Is outsourcing work to other countries a good thing or a bad thing - Essay Example

?Introduction In an increasingly globalized world, the physical boundaries for international and even domestic firms are vanishing fast. The interconnected nature of the world has made it possible for the firms to continuously look for better ways of conducting their business. Outsourcing is also considered one such step towards achieving efficiency and reducing costs. Outsourcing is not a recent phenomenon as firms at international and national level often engaged themselves in such activities since long. Some of the reasons for outsourcing include reducing the overall cost of business as well as regaining or developing the competitive advantage by outsourcing those activities which do not fall under the core competencies of the firms. International firms also take advantage of this as they can achieve the economies of scale at relatively rapid rate as well as get the benefit of cost advantage over their competitors. It is however, important to understand that due to outsourcing of the jobs and functions, resources from one country move to another country. It has been politically debated that due to outsourcing, jobs have been relocated to other countries and as such domestic jobs are being relocated to other countries. There is a widespread debate that as a result of outsourcing the overall number of jobs available is reducing as well as they also create skill shortages. The relocation to new jobs therefore not only results into getting low paid jobs but also significantly reduce the overall quality of life of the workers. One of the key reasons as to why I have chosen this topic is the overall magnitude and volume of outsourcing work to other countries. US is probably the largest country which has outsourced many activities to countries which can offer American firms a distinctive competitive advantage. Above all, this topic can also affect the way future dynamics for the employment will shape and might help in determining my own future once I step into the practical field. This paper will therefore discuss whether outsourcing work to other countries is a good or bad thing. Competitive Nature of the Business Before discussing different arguments and issues, it is important to discuss and outline the theoretical background of the phenomenon of outsourcing. It is argued that the business in current times is changing very fast and the overall dynamics of doing business have rapidly changed. The way firms compete with each other therefore requires that the management of the firm becomes more pro-active in approach and design and develop strategies which can offer it a consistent and sustainable competitive advantage. There can be different reasons for such increase in capital however, globalization and the resulting opening of the markets for international firms has become one of the key reasons as to why the international and domestic firms have increasingly open to new ideas and strategies. Globalization has also allowed the firms to move beyond their traditional physical boundaries and access the markets which are either more profitable or cost effective. (Schniederjans, Schniederjans, & Schniederjans, 2005). Such nature of markets therefore has made them more competitive. Outsourcing It is important to understand that in order to decide whether a firm should outsource or not should consider its overall goals and objectives of the firm. A critical evolution of the firm’s overall objectives and goals therefore require that the firm must decide in its best interest before going for outsourcing. It is also critical that a firm must get a clear and well-defined insight about its core and non-core competencies because outsourcing of non-core activities of the firm is more dominating. It is important therefore that in order to successfully outsource, the correct identification of the core competencies of the firm is essential and failure to do so may result into spending of firm’s resources on things which can significantly impact the firm. Outsourcing is defined as “the act of transferring some of an organization’s recurring internal activities and decision rights to outside providers, as set in the contract”. (Greaver, 1999) The above definition suggests that outsourcing is as a process requires an extensive coordination with outside providers. Outside providers therefore can provide critical solutions or execute some of the activities of the firm which are recurring in nature. Such aspect of the outsourcing therefore makes it one of the intersting strategic move because it often involves interaction with providers which are located outside the physical boundaries of the country where a firm operates. It is however, important to note that firmsalso outsource their activities which are carried by outside providers located within their own borders. It has been observed over the period of time that firms have only outsourced those activities which were essentially not the core activities of the firm. Outsourcing of activities like payroll management, call centers, HR and information technology functions were some of the activities which firms intially outsourced. However, over the period of time, international firms also started to outsource some other key activities such as manufacturing in order to free themselves to focus on their core competencies and spend resources on factors which can yield them greater results.