Case Study 3: Outsourcing (Feed or Farm Out)

1. Review the strategic issues presented in the case.

There are various interlinked strategic issues discussed in the Harvard Business Review case “Feed R&D or Farm It Out?” by Nitin Nohria. The case is about RLK Media and its managerial dilemmas. The case presents strategic issues related to outsourcing and its relation with marketing, human resources, research and development and overall managerial decision making processes. Company’s external environment has changed tremendously from the past and this has impact on its internal environment as well.

Competition has increased from various competitors like Japanese giants and others. One section of management considers outsourcing as a viable option as it can help in maintaining cost and time whereas other section of management believes in expanding manpower in research and development area.

The main strategic concern comes from the market in the form of increased competition and decreased sales and profit margins. The brand has its good market value. Stakeholders associate the brand RLK with high quality and high-end audio video design. High brand value is not sufficient enough to encourage consumers to buy the products of RLK. Low sales are one of the prime concerns for Keith Herrington, the Chairman of RLK, whereas for Lars Inman, the CEO of RLK innovation is the prime strategic tool. There is a growing trend of outsourcing services of different company for various operations of an organization.

This provides an opportunity to cut cost but lowering fixed and operative costs. Competitors of RLK like Pycosonics are outsourcing their research and development services from the Asian companies. It is costly to hire celebrity engineers inside America. Lars himself is not convinced with the idea of outsourcing whereas the circumstances like the financial, limited time and pressure from chairman has forced him to consider this aspect as well.

As Azim Premji rightly identified “Lars has gotten himself into a tough situation. It seems that his company's survival depends on the success of a single product that it doesn't have the expertise to develop.”

Five experts have covered different issues from the incapability of Lars to the challenges of outsourcing. Two core issues to be considered are marketing and organization behavior. Lars as a CEO has multiple responsibilities and accountability for the organization’s performance. In this case, organization is in crucial stage and any wrong strategy can result in disaster.

Within the organization, there are visible differences among people at top management levels. These differences are results of communication gap and lack of identical goals. There are issues on consumer behavior, organization culture, cultural differences of these two companies and nations and retaining the talent within the organization and encourage people to work for common interest or goals.

There are different perspectives to research and development of CEO, Chairman and Ray Ketner, RLK's founder and chief scientist. Each of the perspective is important for the organization.  It is important to understand consumers’ needs and requirements, cost is one of the major concerns and innovation has been keys to success of RLK from the past. RLK at one hand has to maintain its current brand equity and enhance it. It has to increase its sales revenue from old products as well as introduce new technologies. Within the organization there is a need to bring people together.

2. Discuss the key issues management needs to consider in deciding whether to support an in-house R&D function or outsource all Research & Development.

Management has to consider different pros and cons of outsourcing Research and Development services. The key issues for the management are as follows:

  • Cost implications
  • Quality of the outsourced work
  • Changes resulted from outsourcing in RLK
  • Outsourcing full R&D services or partially
  • Concerns over intellectual property
  • Terms and conditions of outsourcing
  • Impact on the brand equity of RLK
  • Impact on organizational culture

As it is mentioned in the case that outsourcing from Inova will help to get done the job in one fifth of the cost in America. Innova was the company Lars was considering for outsourcing. The company has gained reputation in the market place for its quality and technology. Lars himself has admitted that Inova has very disciplined group.  Inova has global reputation for innovation, good pool of talent in the form of doctorates and other engineers.

For RLK research and development is one of the most important functions. RLK has developed its competency through offering innovative product developed by its in house R& D team which is headed by Ray Ketner, RLK's founder and chief scientist. The first most important issue of management would be to understand market and consumer requirements. These consumer requirements need to be communicated clearly to the research and development team. Management need to ensure that technical team understands the requirements.

There should be proper communication among various technical and non technical groups. At the higher level like CEO and Chief scientist, any decision related to research and development area should be discussed and taken together. This will enable flow of ideas and other important issues among the tope management people. These top management people can direct their teams and resources for the common organizational goals.

As Lars has consulted the CFO for understanding the budget implications on hiring celebrity engineers, he should have consulted Ray as well on the outsourcing and Inova issues. It is not necessary to outsource all the research and development activities. Lars along with Ray and his technical team can have discussion over various tasks and can divide the tasks they would like to outsource and task they would like to hold with them.

On the basis of cost, outsourcing will allow company to keep its cost low. The quality of outsourced work very much depends on the communication and compatibility of the teams from different organization working together. The in house team should clearly understand management objectives and need to ensure that the developments are taking place in the same direction.

Outsourcing can have different implications on brand value of RLK and the internal team of R&D of RLK.  It would be good for RLK to outsource some parts of the project not the entire project. This can be done with proper interaction with R&D team. RLK is outsourcing for the first time. It is very important for it to involve each and every person relate to the development of product iVid. Management wants to develop the product within 12 months. Time is less. It is not sure that the recruited person will be able to understand the requirements and develop the product within twelve months.

There are several other aspects as mentioned by Jean Lipman-Blumen are difference in work culture of these two companies, larger Indian/American cultural disparity, risk to branding, lack of face to face interactions, experimenting with new relationship whereas Azim Premji focused on the positive aspects of outsourcing Collaboration, particularly across time zones and cultures, requires crystal clear communication. Jogn Seely Brown and John Hegal III have covered the issues related to exit cost, regaining the leadership, common goals, performance targets, work styles and difference in national cultures.

Larry Huston has also identified need of cultural change where new ideas are welcomed, whether it is from external sources or internal.

3. Discuss the implications of outsourcing R&D for middle managers

Outsourcing R&D will impact the middle managers. Middle management is responsible for the success of various operations of an organization. It is directly linked to the implementation of strategic decisions taken by top management. The organization may receive various responses from the middle management level.

These responses would be based on their understanding to the outsourcing requirement and threat and changes to their profiles and job. The resistance to change is most expected outcome from the middle managers. This can be resulted from fear of unknown, fear of losing power and other reasons.

Top management, if involves concerned middle managers for the decision making process and communicates the objectives clearly and repeatedly, the chances of resistance will be less. Middle management will face changes in the job profiles. Middle management performs various operational tasks which it has to share with the outsourced team. The role of middle managers is very crucial to provide information and participate in sharing of information and technological know-how. Middle managers may face threat of losing job and others.

Management will have to understand all these issues and take preventive measures to ensure success of the outsourcing decision as well as maintaining the organizational culture and brand equity. Outsourcing may result in increase in employee turnover.

Top management can communicate the benefits of outsourcing to ensure that people are not leaving the organization for wrong reasons or communication gap. There can be various issues related to decision making process, information sharing, intellectual properties and others where top management has to take decisions so that middle managers know exactly what should be given to the outsourced team. Outsourcing would have an effect on entire work culture of RLK.

References

  • Nohria, N (2005) Feed R&D or Farm It Out? HBR CASE STUDY (July-August 2005, P 17-27)
  • Hollway, W. (1991) Work Psychology and Organisational Behaviour, Sage: London
  • Kotler, Philip: 2001 Marketing Management, New Jersey: Prentice-Hall Inc., 10th Edition
  • Redman, T. & Wilkinson, A. (2006) 3e, Contemporary Human Resource Management, Prentice Hall: Harlow: FT
  • Schuler H., Farr J.L. & Smith M. (1993) Personnel Selection and Assessment: Individual and Organizational Perspectives, Lawrence Erlbaum Associates: Hillsdale, N.J.