The main change in the different types of relations in outsourcing is the degree of management control in the two companies. The presence or absence of management control can be analyzed using a special tool, a continuum of "make or buy" (see Fig. 1)
Pic. 1. “Make of buy” continuum.
One end of the continuum is the idea of "vertical integration", i.e. the exact opposite of outsourcing. Instead of yielding the manufacturing of the product, the contracting authority acquires an existing supplier. Thus, procurement of products and services become internal function. The argument of these actions is, for example, the desire to strengthen the monitoring of prices for raw materials.
If we move along the continuum towards reduction of control, then we will find ourselves in a "joint venture." It is a form of organizational unit in which companies negotiate the exchange of managerial control over certain activities.
Relationships resulting from the work of two links of the supply chain together are known as the "partnership agreement."
Following further along the continuum, we are approaching the outsourcing model, where one organization completely abandons the management control in favor of the other, but retains ownership of the activity.
In typical projects of "Public Finance Initiative" program not only the management of public institutions, but also their financing are passed to a private enterprise. In this case, the contract determined by the range and level of services for a period of up to 30 years, is concluded with such a company,. In turn , the private company provides services in full compliance with the contract and receives a fee, which also includes entrepreneurial profit.
Another end of the continuum ("make or buy») - represents the type of arrangement when one company pays another one for the manufacturing of other products or services, and does not wish to participate in any kind of activity, and any form of management control. This is what we call "direct procurement."
It should be noted that the wide variety of different combinations may be formed at any point of the continuum. It depends on what is necessary for the implementation of this type of activity at the particular moment.
It is important for procurement managers and executives to understand this. They should understand what is beyond the aiming at outsourcing, and be prepared to adjust any misunderstanding, pointing to the potential benefits and disadvantages of the possible solutions.
