Multiple Criteria Model for Evaluation and Selection of Outsourcing Service
Countries: A Case Study in the East and Southeast Asia
James K. C. Chen, Van Kien Pham, Chih-Sung Chang, Nguyen Thi Le Huyen
Department of Business Administration, Asia University, Taichung 41354, Taiwan
Email: ( kcchen@asia.edu.tw,
phamtrungkien981987@yahoo.com, changjason8989@yahoo.com.tw, huyenvic.eco@gmail.com)
Abstract - Outsourcing has for some time been, considered as
one of the most effective strategies by which firms may reduce
costs and sustain their competitive advantages over rivals.
Making an outsourcing decision is a very complex process
because it requires decision-makers (DMs) to make a
comprehensive evaluation of multiple criteria which often
conflict with each other. The evaluation and selection of these
countries is therefore basically a multi-criteria decision making
problem (MCDM). Over the last two decades, there is a great
number of method have been introduced to deal with MCDM
problems, so it would be more perfect to look at MDCM
methods as a whole. For these reasons, the purpose of this
paper is to review the literature of MCDM methods, and
thereby to construct a simple MCDM-based model to help
managements evaluate and select the best outsourcing location
for their companies. The study utilized the AHP approach as an
empirical example to confirm the usefulness of the MCDMbased model based on seven typically emerging countries
chosen from the East and Southeast Asia regions. In short, the
research provides general view and practice for readers and
DMs in relation to the problem of outsourcing destination
selection.
Keywords - Outsourcing, decision makers (DMs), multi-criteria
decision making (MDCM), AHP.
I. INTRODUCTION
The trend of globalization, together with the worldwide recession
of many economies have put companies into a very difficult
situation of how to compete against their rivals to survive under the
extremely tense competitions of today’s global market. It is vital for
managements to identify their best business strategy, thereby
helping their companies to not only maintain competitive
advantages over enemies but also increase profit from business
operations. Fortunately, outsourcing is a business strategy which
allows firms to focus on core competencies and outsource non-core
business parts to outside partners. Originally, outsourcing was
applied by the Kodak Company in 1989 with the aim of transferring
its information system (IT) function to subsidiaries of IBM, DEC,
and Businessland [1, 2]. These tactics helped the company to
remain a well-known organization and resulted in “the Kodak
effect’’ of outsourcing application [3, 4]. Thereafter, an increasing
number of companies have followed Kodak’s footsteps to sign
outsourcing contracts with external partners. Since the early 1990s,
outsourcing has been a well- known strategy which enables firms to
take advantage of resources both internal and external to sustain
their competitive advantage and quickly respond to the global
market’s demand [5, 6, 7]. While there is no doubt about the
advantages of an outsourcing strategy, the way in which decision
makers concerning how best to use it is a very complex process
which must take into consideration internal as well as external
environmental elements. Companies, which fail to in
978-1-4799-0986-5/13/$31.00 ©2013 IEEE
accomplish outsourcing contracts, may incur a great number of
disadvantages, such as: loss of control or competitive advantages,
increased cost, and even bankruptcy [8]. According to Lonsdale,
one of the main reasons of outsourcing failures is the lack of any
established method for decision makers (DMs) [9]. Therefore,
evaluating and selecting potential outsourcing vendors is never an
easy task. This process requires a comprehensive view of all
conflicting criteria existing at both company and country level. In
addition, selection of an optimal outsourcing provider is performed
under multiple criteria and is basically considered a multiple
criteria decision-making problem (MCDM).
MCDM problems have the very short history of development
because of their complication in nature. They are only solved when
recently the quick development of computer technology has been
able to aid in conducting systematic analysis of MCDM problems.
Over time, there are a lot of approaches that have been introduced
by many researched. So, among those, which is the suitable method
for evaluating and selecting an outsourcing service country? The
study’s purpose is to briefly review some popular MCDM
approaches and to introduce a simple MCDM technique. Thereby,
we build a comprehensive model for solving the complex and
interactive vendor evaluation and selection problem which can
determine the hieratical relationships with the aid of the Analytic
hierarchy Process (AHP) method for obtaining the success of the
outsourcing operation in general and for selecting the best
outsourcing vendors in particular. In doing so, the study arranges
appropriate weightings to each dimension and criterion in the
evaluation model by combining the opinions of the experts. Finally,
the overall priority ranking of all alternatives can be obtained to
assist decision makers. A case study in the East and Southeast Asia
by using the proposed MCDM approach is carried out to confirm
the usefulness of this technic. Generally, this research attempts to
provide an overall insight into MCDM problems and aid decision
makers in making right decisions in relation to the outsourcing
domain.
