Here is an increasingly commonplace business situation: company meetings are attended by the company’s own employees and also by the supplier’s representative, a researcher involved in product development, a representative from the firm responsible for IT development, and a communications expert, who is also from a different company.
The company’s logistics have also been subcontracted, as has service and maintenance work, information systems and payment processes. The workplace lunchtime cafeteria is run by one company, and flowers and coffee machines are taken care of by another. Marketing is handled by an advertising agency, which in turn acquires its expertise from production companies, camera operators, IT professionals, and so on.
This kind of network-based work requires external resource management. It is different to traditional management where everyone is employed for the same company. ‘A lot of research is being done on external resource management, but the research findings are not used much’, reports Professor Kari Tanskanen from Aalto University. He has been researching external resource management together with Docent, Senior University Lecturer in Information Systems Science Johanna Bragge and Associate Professor in Logistics Katri Kauppi from the Aalto University School of Business. In this article, these three researchers highlight six topics, which must be considered when dealing with external resource management.
1. Governance model
What do you do yourself and what do you buy?
‘The company must maintain expertise in the area that is being outsourced. Otherwise it will not be able to purchase the right expertise, nor to manage the external resources. If, for example, IT operations are outsourced, the organisation should still retain IT expertise. If it doesn’t, there will be problems.
Acquiring external resources should not be left to lawyers only. Many different skills are needed to be able to acquire the right things at the right price. For example, you won’t be able to purchase health services if nobody understands them. It’s easy to end up being taken advantage of and cheated if you don’t know what you are buying.
If you need specialised expertise which involves a high degree of uncertainty, it is often better to do it yourself.’
2. Networks
How close does the cooperation need to be?
According to the research, the main finding is that external resource management requires both close, strong partnerships and looser networks. Not all relationships lead to doing business together; instead, they can be e.g. industry level discussions on matters such as the environment or integration of technological standards.
It is worth forming very close relationships with key partners, as these can produce immediate benefits and efficiency improvements. Many think that if something does not produce immediate benefits, it’s not worth doing. This, however, is not the case. Research indicates that diverse networks are important for renewal and innovation even when the benefits are not instantly visible.’
3. Business relationships
Trust is the key.
‘There is strong evidence for this: trust is an extremely important factor in relationships between companies. It is worth investing in building trust. Contracts are always imperfect, as it is impossible to predict and record all possible situations. For this reason, a trust-based relationship benefits both parties. External resources cannot be managed through control or continual monitoring. An absence of trust will end up being costly.
Employees’ commitment is of greater importance when dealing with external resources. The company can invest in joint training, for example, and in this way gain the commitment of partnering organisations. A company should consider its own level of appeal as a potential partner organisation. How should we operate so that the best organisations would want to partner with us and give us their attention?’
4. Strategic thought
How are external resources being utilised?
‘Partnerships are used to supplement one’s own expertise. The strategic question is: what combination of our own capabilities combined with external resources would fulfil customer needs and help us to take hold of new opportunities. How can our own capabilities be combined with external ones such that market opportunities can be effectively exploited? For technology-based start-ups, this is a natural question to ask; but this isn’t the case for all companies.’
5. Innovation and learning
Early involvement of partners in innovation.
‘By involving both customers and suppliers already in the product development stage, costs are decreased and quality and customer satisfaction are increased. There is surprisingly little utilisation of external partners in product development, but a big change is currently under way in this area. When thinking up entirely new solutions, external partners should be involved at an early stage.’
6. Flow of goods and information
It pays to invest in information sharing.
‘A large proportion of problems with suppliers are a result of information not being provided. The better informed the different parties are, the better their operational performance will be. It should also be possible to share forecasts with suppliers. How can operating practices, indicators, processes and information systems be standardised? Research provides strong evidence that effective integration boosts the operational level and performance.’
About the research
The study undertaken was a literature review carried out by researchers from different fields. The title of the study is: Towards evidence-based management of external resources: Developing design propositions and future research avenues through research synthesis (2017). Kari Tanskanen is a Professor at Aalto University School of Science (Supply Chain Management), Johanna Bragge is a Senior University Lecturer (Information Systems Science) and Katri Kauppi is an Associate Professor (Logistics) at the School of Business. The other members of the research group are Tuomas Ahola (Tampere University of Technology), Anna Aminoff (VTT) and Riikka Kaipia (Chalmers and Aalto University School of Science).
What was the best part of the research?
Kari Tanskanen: ‘The belief that this research is significant. There is a lot of research which ends up being of less practical value than this. The topic is broad, and it was very satisfying to get the pieces fitting together. The research draws on findings from 600 articles. It was a big job to condense and organise the information into just a few dozen pages.’
Johanna Bragge: ‘When we got the article accepted and I realised that during the review process the Research Policy journal had been included in the highly respected Financial Times TOP 50 list. This was one of the highlights of my career so far, as this was my first FT-50 article. It felt really good that our persistent work received recognition!’
What is exciting about the research?
Katri Kauppi: ‘It was rewarding to take a look outside of one’s own field of science. It brought new learning. The research world is often siloed in a similar way to the business world, but in this research we worked through perspectives from three different scientific fields. It is, after all, a more sensible option that each field would not need to reinvent the wheel. The research also felt significant because it has such direct practical applications.’
Aalto PRO has several programs where you can learn external supplier management; Digital Supply Chain, Diploma in Operations Management and Diploma in Global Sourching.