments
This work was developed as part of thesourcing framework of the E-Finance Lab.We are indebted to the participating uni-versities and industry partners.
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