II. THEORETICAL BACKGROUND
A.
Outsourcing
As discussed earlier, outsourcing has been a well-known term since
the early 1990s due to its preeminent attributes which include cost
reduction, business focusing and so on. In tandem with the trend of
globalization, companies are now outsourcing every part of their
business in terms of both the production and service processes [10].
As a result, the term of “outsourcing” has become an interesting
topic and has generated a great deal of research. In line with this,
various definitions of outsourcing have been made. Typically,
according to Venkatraman, outsourcing is “the practice among US
and European companies of migrating business processes oversees
to India, the Philippines, Ireland, China, and elsewhere to lower
costs without significantly sacrificing quality.” [11]. Considering
outsourcing at the wider context, Yang and his colleague’s argues
that outsourcing is basically seen as a practice that carries out a
Proceedings of the 2013 IEEE IEEM
contract with another company to take on the primary task of
business process provision [12]. Furthermore, a recent research
done by Mahalik and Satpathy has defined outsourcing as the
management decision to sign contracts with external organizations
in order to externalize some parts of its business operations which
were originally being conducted internally by the primary company
[13]. Although literature on this field has showed many efforts to
come up with a standard concept of outsourcing, so far there is no
hitherto agreed definition.
B.
Objectives of outsourcing
Nowadays firms are using outsourcing as a tool to fully taking
advantage of both internal and external resources. Thereby
sustaining competitive advantage and increasing profits. Earlier
studies have tried to explain the reasons why companies would
need to outsource and have concluded that this need is mostly based
on the transaction cost theory for their arguments [14]. However, in
today’s economic situation, more strategic reasons have emerged as
important factors such as strategic focus, strategic flexibility, risk
analysis, and so forth when considering an outsourcing strategy [15,
16, 17]. This new trend of outsourcing has stimulated more and
more researchers to become involved in working out a solution to
outsourcing problems. One of the most extensively applied methods
is the MCDM. The aim of the MCDM approach is to help DMs
solve conflicting objectives problem based on collective group
ideas [18]. The applications of this method are discussed in more
detail in the next section.
C. Critical success factors of outsourcing
In today’s global trend, to make an outsourcing decision, decision
makers may have to consider many criteria which include all aspect
of culture, politics, economy and so on. Over the last two decades,
the wave of outsourcing has resulted in a large number of scholars
who tried to aid decision makers in deal with MCDM problems for
selecting an outsourcing service vendor. Most of these works focus
on some criteria at company level or for some specific fields such
as information technology semiconductor, science service etc.
[19,20,21,22,23]. It would be a mistake if ignoring factors at critical
success factors at the country level, so this study aims at looking
into factor at both company and country level. Based on the depthreview of literature from various sources, the study figured out that
outsourcing problems are regarding every aspect from cultural
language [24,25], economic and political [26], infrastructure [11] to
human resources [27,28] etc. According to Collier, there are
several factors including legal restriction, culture, and technical that
a decision maker should consider when applying outsourcing [29].
Later Vestring and his colleagues explore others some major factors
such as costs, political stability, regulation, local markets, language
skills, facility cost, fluctuations of currency, and engineering talent
[26].
For these reasons, the study selected a set of critical factors for
the evaluation and selection of outsourcing service countries
including cost, business environment, human resources, and
government’s policies
D. A brief review in multi-criteria decision making
(MCDM)
MCDM is a super class model which measures the process of
evaluating and determining the optimal solutions for given
problems. Some researchers have suggested that MCDM problems
should be divided into two categories, namely multiple objective
decision making (MODM) and multiple attribute decision making
(MADM) [30, 31]. While MODM solves decision problems with
continuous space, MADM focuses on problems in which the space
is discrete [32]. In addition, MODM is commonly used in
programing problems or designing facets in order to obtain the best
goal via evaluating the various interactions among the
predetermined constraints [33]. On the other hand, MADM is often
adopted in evaluating and selecting attributes in which the set of
decision has been limited into predetermined alternatives. Due to
the specific characteristics of outsourcing strategy (including the
limit of the potential outsourcing vendors), the scope of this study
is mainly based on the most well-known branch of decision-making
named MADM.
