Decision logic for Outsourcing vs. In-house
BP PLC headquartered in London is known for being world’s one of the seven super major oil and gas companies. It is recognized to be having fifth largest turnover in terms of the revenue generated in this industry. BP follows a vertical integration strategy as a part to manage its operations across areas such as petrochemicals, power, refining, production, trading and exploration. Based on the report of 31 December 2016, it has been operating in 72 countries globally and generates an average production of 520,000 m3/d of oil. BP has more than 18,000 service stations all over the world. The largest division of the company is further seen to be regulated by BP America and 19.5% of the stake is owned by Russia (Finance.yahoo.com. 2017).
The report is intended to discuss on decision logic of outsourcing for BP with a detailed logic map to indicate the products and services to be outsourced and to be kept in-house. The study has further focused on the analysing these factors using the 5 Performance objectives such as cost, dependability, flexibility, quality and speed. The latter section of the report has evaluated the risks involved in the process of decision making and recommending mitigating strategies to the risks.
The main objective of any operations management strategy is to enhance the performance of a business. In order to achieve this objective it is important to measure the performance in terms of income, profit, general and administrative expenses and operating expenses. The five performance operating objectives are important to track the internal business problems even if there is increase in the external ones. The five performance objectives of BP to analyse the factors that influence decision to outsource or to remain in-house has been discussed with quality performance objectives, speed performance objectives, Dependability Performance Objectives, Flexibility Performance Objectives and Costs Performance Objectives (Newman 2015).
The quality aspects of BP have been discussed with relying on the outsourcing or in-house decisions which will be able to offer the maximum quality for the organization. The decision associated to the speed factors has been considered with the rate at which the company is able to deliver the products. The decision to produce in house has been also suggested with the time required to manufacture or the time required to provide a particular form of service. The dependability factors have been further taken into consideration based on the measure of the product’s ability and the reasonable time. The decision to manufacture or outsource or manufacture has been further taken into account based on the ability of BP to configure the products and the services to adjust with the new requirements. The flexibility of the company has been further identified with the ability with the company is able to produce at different level of quality and various types of modifications. The cost performance objective of the company has been referred to as the variation in the unit cost and the changes pertaining to the produces and the variety of products produced. In general, the higher is the variety in the products; the lower is produced quantity and increased per unit cost. Hence, the aforementioned factors have been taken into consideration whether to outsource or remain in-house with respect to the operations at BP (Krajewski et al. 2013). Based on the discussed operational objectives the external and the internal effects of the 5 performance objectives has been illustrated with the diagram as follows:
5 Performance objectives and factors influencing decision to outsource or to remain in-house
Figure: Effects of five performance objectives
(Source: Sapartners.com 2017)
Cost: The cost performance objective of a company has been referred to as the changes in the unit cost and the changes pertaining to the produces and the variety of products produced. The Company’s cost optimisation has been identified with the decision to produce motor oil and lubricants on its own. This has added to several advantages apart from being the pioneer apart from managing the operations associated to Oil and natural gas. The decision to remain in house with the service stations has further been able to cut the costs associated to renting of land and sharing profits with third party service providers. The company has been further seen to be leading in terms of the coal production and acetic acid, which has supported to overcome the various types of the operating expenses of the company.
Figure: Lowering of unit production cost and increased capital efficiency
(Source: Bp.com 2017)
Figure: Production growth and marking business due to fuel and lubricants
(Source: Bp.com 2017)
Dependability: This is defined as the ability to function as designed and as expected and to perform consistently over a reasonable period of time. The decision to outsource some of the services such as IT services, finance and accounting services and HR services has result in a safe, reliable and efficient execution of the available resources at BP. In the past, several initiatives to drive the IT services has been recognized with IBM, Tata Consultancy Services, Infosys, Accenture, Wipro, HP and T-Systems. The outsourcing of such services has been able to provide significant opportunity in terms of the leveraging the BP’s work processes with world class IT expertise and provide more value in Oil and Gas industry. The outsourcing of the IT services has been further able to simplify the process of BP to a great extent and resulted in a better dependability of the services (Dubie 2017).
Figure: Reliability and dependability of the services at BP
(Source: Bp.com 2017)
Flexibility: Flexibility is referred to as the potential to produce products of different levels of quality and with various design modifications. Based on the director’s report on the use of quantitative and qualitative assessments is critical to the flexibility of the organisation. While framing the policies the committee associated to these decisions has ensured that there is sufficient flexibility taken to accommodate the future changes in the industry’s environment and the various types of remuneration practices along with it. This will allow the committee to respond to the various types of other circumstances to apply a particular performance measure which may evolve as a result of the company’s strategy (Kortmann et al. 2014). BP has further provided the power to exercise judgement in making qualitative assessments and there is scope for exercising discretion when desired by the committee. The outsourcing of services such as human resource planning has provided the company with the opportunity to accommodate with performance-based pay and safeguarding the suppliers against failure of future payments (Khanna 2015).
Cost
Figure: Flexibility to safeguard the future payments
(Source: Bp.com 2017)
Quality: This factor determines how well a product performs its proposed function along with the product’s features and the reliability. Quality also refers to the product’s durability, the ease of serviceability and the extent to which the customers believe the product meets their needs. The decision to outsource the services such as Finance and Accounting with Accenture has further provided the opportunity to complement BP’s in-house captive business service centres. The agreement with Accenture has enabled BP to consolidate the global F&A function with more standardization of the reports. The significant quality improvements have been discerned with the use of advanced analytics to develop business controls and drive greater insights in the business. BP has been further able to leverage overall process by using Accenture’s knowledge and implementing BPO technologies BP’s finance to steer end-to-end process standardization and controls (Bp.com. 2017).
