Like any other business decision, there is a degree of risk engendered by outsourcing.51, 52 Although there are a number of potential benefits, the substantial number of unsuccessful outsourcing deals prompts a healthy concern.53 Certain characteristics associated with the service outsourcing decision can amplify the level of inherent risk to the firm. These characteristics may be more associated with either the task or vendor decision, but generally are of some relevance to both decisions. Ten characteristics will be examined that have been derived from relevant literature on services and outsourcing. Table 2 (See PDF) lists these characteristics along with representative citations from the literature. These characteristics will be considered in the following paragraphs in the sequence in which a firm would likely encounter them in the context of an outsourcing decision.
Firstly, characteristics will be examined that exist whether the firm is considering outsourcing or not. These include the characteristics of heterogeneity, intangibility, inseparability and perishability. Heterogeneity refers to the potential for high variability in the performance of services,54, 55 meaning the provision may differ across customers, provisions and personnel. The quality of diagnostic imaging services such as ultrasounds, for example, may differ across personnel or work shifts. The potential for great variation raises the risk of vendor service quality fluctuating below an acceptable level. Although for some services in a health care arena, the consequences of such variation might be limited, for others it could be severe.
Intangibility means that services cannot be seen, touched or felt - physically sensed in any way.54, 55, 63, 64 Because services are performances, they cannot be easily assessed before purchase, or in some cases afterward. This lack of measurability introduces the risk of opportunism, which involves a service not being provided to the standard contractually agreed. 57 The first type of risk is cheating, the concern that asymmetric knowledge will be deliberately used to the outsourcing firm's disadvantage. The second type of risk, neglect, is an error of omission; it refers to the concern that one's interests will be intentionally omitted. For example, because of service intangibility, the quality of a hospital's facility or equipment maintenance services cannot be easily determined, barring extreme examples. Cheating might involve either the vendor providing unwarranted services or billing for them, although neglect might involve the vendor choosing not to provide the maintenance services specified. Intangibility is part of the nature of services but generally the less the firm is able to assess whether rendered services were needed and needed services were rendered, the higher the level of risk.
Inseparability refers to the simultaneous production and consumption of services.54, 55, 65 This characteristic of services means the service provider is generally an integral part of the service provision. For this reason, contact personnel become a key feature in the service experience66 and greater importance must be placed on the service encounter.67, 68 In some cases, these contact personnel are rendering services externally to the firm's customers (for example, therapeutic services); in others they are rendering them to the firm itself (for example, real estate lease administration). The dissatisfaction, and potentially legal liability, associated with a service failure in these two situations may have very different impacts on the firm. Although a firm experiencing a service failure may be displeased with the vendor, a customer experiencing failure may develop a negative opinion of the firm itself. The more an outsourced service will involve direct interaction between the vendor and the firm's customers, the greater the risk that a failure could negatively impact the firm.
Perishability refers to the fact that services, as performances, cannot be stored or inventoried.54, 55 For this reason, it is difficult for the vendor to coordinate supply and demand therefore at times there may be either too much or too little. The consequences of a service provision being delayed or lacking altogether may have either a direct or indirect impact. The absence of medical services in an emergency situation may lead to a person's death, whereas a delay in housekeeping services may mean a patient merely finds room cleanliness not up to their expectations. Indirectly, a particular service provision may appear minor, but its absence may inhibit other aspects of the firm's functioning. In a surgical setting, inadequate anaesthesia services may prevent other medical specialists from performing their procedures. The greater the uncertainty a service might be unintentionally lacking when it is needed and the more severe the consequences, the greater the risk.
As the firm continues through the decision-making process, it must next consider characteristics associated with the specific tasks that could be outsourced. These include the characteristics of scope and strategic potential. Scope , in the context of the outsourcing decision, concerns the extent of a service to be outsourced. A complete functional task may be outsourced or just particular portions of it. For example, a medical facility may outsource specific accounting services, such as collections, or it may use outsourcing for all its accounting needs. Large task scope may give rise to the perception that the firm has lost control over its own ability to provide services - that it is dependent on an external third party to meet its needs. 69, 70 For example, the more accounting services a firm fully outsources, the fewer in-house resources that firm will likely retain to accomplish tasks such as those; thus, the firm becomes less able to perform them without assistance from an outside party. In general, the broader and deeper the service to be outsourced, the greater this risk of dependence, especially if no alternative supply is readily obtainable.
Competitive impact refers to how the importance of an outsourced task may change over time.57 Although some tasks that may be outsourced are more 'commodity services' (for example, housekeeping and in-facility transportation), others may be crucial to sound medical care (for example, pharmacy and emergency operations) or differentiation in the marketplace. Although an outsourcing decision may be made for valid reasons at one point in time (for example, the firm has little internal capability to perform the task), such a decision may have negative strategic implications and yet may be difficult to reverse. For example, a hospital may outsource its pharmacy operations only to see their competitive importance increase over time. They may then have difficulty reversing this decision because of an extended contract, financial expenses or learning curve costs. Generally, the greater the possibility that outsourcing a service could inhibit the competitive efforts of a firm in the future, the greater the risk associated with outsourcing it.
Another set of characteristics the firm encounters if it chooses to continue through the outsourcing decision process are the characteristics associated with task specifiability, task volatility and disclosure. Task specifiability is defined as the extent to which a firm can precisely communicate the requirements of a task to a vendor at the beginning of a project.57 A firm must fully outline for the vendor the requirements of the service to be performed. Yet some of the knowledge needed to perform a particular service may be difficult to explicitly articulate because the service provision is unfamiliar to the firm, complicated or the knowledge needed to perform it is highly tacit. 57 For example, hospitals may seek to outsource tasks that are relatively straightforward, familiar and already formalised, such as environmental services. Conversely, they may choose to outsource services that are new to them, very complicated, or for which few requirements have been explicitly detailed, such as electronic infant security systems. The more difficult a service is to specify, the greater the risk that a firm may either overlook important aspects of the service needed or include those of little value.
Requirement volatility is the extent to which service requirements may change over the life of an outsourcing contract.57 As a part of an outsourcing decision, a firm must detail the requirements for acceptable service provision. Yet these initial requirements may not continue to meet either the firm or customer's needs. The requirements for some services may change little over a multiyear contract whereas others may be impacted by substantial change in the marketplace or customer needs. For this reason, the initial service to be provided may need to evolve as well. For example, technological advances or privacy legislation may impact the manner in which patient medical records can be stored or accessed by a hospital. Such volatility increases the risk that the initial requirements may not satisfy the firm's evolved needs and thus increase the costs or lower the quality of the service provision. In general, the higher the requirement volatility for a service, the greater the risk to the firm making the outsourcing decision.
Disclosure refers to the provision of internal information to external third parties. For outsourcing to be effective, all information relevant to the service provision must be shared by the firm with the vendor. This shared information can obviously range across a spectrum of importance, and thus sensitivity, to the firm. The sharing of general information such as computer system model and software may be all that is required for some service provisions, although highly sensitive information (for example, patient health and billing records) must be shared with a vendor for the p