Although MADM methods have been applied to different
outsourcing issues in different situations at different times, they
have some major facets in common (Triantaphyllou et al, 1998) as
follows:
 A set of alternatives: the final purpose of MADM is to find the
best alternatives within a set of available alternatives, for
instance among China, Singapore and The Philippines, which is
the best outsourcing service nation?
 A set of attributes: these attributes can be goals, criteria or subcriteria and they may have mutual conflicts, for example good
infrastructures in Singapore may conflict with its high laborcosts in any outsourcing country selection problem.
 Decision weights and decision matrices: Any MADM issue can
be simply translated into a decision matrix form (M-by-N
matrix) in which entry aij (where i = 1, 2,.., M and j = 1, 2,..., N)
shows the performance of alternative Aj when it is evaluated
based on criterion Cj. Then in the matrix, the priority weights of
the criteria (Wj) are also computed to rank the relative
importance of attributes. These weights are normalized to add
up to one.
E. Different approaches of MCDM
Outsourcing has become the most widely used strategy for
many firms nowadays. In order to select the suitable outsourcing
partner in the suitable country, it requires a process of careful
evaluation and selection based on various criteria which often
mutually conflict. Generally, the selection of any outsourcing
service country is multiple criteria decision making-based
(MCDM-based). From the extensive review of the relevant
literature, the study found out a great number of works that have
adopted MCDM technics in different ways for different issues of
outsourcing. These approaches can be both individual such as
Analytic Hierarchy Process (AHP), Analytic Network process
(ANP), Data Envelopment Analysis (DEA) etc. and integrated,
for example AHP and DEA, AHP and DEA, or AHP and
Preference Ranking Organization Method for Enrichment
Evaluation (PROMETHEE).
1) Individual approach
 Analytical Hierarchy Process (AHP)
As the most popular individual approach, The AHP was first
introduced by Saaty in 1971 and it has been widely applied to many
different fields whether political, economic, social or management
sciences [34, 35]. The AHP can provide DMs with the robustness
and flexibility needed to determine the most important attributes of
a set of alternatives through its hierarchy model [36]. For this
reason, the AHP has appealed to a variety of scholars over the years
who have aimed at solving MCDM problems in relation to the
outsourcing sector. For instance, Noci developed an AHP method
for the supplier selection of automobile companies [37]. In 2008,
Chiou and his partners attempted to help DMs in choosing the best
suppliers under six major criteria and twenty four sub-criteria by
adopting the FAHP approach [38]. Recently, Yang and Peng have
applied the AHP method to reconstruct a set of outsourcing partner
Proceedings of the 2013 IEEE IEEM
evaluation systems in term of information system and information
technology (IS/IT) [23].
 Analytic network process (ANP)
As there are many real life decision problems in that cannot be
constructed in the hierarchy, ANP was developed [39] to overcome
the weakness of the AHP method. Therefore ANP can be seen as a
generation of AHP. The AHP allows DMs to solve decision
problems within complex interrelationships among the attributes of
a system. Some of the researchers have utilized the ANP for
supplier selection problems, such as Ozden who developed an ANP
model to deal with the problem of supplier selection based on ten
criteria of a supplier’s performance and capability clusters [40].
Liao and his partner used the ANP with the aim to aid Taiwanese
DMs in selecting the best suppliers [41].
2) Integrated approaches
When applying the above individual models in real situations,
it may be ineffective because of many aspects of real life which
cannot be reflected as a whole. This issue has stimulated
researchers to come up with a number of innovatively mixed
models in order to perfect literature in the given field. For instance,
Weber and his colleagues proposed a model to determine the best
suppliers via combining DEA with multi-objective programing
(MOP) [42]. This approach aims at using the MOP to construct
“super-vendors”, then applying the DEA to evaluate these “supervendors”. Later, Ghodsypour and O’brien developed a decision
model by integrating linear programing with the AHP to deal with
tangible and intangible criteria when selecting the optimal supplier.
Another mixed model, which was proposed by these two
researchers for multiple sourcing problems, is an integration of
integer non-linear programing [43]. More recently, Wang and Yang
combined the AHP and Preference Ranking Organization Method
for Enrichment Evaluation (PROMETHEE) to solve IS outsourcing
decision problems based on six proposed factors [44]. Chen et al.
used the hybrid method which includes fuzzy set theory and Grey
Relational Analysis (GRA) for the green supplier selection [45].
This approach can avoid any negligence within the same criteria.
