Song Hanh Pham
Comecta is a small firm developing gaming software for internet and mobile gaming application located in Sheffield. Despite being of very small size with one-owner manager and one employee, the revenue of firm A has been significantly growing since its establishment in 2007. What factors help this small firm to survive and develop?
According to its owner manager, the key to its success is outsourcing. The firm started outsourcing at very early stage.
After a year it began outsourcing accounting function which used to be handled by the firm owner manager to a local accounting firm. The owner manager explained the reason for outsourcing is to free his time for other key business. When being asked about why the firm outsourced to local accounting firm but did not outsource to an Indian firm who may be an original accounting service provider, the firm’s owner manager explained that the accounting work involves UK tax regulations, so it needs to be provided by an UK accounting firm. Moreover, the size of the outsourced accounting job is not big to think about saving cost by risky outsourcing to non-UK accountant.
Not only non-core business function like accounting, but also program development which is the firm core-business function has been outsourced. The firm outsource some software development project due to lack of manpower, especially expertise. The firm owner manager mentioned about the possible risks and cost when outsourcing core business function such as the loss of business control to outsourcing suppliers, mismanagement of quality, expenditure to be paid to investigate and monitor outsourcing suppliers.
However, the firm owner manager revealed that so far the firm has not experienced risks and costs when outsourcing its programing function thanks to good application of information technology in searching and monitoring the vendor. They selected vendor through competitive bidding on professional websites. They announced the bids on www.eland.com and had a number of vendors contacting them for a quotation.
The vendors are from America, India, Ukraine, China. Chinese vendors offered the cheapest price but the firm’s manager did not select the firm because through checking on different internet sources, the firm ’s manager thought it was a flake and middleman. The firm selected a Ukraine vendor because that firm has a good history, good portfolio, experience, expertise and a good reputation from reviewers of the website and offered a competitive price. All of the information from the internet which the firm used to check its Ukraine vendor assured the firm that its Ukraine vendor was not a “fly by night” but reputable, experienced and talent producer. The quotation by Ukraine firm is more competitive than an Indian firm which firm A’s manager used to think that Indian IT firm offer low cost programming. All the communications between the firm and its Ukraine vendor are conducted through Skype. No travelling is involved before signing contract and managing the contract. Language is not a barrier. All of the Ukrainian staff can speak English.
The firm and its vendor got on well together, all the work conducted on specification. Occasional mistakes occur during programming but the firm’s manager felt these to be minor and common during production, whether the job is conducted in-house or outsourcing.
The firm’s manager is very satisfied with his Ukrainian vendor. He said that he would use that firm again in the future project if the vendor is still competitive. However, the firm’s manager also considers a possibility that if he develops a lot of products in that range which require software programming he may employ in house staff as in-house staff may be cheaper. The firm paid GBP7000 for the outsourcing contract which was conducted in three months. The firm’s manager thought he could pay GBP 25000 to have an in-house programmer for a year. If there is a frequent use of programming, by having in-house programmer, the firm can save GPB 3000 per year.
The case of Comecta’s outsourcing shows that by sensible choice of activities, location and partner to outsource, a small firm can overcome the scarcity of internal resources to develop. By good application of ITC technology, a small firm can reduce risks, costs and benefit from using the foreign expertise at more competitive price than in house production or domestic outsourcing.
A firm acting rationally should adopt market-based strategies when their production cost savings of outsourced work outweigh the transaction costs, which is defined as a cost incurred in making an economic exchange, incurred. However, the decision to produce in-house or to outsource depend not only on the production and transaction costs and also on the frequency of transactions, the degree of asset specification or customization needed for the transaction, as well as vendor opportunism and uncertain conditions. Although outsourcing enables a small firm to obtain access to resources that are unavailable internally, and to high skilled labor, acquire ready-made innovations, compensating for the lack of a particular expertise in-house, and gain access to new technology/skills at more competitive price and quicker time to market than in house production, a firm should consider employing in house production when the transaction becomes more frequent.
Although outsourcing abroad or off-shoring provides a firm with a greater chance to get access to a broader pool of talents at more competitive price, there are several difficulties that the firm could face when using offshore suppliers. Good application of ICT in searching and monitoring vendors can help a firm to reduce outsourcing risks and cost. In short, wise selection location and suppliers to outsource for each business activity however can enable a small firm to effectively leverage external resources needed for its survival and growth.
Dr Song Hanh Pham, Sheffield Business School at Sheffield Hallam University