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ACCA Strategic Professional · Strategic Business Leader · Enabling success: organising

Kestrel Logistics outsources its payroll processing to a supplier under a five-year contract. After two years the supplier's quality falls, but Kestrel has no payroll staff left and switching would take a year. Which risk of outsourcing has most clearly materialised?

The risk is dependency on the supplier and loss of in-house capability. With no payroll staff and a year needed to switch, Kestrel is locked in, has weak bargaining power and limited control over service quality, which are classic outsourcing risks.

  1. ALoss of economies of scale
  2. BDependency on the supplier and loss of in-house capability, giving weak bargaining powerCorrect
  3. CCultural clash within a shared service centre
  4. DOver-centralisation of strategic decisions

Explanation

With no internal expertise and high switching costs, Kestrel is locked in to the supplier, which weakens its negotiating position and control over quality. Economies of scale are normally a benefit of outsourcing, and the other options do not describe this situation.

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