Factors Driving Contracting
In this section let us try to analyse the factors which drive contracting decisions. Here, the buy mode is referred as contracting, subcontracting and outsourcing. Even in a „make? mode, some contracting is involved. For example if a firm desires to manufacture a part in its own shop, it has to purchase the material from an outside agency; it may outsource the rough cutting operations to an outside agency; it may even employ an outside agency like a laboratory to inspect the material for quality before the material is taken to its shop. This outsourcing is elementary and we will not consider this as part of outsourcing as this is part of the „make? mode in contracting.
Lets us now see the factors which drive the contracting decisions:
- Companies require efficient contractors in place, so that they can carry out their business operations without any trouble. This is a big advantage to the company owners because, a general contractor will be available to him and the business owner can concentrate, his time, money and energy on his core competence of running his business. Similarly, general contractors make a living, working with known subcontractors. An efficient general contractor will have an established relationship with specific project he is presently engaged in.
- If the project is completed on time or even before, this enables the business owner to realise his revenues early.
- Contracting lowers (sometimes may increase due to various other reasons) the overall cost of the service to the business owner by reducing scope, defining quality levels, re-pricing, and re-negotiation.
- Contracting reduces the ratio of fixed costs to variable cost by offering a move from fixed to variable cost and also by making variable costs more predictable.
- Business owners will focus on improvement of quality, so they ensure that the contractor is capable of ensuring quality during process of specific work.
- Business owners will focus on contractors who have wider experience, access to intellectual property and the knowledge of contractor specialised in the work.
- Contractor must be capable of developing a product in a much faster way with the additional capacity brought by the supplier.
- Risk management is one of the main benefits of contracting especially in large, complex projects where the risks are distributed to parties most capable of managing the risks applicable to the work of each party.
- ? Contracting for low cost labour, for example is Research and Development projects which are outsourced by the high labour-cost countries to expertise available in low labour-cost countries like India and China.
The term "subcontracting? implies to the next level of contracting resorted to by a general contractor. If a contracting firm takes up the total project of constructing a building, the firm itself may have the core competence of carrying out the civil works, but it will usually award subcontracts for components of the total work like electrical works, air-conditioning works, fire protection system works and so on. However, the contracting firm is responsible for book-keeping the performance of total work.
Since the 1980?s, the term „outsourcing? has also come into use. It implies essentially the same as contracting or subcontracting. Outsourcing is the transfer of management and day-to-day execution of a specific business function to an external source provider. Business segments that are outsourced are:
- Information Technology (IT).
- Computer Aided Design(CAD) drafting.
- Facilities management.
- Accounting.
- Human Resource (HR).
- Market research.
- Manufacturing.
- Designing.
- Web development.
- Content writing.
- Engineering.
Outsourcing or subcontracting helps the organisation to perform the task in an easy manner with division of labour, whereby each agency executes a part of the total project requiring specific skills applicable to that part.
The other recent term which is used is off-shoring, in which the buyer organisation belongs to another country. As an extension of this usage for the term, even if the work is not outsourced that is. the work stays within the same corporation/company, the transfer of an organisational function to another country is now considered as off shoring. The distinction between outsourcing and off shoring will soon become lesser over time, because of increasing globalisation of outsourcing companies. Outsourcing involves contracting with a supplier, which may or may not involve some degree of off shoring.