Abstract
Case Analysis
Following a suggestion by the Dean of the National Institute of Management (NIM), Swati Bhargava, the Administrative Officer Col S R Rao put together a proposal aimed at improving security services at NIM. The decision by the board of governors (BoG) would effectively be between two choices of either insourcing or outsourcing security services.
NIM is a premier management school, set up by the Government of India, spread over a campus of 193.4 acres, 20 kilometers away from a city in central India. With academic facilities, hostels and housing spread across campus, safety and security were key priorities. Historically, NIM had an unsatisfactory experience with outsourcing security. Over the previous four years four different agencies had worked for NIM. The government required tendering process led to low bids being submitted in order to win the contract. This in turn would lead to an inability by the agency to recruit and retain quality personnel. In addition, the agencies tended to minimize their costs by withholding benefits, training, and equipment to their personnel. While NIM found the quality of security to be inadequate on account of short-changing on the contract terms by the agencies, the agencies, in turn, invoked arbitration clauses to settle disputes. Two such arbitrations ended with mutual settlements where NIM ended making payments to the agencies. The experience with outsourcing to agencies had been poor—the core purpose of safety and security was not well achieved, the personnel were treated poorly by the agency, disputes in the contract led to financial costs, and much senior management time and energy was taken up in dealing with the agencies.
On account of the location of NIM only regional security agencies could be tapped and these agencies operated on an opportunistic basis. Given the history with such agencies, Col Rao considered an alternative of approaching Home Guards or para military personnel for security. At about ₹20 million a month as opposed to ₹2 million per month charged by the regional security agencies, the costs turned out to be prohibitive.
From Outsourcing to Insourcing Security
Col Rao assessed that a national security agency was not a feasible option since no such agency had an office in the city where NIM was located. Swati and Col Rao then contemplated insourcing security. This would entail additional administrative band width in terms of recruiting more staff, training, and equipping them. A one-time expenditure of ₹1 million towards equipment would be needed. In addition, the recurring monthly costs would be about ₹2.66 million. This investment was expected to lead to reliable security and fair treatment of the personnel.
At the Governing Council Meet
The members of the BoG reviewed the proposal for insourcing security and noted that based on incremental costs the move would mean an increase of about 50 per cent. More important, this recommendation by Swati and Col Rao was not in line with traditional management principles. Security could be deemed to be a non-core activity and not the competence of NIM. Swati, however, registered a point of considering all “invisible” costs as well in taking such a decision.
SITUATION ANALYSIS
Case A spells out the upsides and downsides of the two alternatives. Viewed from the perspective of which choice may better serve the purpose of putting in place security arrangements, it may seem that insourcing is clearly preferred. Safety for the community and passing on of benefits to the security staff would seem better achieved by insourcing. Decision making typically goes beyond a purely analytical assessment and involves judgement. Insourcing inevitably will lead to taking on operational and administrative demands with increase in the size of the organization. This alone may support the argument to outsource with a rider that the experience of the earlier four years be drawn upon in order to structure the arrangements differently. With clarity on deliverables and stronger monitoring of the security agency, better outcomes could be aimed for the future.
Case B introduces new dimensions more explicitly. There is a widely held management thought that non-core activities should be outsourced in order to do well on the core activities. The dining hall and campus security fall in the realm of non-core activities for NIM. This argument may suggest that security should be outsourced. However, outsourcing has to be done to a specialized entity which can perform the task well. Case B highlights that the security industry is fragmented and small operators in the region compromise on essential aspects of the business. Under the circumstances, NIM may be better served by insourcing security even if the financial costs are clearly higher to do so.
At a larger level, this question is about the scope of the organization. It is about the ‘best alternative test’ of whether an activity should be contracted out in the marketplace as against conducting it within the firm hierarchy. The framework that synthesizes this (Collis, & Montgomery, 1997, pp. 100– 124) considers rent appropriability, hold up and transaction costs. The case facts suggest that NIM has had arbitration invoked and had to settle out of court. In addition, the earlier four years are evidence of an inability to set in place incentives that could reduce agency costs. While coordination of this additional activity would place strain, the overall assessment when seen through the prism of the “best alternative test” suggests insourcing as the way to go.
On a separate dimension, a case can be made for scope expansion (Stuckey & White, 1993) if there is risk of market failure. With the absence of quality, national level security providers and the high costs of the paramilitary forces, NIM was left with the disorganized regional players. With a failure of the market for security services leading to distorted bargaining powers, again insourcing may seem the better way ahead.