Figure: Quality Portfolio at BP
(Source: Bp.com. 2017)
Speed: Speed refers to the overall time required to manufacture one or more products and the time a company needs to put in research and development of a new product. The detailed in-house logistics planning has been able to significantly reduce the fuel consumption rate per trip and measure the reduction in the amount of speed. It has been further discerned that keeping the vessel outside the range of 500 meter rig requires significantly less engine power than positioning the same and thereby affecting speeds of the vessels. Hence, the in-house logistics planning by BP has resulted in significant improvement with speedy delivery of services (Bp.com 2017).
Despite of the benefits deciding on whether to choose for outsourcing or in-house production, there are significant pros and cons for any of the decisions taken by BP. Some of the main risks associated to outsourcing of the IT services have been identified in terms of several factors such as cost escalation, service debasement, hidden costs, litigation costs, and loss of competency, unexpected transition costs, contractual Amendment and switching costs (Blome Schoenherr and Eckstein 2014). Some of the main predictions of the outsourcing of accounting services are then identified with leakage of confidential data which may result in huge reputational loss for the company. Along with the risk of data security and protection there is significant risks associated to loss of business knowledge, failure of vendor to deliver, process discipline, productivity fluctuation, turnover of the personal and compliance with government oversight and regulations. The risk evaluation based on the outsourcing of human resource planning may involve significant costs to appoint the rightly skilled personnel in the company. Some of the other considerations need to be made in terms of inappropriate personal and increased turnover due to improper HR planning (Mahadevan 2015).
Dependability
Some of the risks associated to the in-house production of the services such as motor oil, lubricants, citric acid and coal has been recognised with increased cost of production. The international oil prices are susceptible to go through significant changes and hence they pose a major threat which is associated to sudden changes in the cost structure. The changes in the prices of oil have been further identified with the risk of increased cost for extraction and refining of the same. Due to the large scale of business there is significant risk associated to monitoring of operational activities. In the past, the risk management failure is has led to several disaster in the Gulf of Mexico as a result of explosion of methane gas at BP’s Deepwater Horizon offshore oil rig in 20 April 2010. The incident led to claims payable to 166000 individuals and businesses worth more than $ 2.5 billion. The possible causes for the incident have been identified due to lack of sufficient technological expertise, and outdated structure of organisation and acute shortage in resources (Slack, Brandon-Jones and Johnston 2013).
The main recommendation to mitigate risks pertaining to operational failure needs to be addressed with response planning for operational phase. Hence, in order to mitigate the risks associated to in-house services the company needs to prepare a response framework document related to oil spill. Further needs to develop oil spill response plan and containment manuals. BP needs to further purchase oil spill response equipment and employ response staff for the same. The operations team at BP needs to strengthen the concepts for operations particularly associated to ESIA framework and OSRP framework. The response team needs to further prepare operations procedure and manuals development to address the potential operational risk. BP needs to ensure position of appropriate vehicles and equipment is for the different types of operational requirements and train field staff for mitigating the identified risks. In order to ensure that there is no risk involved with the outsourcing of IT services, BP needs to ensure that the IT service provider is having sufficient credibility in the market of keeping the data and personal information secure. The company should consider entering into contractual agreement with the various types of financial and accounting service providers. This will ensure minimum plausibility for leakage of the confidential information.
Conclusion
The different aspects of the report have been able to map the exact services which need to be outsourced and which need to remain in-house. Some of the main considerations to outsource the services of BP have been identified in terms of IT services, Finance, Accounting Services and human resource planning. Some of the other noted services which should be kept in-house have been depicted in terms of production of motor oil and lubricants, oil and natural gas, acetic acid, coal and service stations. The company’s cost optimization has been identified with the decision to produce motor oil and lubricants on its own. This has added to several advantages apart from being the pioneer in managing the operations associated of to Oil and natural gas. The decision to outsource some of the services such as IT services, finance, accounting and HR services has resulted in a safe, reliable and efficient execution of the available resources at BP. It has been further discern that the use of quantitative and qualitative assessments is critical to the flexibility factor. The decision to outsource the services such as Finance and Accounting with Accenture has further provided the opportunity to complement BP’s in-house captive business service centres.
References
Blome, C., Schoenherr, T. and Eckstein, D., 2014. The impact of knowledge transfer and complexity on supply chain flexibility: A knowledge-based view. International Journal of Production Economics, 147, pp.307-316.
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Newman, M., 2015. Evaluating the EPA’s performance in pollution regulation and management against its legislated objectives. Australian Environmental Law Digest, (Jun 2015), p.14.
Newsroom.accenture.com. (2017). BP Selects Accenture as its Global Outsourcing Provider of Finance and Accounting Services | Accenture Newsroom. [online] Available at: https://newsroom.accenture.com/subjects/client-winsnew-contracts/bp-chooses-accenture-as-its-global-outsourcing-provider-of-finance-and-accounting-services.htm [Accessed 23 Jul. 2017].
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Slack, N., Brandon-Jones, A. and Johnston, R., 2013. Operations management. Pearson.
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