( Raiborn, Butler, , & Massoudb, 2009). It is also important to note that transcation cost theory is one of the earliest attempts made by the firm to outsource. Transcation cost theory suggests that firms often take actions which can help them to reduce the costs. Based on this assumption, the firm making investments through outsourcing therefore ensures that they invest into outsourcing activities in order to reduce the overall size of the firm. Reduction in the size of the firm allow the firm to reduce the costs and become more efficient. Agency theory is also cited as one of the key theortical backgrounds behind the concept of outsourcing. Agency theory indicates the relationship between the firm and its employees and it is suggested that by reducing the number of employees by relocating resources for outsourcing purposes can effectively allow a firm to become competitive. This competitiveness is achieved through the reduction in the costs of the firm as a result of reducing the number of employees. Globalization has also served as one of the key reasons as to why the firms have increasingly engaged themselves into outsourcing. The improvements in the communication technology as well as better coordination through different modes have enabled international firms to procure and outsource different activities from the international markets at the costs which are significantly lower than the normal costs in the domestic markets. It is important to note that outsourcing often takes place within an international context and firms often outsource their activities to external vendors. The very concept of outsourcing therefore outlines that the outsourced activities must be performed by external vendors and not by the firm itself. It requires the seperation of an organization from perfoming some of the activities which were historically performed by the firm. What is however, debateable is the assumption that the continous process of outsourcing has resulted into too many jobs and work being relocated to other countries. This often has been argued that the constant shifting of the resources as well as the jobs is creating unemployment in the countries where these firms are actually located. The debate on the impacts of outsourcing and whether it is a good or bad thing therefore is not only academic in nature but also has some political dimensions too. During the current economic crisis faced by the developed world, a general consensus has emerged that outsourcing may be one of the reasons as to why the developed countries are facing unemployment. The overall argument suggests that the since jobs have been relocated therefore there has been skill shortages due to which people are unable to obtain evey jobs which were traditionally being performed by the local people. It is argued that relocation of jobs and resources has shifted the momentum in favor of countries which are supplying outsourcing services to interational firms. The technological transfer has allowed such countries to improve their human resource base to compete at the international level. Why outsourcing is a good thing? It is important to discuss both sides of the arguments in order to set a platform to argue whehter outsourcing work is a good or bad thing. Core competencies development Outsourcing is now no more viewed as something which is tactical in nature but it has developed as an issue of strategic importance. International firms are considering outsourcing as something which is essential in nature and consider it seriousely. Firms at macro-level if are engaged in the development of their core competencies by outsourcing their activities to external vendors. (Mouhalis, 2006). At the macro-level, it is therefore critical that by outsourcing the non-core activities firms get time and resources to develop their core competencies. Focus on the core competencie allow firms to compete with competitors at the global level. Better competition at the global level as well as at the international level. Organizational transformation Outsourcing can also allow firms to achieve the organizational transformation by shifting or outsourcing their non-core activities. By outsourcing, firm can improve their customer services, product delivery as well as better operating performance. When firms outsource their non-core activities to firms/providers which are best delivering such non-core activities, they actually can focus on the development of core competencies. This can allow the firms to achieve its gradual transformation at the national and global level to become more competitive. Competition futher result into benefit for both the consumers as well as the producers. (Sandier, 2005). Knowledge Access Probably one of the most important benefit of outsourcing is the access to knowledge and local resources which can allow international firms to become more competitive. Over the period of time, the dynamics of doing business have changed and firms have become knowledge firms. Survival at the international level can only be achieved if firms continue to evolue and learn to better equip themselves to compete at the global level. (Yakhlef, 2009) Outsourcing provides an opportunity to the firms to gain vital access to the knowledge which can help them to develop their own core competencies. As discussed above that the firms now have also started to outsource other key activities also therefore it is important that firms also gradually develop their own knowledge to ultimately perform these activities. Outsourcing also allows the firms to have access to better human resource with diversified set of knowledge. This access to a diversified source of knowledge therefore can further allow firms to learn and adapt to the different challenges posed by the external enviornment of the firm. Capacity Management When firms are over-occupied with their non-core activities, their resources may end up in such activities. This therefore may result into under utilization of firm’s capacity to perform its core activities. By