Liao et al. proposed the Fuzzy and multiple-segment goal
programing (F-MSGP) technique to identify the best suppliers in
food industry [46].
Malaysia, the Philippines, Singapore, Thailand and Vietnam were
selected.
2) Questionnaire design and data collection: The
questionnaire designed in this paper was based on the nine-point
scale theory of Saaty (as shown in Table II) to make all possible
pair-wise comparisons among attributes and alternatives (. For
example, two criteria are chosen from the hierarchy model, namely
cost competiveness (C1), and human resources (C2). Assuming that
an expert thinks C1 is far more important than C2; say (7:1), then
he will mark () on the 7:1 blank (see the Appendix I for more
detail)
After completing constructing the AHP questionnaire, it was
administered to 12 experts who are working for different companies
in different fields regarding the outsourcing domain in order to
obtain experts’ evaluation over pair-wise comparisons. Data
collected in this step was used for analysis in the next section.
Consistency test: According to the Saaty’s perturbation theory,
when calculating priorities from the comparisons matrices, if the
consistent level is less than or equal to 10%, the results can pass the
consistency test [47]. In this research, experts gave their opinions in
three different stages in proportion to three separate levels of the
hierarchy model. The first level includes pairwise comparisons with
respect to the overall goal. The second level is pair-wise
comparisons among sub-criteria with respect to each criterion,
followed by the lowest level with respect to alternatives. With the
help of Expert Choice software, the findings indicate that all of 12
experts who participated in the survey pass the test due to the
consistent ratio being smaller than 0.1. After passing the
consistency test, these 12 experts’ evaluations were combined
together in the entire hierarchy in the next section.
TABLE II
The AHP NIGHT POINT SCALE
Intensity
of
importance
1
3
III. EMPIRICAL EXAMPLE
As mentioned previously, various approaches for MCDM problems
have been developed in literature to help managements have more
choices in making decision through the use of multiple criteriabased with regard to their selection of outsourcing vendor. Among
them, the AHP is one of the most popular techniques, which has
been extensively applied to deal with different issues in real life. As
the outsourcing country selection problem consists of both
quantitative and qualitative attributes, the AHP is a simple and
effective choice to rank these attributes in the order of priorities in
meeting conflicting objectives. In order to adopt the AHP
effectively, five main steps were applied in this paper [47].
1) Problem modeling: To help practitioners make an
outsourcing decision under any multiple criteria problem, the study
uses the AHP approach to structure a hierarchy model which can be
divided into four levels: the first level is the overall goal (selecting
the best outsourcing service destinations) located at the top of the
hierarchy. The second level is the four main criteria: cost
competiveness, human resources, business and economic
environment, and government policy and legal framework. Each
criterion in turn includes its sub-criteria which are positioned in the
third level. Eventually, the bottom position of the hierarchy
presents seven alternatives in which seven typically emerging
countries in the East and Southeast Asia such as China, Indonesia,
Definition
Explanation
Equal
importance
Somewhat more
important
Two
factors
contribute
equally to the objective
Experience and judgment
slightly favor one over the
other.
Experience and judgment
strongly favor one over the
other
Experience and judgment
very strongly favor one over
the other. Its importance is
demonstrated in practice
The evidence favoring one
over the other is of the
highest possible validity
5
Much more
important
7
Very much more
important
9
Absolutely more
important.
3) Combining and calculating the weight values: After
passing the test for the reliability and validity of questionnaires, the
study combined 12 experts’ judgments in order to obtain the
pairwise comparison judgment matrices (PCJMs) for each level of
the hierarchy. As a result, the inconsistent ration of each PCJM is at
0.00 (<0.1) which means that when combining 12 evaluators in the
entire hierarchy, they are consistent in making judgments of pairwise comparisons. Meanwhile, the normalized priority weights
obtained from PCJMs were used to synthesize the solution for
outsourcing country selection problems.
4) Synthesizing and calculating the global weights: This
phase uses the normalized priority weights attained from the Expert
Choice’s outputs to rank the relative importance of each criterion,
Proceedings of the 2013 IEEE IEEM
and thereby to calculate the global priority weights of all subcriteria. The global weights can be computed by adding the local
priority weights multiplied by the weights of criteria as shown in
Table IV. The results point out that with respect to the overall goal
(selecting the best outsourcing destination), cost competiveness is
the most important factor (priority weight: 0.442), followed by
business and economic environment (0.201), government policies
and legal framework (0.18), and human resources (0.201).
