Outsourcing Business - Research Paper Example

Outsourcing Businesses Introduction Usually, foreign and domestic business process contracting is known as outsourcing; however, offshoring is more appropriate word to represent all outsourcing that involves procurement of the services from the overseas supplier. In last decade or so, offshoring business activities have increased significantly. Although several services are being outsourced currently yet services related to IT constitute a substantial chunk of total offshoring business. The paper attempts to explore reasons for IT outsourcing success; impediments in the process of outsourcing and the trends of outsourcing that are seen in current times. Variety in Outsourcing Businesses Ang and Inkpen (2008) argue that since 2002 offshoring activities have increased significantly, not restricted to only IT sector, but it has gone beyond that in the field of business process outsourcing (BPO), legal outsourcing (LO), infrastructure outsourcing (IO), knowledge process outsourcing (KPO), and many more. In 2000, total offshoring business was estimated at US $119 billion; however, by 2008, that increased significantly to the tune of US$ 300 billion. Some Important Statistics In 2011, the US companies outsourced 2,273,392 jobs and as much as 35 percent of the companies consented that they had been outsourcing at least one of the processes. While segregating outsourcing in the services, it has been found that 43 percent of the companies in the IT sector in the US resorted to outsourcing; while in R&D and distribution services sector outsourcing percentages are found to be 38 percent and 26 percent respectively (Statistic Brain, 2012). Lewin (2012) argues that emerging economies occupy a large pie of global offshoring business promoting overall economic development as the US companies do not mind offshoring nine or more time zones away despite the presence of near-shore delivery centers. This clearly implies that offshoring has been accepted across mid and large sized US companies for varied reasons and it is going to stay and grow in the future bringing new waves of economic development across the globe. Reasons of Outsourcing Companies in the US have described several reasons for offshoring the jobs and they can be described as per the following. Source: http://www.statisticbrain.com/outsourcing-statistics-by-country/ From the above exhibit, it is quite clear that cost reduction and unavailability of IT skills were the main reasons for the companies to outsource. Freeing up internal resources and improving customer focus were two other major reasons of the outsourcing given by the companies. Offshoring IT Business Evolution Global offshoring IT and BPO market is huge but its evolution has been dependent upon the three factors: Supply quality; timely delivery; and adopting the actions. Based on a study, it is expected that almost $300 billion offshoring business can go to low-cost locations without much inhibitions (NASSCOM-McKinsey, 2005) Global IT and ITES Related Offshoring Business NASSCOM-McKinsey (2005) report emphasizes that the global potential of offshoring business is at least ten times more than what has been tapped so far. Traditional IT outsourcing business that includes hardware and software servicing, help desk services, network administration is comprised of almost 45 percent of the total potential market for offshoring and will continue to grow at a decent rate in the years to come. Apart, R&D services, application development and maintenance (ADM) business comprise of about 30-35 percent of the market and will grow at slower pace due to complexities involved in it. Similarly BPO business growth is driven by industries such as retail banking, finance, accounting, and HR services (NASSCOM-McKinsey 2005). Outsourcing through Virtual Networking Leading multinational companies outsource variety of jobs to build up their strengths. For example, Nike, a leading fashion wear company does not produce any clothing but focuses more on building brand value by putting intensive efforts on marketing functions. Daft et al. (2010) calls it a virtual network structure in which the company subcontracts most of its processes to different companies and effectively coordinate between all activities to bring efficiency in the operations. This has been possible now due to rapidly developing information and telecommunication technology. The virtual network organization means the organization has kept most strategic activity in its fold while outsourcing all other activities to the outside experts. This certainly frees up a lot of organizational resources. That means organizations keep most core activities with them and outsource other activities to other partners. Role of IT in Outsourcing Production Processes Currently, production offshoring is significant as it helps reduce production costs to a great extent providing competitive leverage to the companies. In a global environment when international business has increased manifold in last two decades, it becomes extremely important for the companies to produce goods at the lowest possible costs to maintain comparative advantage. Computers though evolved in the US yet most of the reputed manufacturers outsource their parts requirement from the Far East nations and concentrate mainly on marketing activities. Most of these companies are fully aware that super profits cannot be made from the manufacturing activities but major profit is made by differentiating their products with the commodity manufacturers and for that brand creation, and brand image is important. That is why they outsource most of the manufacturing activities and concentrate solely on brand creation and brand image building exercises. Daft et al. (2010) rightly argue that production process outsourcing has many challenges and those can be addressed using information and communication technologies to a great extent. Outsourcing as Growth Strategy Corbett (2004) specifies about the several salient features of offshoring. Offshoring does not simply lead to cost saving but it is increasingly used as a strategic tool to enhance competitiveness and productivity. For example, British Airways saves $23 million for every 1000 jobs sent to India. It is estimated that manufacturers on average, outsources 70% to 80% of their finished goods. It is not viewed as a mere business tactic but an essential requirement for remaining globally competitive. It is not surprising that for 90% of companies, offshoring is essential for their growth strategies. Many people consider outsourcing a recent occurrence but in reality, as argued by Corbett (2004), outsourcing phenomena started a way back in 1970 when many manufacturing companies began outsourcing less important processes. That is how they freed their resources for strategically more important jobs. Large firms have been found to have been offshoring almost one-half of their IT operations. It has been advantageous