I

Table of contents

Table of  contents.  I

List  of abbreviations.  III

Table of  figures  IV

1.  Introduction  1

1.1  The problem  2

1.2  Goal  3

1.3  Structure of the analysis  3

2.  New institutional economics  5

2.1  The transaction cost theory  6

2.1.1  Definition of transactions.  7

2.1.2  Types of transaction costs  9

2.1.3  Measurement of transaction costs  12

2.2  The property rights theory.  14

2.3  The principal agent theory  15

2.4  Critical comments  17

3.  Outsourcing  19

3.1  Definition of outsourcing  19

3.2  Types of outsourcing.  20

3.3  Outsourcing contracts.  22

3.4  International aspects of outsourcing.  24

3.5  Chances and risks of outsourcing.  28

3.5.1  Chances  28

3.5.2  Risks.  30

3.6  Critical comments  32

4.  Outsourcing of a warehouse at the company Fichtel Sachs AG  34

4.1  The organisation.  34

4.2  Definition of outsourced warehouse  34

4.3  Cause and goal of the outsourcing process  36

4.4  Realisation of the process  36

4.5  Critics and results.  39

4.6  Similarities and differences in theory and practise  41

II

5.  Conclusion  43

6.  List of literature  44

III

List of abbreviations

AG Aktiengesellschaft, public limited company a. m. above mentioned DIW Deutsches Institut für Wirtschaftsforschung Berlin ed. editor e. g. exempli gratia, for example et al. et alia, and others etc. et cetera, and so on EU European Union GmbH Gesellschaft mit beschränkter Haftung, private limited company IT Information Technology JIT Just in Time OECD Organisation for Economic Co-operation and Development R&D Research and Development Systeme Anwendungen Produkte ¹ SAP TV Television UK United Kingdom US United States USA United States of America w.a. without author

¹ Note by the authors: Company name.

IV

Table of  figures  

Figure  1: Theoretical framework  

Figure  2: Phases of transactions and transaction costs  

Figure  3: Types of outsourcing  

Figure  4: Chances of outsourcing  

Figure  5: Risks of outsourcing  

Figure  6: Concept of an outsourced warehouse  

1

1. Introduction

During the last years international companies dealt with the question of optimal division of labour in cooperation with suppliers; especially in the automotive and supply industry ² . This question and its solutions decide of the competitive position of many companies in several industrial sectors. Major points in regard to division of labour are the areas of manufacturing-, quality-, logistics- and development functions. Such procedures create qualitative relationships between the parties involved ³ .

Another question concentrates on the maintenance or the change of company internal services e. g. cleaning, car pool, human resources, canteen and accounting. Although the core services of the companies remain the same, in these areas total cost reductions as well as flexible processes can be achieved ⁴ .

The process of optimal division of labour to be achieved by giving away internal functions to an external service provider, in economic literature is called outsourcing ⁵ .

Generally, corporations use outsourcing to target on cost-, flexibility-, time- and quality aspects ⁶ .

² See Matje, A. (1996), p. 1.

³ See Arnold, U. (1993), pp. 20-25.

⁴ See Lindner, T. (1993), pp. 8-12.

⁵ See Koppelmann, U. (1996), p. 4.

⁶ See Koppelmann, U. (1996), p. 8.

2

1.1 The problem

Each company which outsources an internal service, expects an optimisation in cost-, flexibility-, time-, or quality targets ⁷ . But nevertheless in some cases those expectations are not fulfilled ⁸ .

Depending on the function which is to be externalised, the outsourcing process varies in regard to the complexity, cost- and control efforts, communication, working time and amount of work ⁹ .

Outsourcing is linked to costs which arise during the externalisation process. The costs for the process can be budgeted , but however due to unforeseen circumstances the budget can vary. If the actual costs are higher than the estimated budget, the expected cost target may not achieved ¹⁰ .

Furthermore the providing of an external service has to be controlled by the customer. In general the providing of an external service is regulated by contracts. Those contracts include rights and duties of each party involved. A not fulfilment of the contract by the service provider means to the customer higher efforts to enforce his rights and moreover in worst case the need to reverse the whole outsourcing process.

The externalisation of a service includes the risk of a loss of know-how for the customer. Due to the fact that know-how and information have to be transferred between two different companies, the risk of a loss of know-how increases. Furthermore the communication flow between two different companies is affected by organisational barriers.

This shows that the outsourcing process is very complex and has to be planned, well organised, calculated and best possible executed to gain expected success.

⁷ See Koppelmann, U. (1996), p. 8.

⁸ See Hopfenbeck, W. (2000), p. 299.

⁹ See Heinzl, A. (1991), pp. 6-8.

¹⁰ See Hopfenbeck, W. (2000), p. 605.

3

1.2 Goal

The main target of this paper is split in two parts. The first point is to show and explain the relevant theoretical framework of outsourcing in regard to the new institutional economics theories. To define the term outsourcing and give an overview about this externalisation process as it is seen in economic literature is the second part of the main target.

Therefore the paper presents the transaction costs-, the property rights- and the principal agent theory. Furthermore it shows different types- and the international aspects of outsourcing and discusses the chances and risks of the process.

The sub target of the paper is to give an interlink between theory and practice by presenting an current example of outsourcing in an international context, moreover to find out similarities and differences between theory and practice.