5) Eventually, the priority of seventeen sub-criteria was
rearranged based on the global weights. As a result, four subcriteria of cost competiveness occupy the highest priorities in the
third level of the hierarchy. Specifically, employee salaries (SC12)
is the prime element, followed by taxes (SC13), freight prices
(SC11), and real estate cost (SC14). Then, workforce size and
efficiency (SC21) is the fifth most important sub-criterion which
pertains to the factor of business and economic environment. The
element of tax incentives element (SC44) ranks of sixth
importance, followed by stability of business and economic
environment (S21).
The final purpose of DMs is to determine the best outsourcing
locations for their companies. As mentioned earlier, the findings of
this paper were based on experts’ evaluations over four major
criteria and seventeen sub-criteria given in the hierarchy. In this
empirical example, seven typically emerging countries in East and
Southeast Asia were chosen as the alternatives and arranged in the
matrix to make pair-wise comparisons. As summarized in Table V,
China is the leading country (0.24) for the provision of outsourcing
service and it was evaluated as being greatly more important than
the other six nations. Vietnam (0.15) is the second most attractive
country, followed by Singapore (0.14), The Philippines (0.13) and
Thailand (0.13). Malaysia (0.11) and Indonesia (0.10) are the two
less important countries in the region. However, there are some
little differences among these countries in terms of pretermitted
attributes because each nation has its own competitive advantages.
For example, The Philippines have a population with greater
aptitude for language, but Vietnam has lower labor costs. Singapore
has an advanced infrastructure and skilled workers, whereas
Thailand can offer outsourcing services at lower prices. Differences
of weights of alternatives are shown in Table IV.
TABLE III
THE GLOBAL WEIGHTS OF CRITERIA AND SUB-CRITERIA
Rank
Criteria
Original
weight
Subcriteria
SC12
SC13
1
C1
0.442
SC11
SC14
SC21
SC22
4
C2
SC23
0.176
SC25
SC24
SC31
SC32
2
C3
0.201
SC33
SC34
SC44
SC42
3
C4
0.180
SC41
SC43
Overall consistency ratio = 0.00
Local
global
weight
weight
0.147
0.333
0.299
0.132
0.206
0.091
0.163
0.072
0.354
0.062
0.261
0.046
0.169
0.030
0.126
0.022
0.090
0.016
0.276
0.055
0.257
0.052
0.240
0.048
0.227
0.046
0.317
0.057
0.252
0.045
0.227
0.041
0.204
0.037
Total: 0.999
TABLE IV
ALTERNATIVE RANKING
Alternative
China (G1)
Indonesia
(G2)
Malaysia
(G3)
Philippines
(G4)
Singapore
(G5)
Thailand (G6)
Vietnam (G7)
G1
1
G2
2.76
1
0.24
0.1
Priority
1
7
Ranking
Consistency ratio = 0.01
VI. CONCLUSIONS
The multiple criteria decision making (MCDM) approach has been
widely applied to many different fields due to its ability to tackle
problems by evaluating a set of alternatives via a set of decision
attributes. It is impossible for one research paper to cope with all of
these, therefore this paper focused on the outsourcing domain, one
of the most interesting issues of business strategy nowadays, to find
the best MCDM method for the optimal outsourcing destination
problem. In regard to this topic, many approaches have been used
in the literature to aid researchers and practitioners in applying the
MCDM method to deal with outsourcing problems effectively.
These include both individual and integrated works. This paper
introduces a simple MCDM model for outsourcing problems based
on an extensive review of literature. In addition, the research
attempted to demonstrate the reliability of this model by providing
readers
with an empirical example in relation to the problem of outsourcing
country evaluation and selection. In the example, seven promising
countries in East and Southeast Asia and a set of main attributes
were obtained from the literature and used to construct the
hierarchy model using the Analytical Hierarchy Process (AHP)
theory. As a result, China is the best country for the provision of
outsourcing services in terms of cost competiveness and business
and economic environment.
Although the advantages and usefulness of the MCDM have
been extensively recognized by both researchers and practitioners
over the last decades, it can be concluded that there is no perfect
MCDM method so far. This topic is, thus, still valuable for future
researcher’s to improve and identify the best MCDM approach
under various fields.
G3
2.78
1.07
G4
1.42
1.10
G5
2.15
1.62
G6
1.93
1.37
G7
1.45
1.34
1
1.07
1.41
1.02
1.71
1
1.25
1.03
1.08
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