outsourcing such activities, firms therefore can enable themselves to better utilize such capacity. Though the above discussion suggest that outsourcing can basically result into better efficiency and competitiveness however, it is critical that outsourcing can also result into negative issues. The above arguments critically point out that outsourcing ultimately results into the reduction of cost for the consumers. It is argued that an $80 DVD player1 could have only became possible for Americans because its manufacturing wer outsourced to countries which were ready to offer cheap manufacturing faciltiies. Outsourcing is therefore good in the sense that it not only allow firms to become more competitive but also result into benefits for the consumers as a whole. (Engle, 2002). Apart from this, it is also critical to note that outsourcing can also become source of employment in countries where work is outsourced thus effectively outsourcing can allow the employees in less developed countries to improve their standards of life. At a global level where the benefits of globalization are not just restricted to the developed countries, outsourcing has served as one of the key instruments to share the benefits of the outsourcing with the less developed countries. By relocating manufacturing and other non-core activities to such countries, international firms therefore are actually providing benefits to both the consumers in their own countries and employees in their host countries. One of the key debates during the 2004 and subsequent elections in America was based on the jobs. It was generally discussed that increasing outsourcing has actually cost American many jobs. This argument became more powerful in the midst of the current economic crisis wherein the overall level of unemployment is increasing. This increase in unemployment level also suggested that increasing number of jobs have been relocated outside US. This relocation of jobs have not only created skill shortages but also made it difficult for the people to obtain new jobs or change their profession. (BARRETT & MOORE JR., 2010) Over the period of time a trend emerged wherein not only the manufacturing jobs were relocated to countries like China but activities like information technology as well as services are being outsourced too. This line of argument therefore suggests that outsourcing could result into more unemployment therefore loss of jobs can put more stress on the domestic economies. What is however, important to note that over the period of time, different empirical studies have suggested that the outsourcing has actually provided more benefits to the international economies. Outsourcing has improved the efficiency of the firms and hence resulted into low costs for the consumers in the developed markets. The above discussion therefore suggests that outsourcing of work is of relative benefits to the firms as well as the economies. However, outsourcing has some de-merits also and international firms are increasingly focusing on the domestic outsourcing rather than opting for the international outsourcing . Conclusion Outsourcing is not a new phenomenon as international firms have increasingly engaged themselves into outsourcing of their non core activites. Outsourcing basically outlines that the firms, in order to improve their operational efficiency tend to outsource their non core activities. It is important to note however, thaat the firms have also started to outsource some of their core activities also in order to better streamline their operations. Outsourcing is a good thing because it can result into better efficiency for the firms and can also create benefits for the end users. The access to knowledge, opportunity to develop core competencies as well as the management of capacity are some of the benefits which outsourcing as a whole can offer. What is important to note however, that outsourcing can actually result into better efficiency and benefit for the firms as well as the consumers in developed markets. Due to outsourcing jobs however, can relocate to the countries offering outsourcing services. Due to job relocation unemployment may increase in the developed countries and hence can further create skill shortages. This issue however, has also became political in nature as politicians tend to accuse governments for allowing countries like India to gain more share in the jobs by offering outsourcing services. It is important to note however, that over the period of time, outsourcing has provided more beneifts than harms and can defintely be considered as something which has resulted into better efficiency and cost effectiveness for the firms at the global level. Bibliography 1. BARRETT, C., & MOORE JR., J. (2010, September). Outsourcing and the 21st-Century Economy. Retrieved September 9, 2011, from The Wall Street Journal: http://online.wsj.com/article/SB10001424052748703882404575520232436064498.html 2. Greaver, M. F. (1999). Strategic outsourcing: a structured approach to outsourcing decisions and initiatives. New York: AMACOM Div American Mgmt Assn,. 3. Mouhalis, J. (2006). Business Process Outsourcing: Is It Right for You? Mortgage Banking , 67 (1), 190-192. 4. Raiborn, C. A., Butler, J. B., & Massoudb, M. F. (2009). Outsourcing support functions: Identifying and managing the good, the bad, and the ugly. Business Horizons , 52, 347-356. 5. Sandier, S. F. (2005). Why Outsourcing Succeeds—or Not. HR Focus , 82 (7), 13-14. 6. Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2005). Outsourcing and insourcing in an international context. London: M.E. Sharpe. 7. Yakhlef, A. (2009). Outsourcing as a mode of organizational learning. Strategic Outsourcing: An International Journal, 2(1), 37 - 53. Read More