1.3 Structure of the analysis

Due to the goal of this paper, the analysis starts with the outline of the problem, that expected goals within the outsourcing process may not be fulfilled. Thereby the analysis is focused on cost aspects, the control problem and possible lacks of information which arise by externalisation of an internal function ¹¹ .

In the second step the defined problem has been regarded from a theoretical point of view. The background for this problem, in economics is the new institutional economics theory. Afterwards the three sub theories of the new institutional economics the transaction cost-, the property rights- and the principal agent theory ¹² , are described and explained in detail. The main focus in this part of the paper is the transaction cost theory. The end of the theoretical part forms a critical review on the presented theories.

¹¹ See Koppelmann, U. (1996), p. 8.

¹² See Matje A. (1996), p. 56.

4

The analysis continues with a reflection of outsourcing. At the beginning the term outsourcing is defined. In addition to this, the different outsourcing types are shown and distinguished. Moreover it is given an overview about outsourcing contracts. Furthermore the international aspects of outsourcing are shown. At the end of this chapter, chances and risks are described in detail to show advantages and disadvantages of this externalisation method. Finally the literatures’ approaches in regard to outsourcing are evaluated and appreciated to show bottlenecks.

To build a linkage between theory and practice, in the forth chapter the outsourcing process of a warehouse by the Fichtel & Sachs AG is described - and finally evaluated in comparison to theory. First of all, to present the Fichtel & Sachs AG, the organisation is outlined. Further there is given a definition of the concept of an outsourced warehouse. In the next step, the companys’ cause for the consideration of the make or buy decision is explained and the expected goals are mentioned. Afterwards the executed process is exposed in detail. Hereby the focus is set on the quote evaluation and decision, the advantages for each of the involved parties as well as the allocation of the functions within the outsourced process. Moreover, doubts on this externalisation process, expressed by involved staff, and the realised results are presented to generate a critical point of view.

At the end of the fourth chapter theory and practice are compared. Herewith similarities and differences between the used theory and the presented example from practice are worked out. In particular cost aspects are considered, the risk of information loss and the control problem arising within the outsourcing process are determined.

The paper finishes with a conclusion and a brief outlook of the development of outsourcing in future.

5

2. New institutional economics

The new institutional economics target is to explain the global operations, in which imperfect actors, people with limited rationality and moral are dependent on each other in their economic acting ¹³ .

The new institutional economics are three theories assigned. These are the property rights theory - the theory about the rights of disposal - , the economical theory about substation - the principal agent theory - and the transaction cost theory ¹⁴ . The theory about the rights of disposal and the theory about substation deal with the analysis of institutional arrangements and the design of incentive systems. The transaction cost theory analyses the link between the execution of a bartering action and the therefore essential and relevant contractual and organizational framework ¹⁵ . Thereby legal-, economical- and organisational perspectives are combined ¹⁶ .

The following figure shows the starting point and the theoretical framework of the new institutional economics and the three theories, which are derived from it.

Figure 1: Theoretical framework

¹³ See Picot, A.; Dietl, H.; Franck, (1997), p. 54.

¹⁴ See Matje A. (1996), p. 56.

¹⁵ See Williamson, O. (1990), pp.65-70; Fischer, I. (1923), pp. 37-40.

¹⁶ See Williamson, O. (1990), pp. 11-13.

¹⁷ See w.a http://www.aib.wiso.tu-muenchen.de/ lehre/ws0506/Grundlagen2/Reader-05.pdf, p. 1, as of May,16 ^th 2006.

6

2.1 The transaction cost theory

The basis of the transaction cost theory was developed by COASE in 1937 to explain the question, why enterprises in a work-sharing economy build up ¹⁸ .

In the middle of the 1970’s this approach was seized by WILLIAMSON ¹⁹ . Since this time the “the analyses of the efficient coordination form for a given task” ²⁰ is in the focus of the consideration. This development is called governance-approach in difference to the measurement-approach, which is used at the new institutional economics or rather the new institutional microeconomics ²¹ .

The transaction cost theory becomes increasing extension at the research of business administration ²² , as the following examples shows:

- establish a company ²³ ,

- make or buy decision or rather decision about vertical integration (in the production) ²⁴ ,

- organisation (in-house as well as external e. g. co operations) ²⁵ , - make or buy decisions at the division of research and development ²⁶ and - distribution decisions ²⁷ .

¹⁸ See Coase, R. (1937), pp. 386-405.

¹⁹ See Williamson, O. (1990), p.18.

²⁰ See Bauer, C. (1990), pp. 42-44.

²¹ See Schumann, J. (1987), pp. 212-218.

²² See Picot, A. (1993), columns 4194-4204; Koch, H. (1992), pp. 807-824.

²³ See Picot, A., Schneider, D., Laub, U. (1989), pp. 358-387.

²⁴ See Bauer, C. (1990), pp. 12-15; Picot, A., Dietl, H., Franck, E. (1997), pp.192-195.

²⁵ See Picot, A. (1991), pp. 143-170.

²⁶ See Schneider, D., Zieringer, C. (1991), pp. 58-63; Schneider, D. (2005), p. 84.

²⁷ See Fischer, M. (1993), pp. 248-249.