Question

A manufacturing company is considering outsourcing an enterprise resource planning (ERP) system’s design and development project. It has analyzed the bids of three potential contractors and found MyERP, Ltd. (hereafter, MyERP) to be the best choice. However, the company would only sign a contract if the outsourcing success score is 1.25 or higher. Unfortunately, MyERP’s current ratings do not meet the minimum requirements of the manufacturing company. However, since MyERP is the only option left for the company it decides to delay its decision (outsource or not) by three months, during which MyERP would have a chance to improve the predicted outsourcing score.

MyERP does not know how outsourcing outcome scores are computed. However, it does know that it would not be possible to reach the best possible ratings in every category in a three months’ period. Specifically, MyERP believes that it would only be able to achieve a two-point change in all the ratings combined. That is, it can lower a ‘bad’ category by 2 points, raise a ‘good’ category by 2 points, lower two different ‘bad’ categories by 1 point each, raise two different ‘good’ categories by 1 point each, or lower a ‘bad’ category by 1 point and raise a ‘good’ category by 1 point. (Note: a category’s rating cannot be lower than 1 nor higher than 5.)

MyERP hired you as an independent consultant to advise it about the best strategy for increasing its chances of receiving the lucrative contract.

Through your research you’ve learned that the company considers MyERP’s reputation to be average (it gives it a rating of 3). In addition, the company estimates mutual asset specificity to be quite high (rating of 4), and is evaluating the uncertainty associated with a contract to be average as well (rating of 3). Finally, the company does not expect the MyERP to not behave opportunistically after the contract is signed but does not rule it out altogether (rating of 2).

You also learned that the following model is used by the manufacturing g company to estimate outsourcing outcome scores:

OutsourcingOutcomeScore = – 0.100 X Uncertainty – 0.300 X PostContractualOpportunisticBehavior + 0.200 X Reputation + 0.250 X AssetSpecificity

Using the above information write a short report (no more than one page, font size 12, Times New Roman, double-spaced) in which you discuss the best strategy MyERP should implement. And, since MyERP is not familiar with how outsourcing outcome scores are computed, explain in simple terms why the strategy that you recommended is the best one.

Answer 1

Given that,

1) ERP sysytem design and developmnet project to be outsourced.

2) MyERP Ltd found to be the best choice among three contractors.

3) MyERP success score is low as per manufacturing company (It should be 1.25 or higher).

4) Manufacturing company decides to delay its decision for three months.

5) MyERP has a chance to improve the success outsourcing score.

6) MyERP can only achieve a two point change in all the ratings combined,that is either bad category can be lowered or good categories can be raised (only in total two ratings are impacted)

7) Category ratings have to be in betweeen 1 and 5.

The Task findings given data when MyERP hired me as an consultant:

1) Company consided MyERP Reputation rating as 3(average)

2) Company consided MyERP Asset Specificity rating as 4(quite high)

3) Company consided MyERP Uncertainty rating as 3(average)

4) Company consided MyERP Opportunistic Behaviour rating as 2.

5) OutsourcingOutcomeScore = - 0.100 * Uncertainty - 0.300 * Opportunistic Behaviour + 0.200 * Reputation + 0.250 * Asset Specificity

SHORT REPORT

As per the findings MyERP Outsourcing score is quite low that is 0.7 (calculated as = - 0.100 * 3 - 0.300 * 2 + 0.200 * 3 + 0.250 * 4). In three months time the Outsourcing score is to be nearly doubled. So for this the Outsourcing outcome score is to be seen that by which bad or good category to be lowered or raised.

Outsourcing score is negativily depending upon Uncertainty and Opportunistic Behaviour so we can say that they are bad categories and can be lowered. Similarly Reputation and Asset Specificity are positive so we can say that they can be raised. are good categories. As Reputation and Uncertainty are average so for a three month time MyERP will not work on Reputation and Uncertainty and alternatively works to lower their Opportunistic Behaviour and raise their Asset Specificity.

Reputation is not considered for improvemnt because the company might have already researched and accepted the contractor to participate in the bidding. Also Uncertainty will not be considered as for any contract uncertainties are quite often and one cannot change the same.

So MyERP will work on the Opportunistic behaviour by having some sysytems in place and changes in the mutual contract so that Manufacturing company can be profitable and satisfies and this can be done by lowering the category rating by 1 rating , that is the new rating will be 1. And a sthe asset Specificity is alrdeady high so MyERP will raise the category rating by 1 rating , this can be achieved by having new systems and technology integrations in SOP's. Therefore the new Asset Specificity rating will be 5.

So now the OutsourcingOutcomeScore = - 0.100 * Uncertainty - 0.300 * Opportunistic Behaviour + 0.200 * Reputation + 0.250 * Asset Specificity = - 0.100 * 3 - 0.300 * 1 + 0.200 * 3 + 0.250 * 5 = 1.25

Thus MyERP will achieve its Success Score and can be eligible to get the project after three months.