... Ronald Coase brought the transaction cost theory to the world...the (market) inefficiencies could be eliminated by organizing transactions within the same organization...

So what you need to do is; optimize the communication and the interfaces between your company and the sourcing partner:

First of all: minimize the control. Minimize the amount of control. This control is correlated with the number of exceptions; the more you can standardize the process the less control you need.

You should also minimize the manual exceptions. If there is a manual interface between the two organizations, make sure this is minimized. The "shortcut" in the previous situation where you could knock on the door and solve a problem is no longer possible (too costly).

At last, use the best of both systems. An outsourcing partner has its own configuration or structure of systems. These systems are designed to in-source large numbers (of transactions); your company is only one of the many that uses this outsourcing partner. The more you can surf along on the standard that is already designed by the existing companies that are connected the fewer problems you will face. And, the more cost effective.

These three issues only address the operational situation. What you need to know upfront is that your requirements and those of the sourcing partner match.

And...before you go into the (detailed) design -- do not forget about the inefficiencies.

Outsourcing has only become possible because of the existence of a market for those specific business processes. And with the market, there is a price coordinating mechanism.

Yet, that market is based on some characteristics. Standardization is one part of this. If there is no standard, there is no standard price, no benchmark but a lot of inefficiencies that you need to manage with contracts.

If you design - the outsourcing process - with too many exceptions, because there is no market solution (standard) yet, the sourcing will not reduce transaction costs. It rather will increase them.

You'd better know this in advance, before continuing the deal, or start the negotiations.

© 2006 Hans Bool