for them to outsource their routine jobs such as payroll, accounting, and other back office operations. That is how the companies can serve their consumers better by giving them the benefit of decreased costs and lesser servicing time. Currently, firms are constantly under pressure to enhance their operating efficiencies and that drives them to go for offshoring their various processes so that they can focus more on strategic issues to meet market challenges. Offshoring has reduced the cost of products substantially benefitting consumers at large. Thus, consumers with the same disposable income can buy more goods than ever possible earlier. Through the outsourcing strategies, firms increase their profits and thereby company valuations substantially benefitting tens of millions of shareholders across the nations. Obstacles to Outsourcing Outsourcing too faces several hurdles or objections and those can be described as per the following (Corbett, 2004). (a) Employee Objections Employees do raise objections on the outsourcing jobs for they are made to change their roles in the organization or employees need to acquire new skills in this process. The firms need to organize training programs for employees to enhance their skills while changing their roles and communicate them with more transparency. (b) Losing Control or Flexibility on Operations The big obstacle to outsourcing comes in the form of losing control on processes; however, that is not true as all quality parameters and other requirements are made clear to the suppliers beforehand. Monitoring the quality parameters and the strict scheduling meeting deadlines becomes an absolute responsibility of the suppliers that they always adhere to for continuation of the business. (c) Outsourcing Critical Functions Usual mindset resists outsourcing critical functions; however, it is a known fact that outside specialists can perform the given task more effectively and efficiently. Understanding Math of Outsourcing Corbett (2004) explains why organizations are compelled to offshoring the jobs that are thousands of miles away. According to him, its answer lies in wage differences between the two countries – host and outsourced country. For example, a Java programmer costs the company $60,000 a year in the US compared to only $5,000 in India with matching skills. An architect in the US will cost not less than $4,000 per month but an architect from Philippines will be available at just 10 percent of the cost. Similarly, an aerospace engineer in Russia is available at $600 per month while the person with the same qualification would cost 10 times higher in the US. Thus, net savings to the companies on offshoring the jobs are huge running in millions and billions of dollars every year. It is not at all surprising when British Airways informs about its cost savings to the tune of $23 million for every 1000 jobs outsourced to India (Corbett, 2004). Does Low-cost Outsourcing Affect Quality? Corbett (2004) argues that low-cost offshoring does not impact the quality parameters. In fact, it is other way around; company's quest for quality is the reason for offshoring jobs. For example, most call center jobs in India are occupied by the persons having college degrees while matching degree holders in the US will never prefer doing call center jobs. In that sense, it is a strategic outsourcing to enhance capabilities of the organization. Corbett emphasizes that due to high English-speaking skills and low wages, India has emerged as the most favored destination for the US based IT companies. It is not surprising that India has emerged as a leading service provider in the IT and ITES related business in the world grabbing huge market share. IT Facilitates Recruitment Process Outsourcing (RPO) Gilbert (2012) of Ochre House argues that currently, process driven elements of the HR function are being increasingly outsourced by the companies that include recruitment activities. In a survey done by Ochre House across 100 companies of Europe, it was found that the main purpose behind the recruitment outsourcing was to reduce the cost incurred in recruitment. Although the objective of achieving significant savings for the companies is fulfilled yet it is equally true that the companies aim at availing outside expertise largely to increase their brand value too. Efficiency, adding value and simplification were the three major factors for recruitment process outsourcing (RPO) and advances in information and technology (IT) field, in recent years, have made it possible for the companies to target talented people in the market. Today, outsourcing does not stop at recruitment exercises only but goes beyond through the process of training, development and long-term retention to impart true value to the organization (Gilbert, 2012). Cultural Intelligence and Offshoring Ang and Inkpen (2008) emphasize that cultural intelligence is a strategic necessity in sourcing services and products from the firms globally. He further agrees that cultural intelligence is multidimensional and a complex phenomena yet firms need to take into consideration this very important aspect while offshoring. Developing a firm-level cultural intelligence is necessary to help raise awareness in companies and in developing culturally intelligent executives. In the long run, these capabilities help enhance the offshoring success of the organization. Conclusion It is a fact that increasing number of companies – multinationals and non-multinationals alike outsource numerous IT and ITES based processes globally. The competitive pressures often compel them to offshore their jobs; however, offshoring is now done as a strategic and tactical tool and game plan to increase their overall efficiency levels. There is no doubt that in the seamless business world where growth, efficiency, competitiveness are the buzz words, the outsourcing activities are not only going to stay in the years to come but also will expand enormously adding newer and newer processes. It can be said that huge international economic development in the last decade or so is largely attributed to the successful offshoring efforts conducted in the field of IT and related services. References Ang, S. & Inkpen, A. (2008). Cultural Intelligence and Offshore Outsourcing Success: A Framework of Firm-Level Intercultural Capability. Decision Sciences Institute, vol.39, Corbett, M.F. (2004). The Outsourcing Revolution. economist.com. [Online] Available from http://www.economist.com/media/globalexecutive/outsourcing_revolution_e_02.pdf [Accessed 27 February 2013] Daft, R. L.; Murphy, J. & Willmott, H. (2010). Organizational Theory and Design, 11th ed., Cengage Learning, Cincinnati. Gilbert, S (2012). Driving outsourcing - the real drivers behind recruitment process outsourcing. Ochrehouse.com. [Online] Available from http://www.ochrehouse.com/Media-And-PR/Driving-outsourcing-the-real-drivers-behind-recruitmen-process-outsourcing [Accessed 27 February 2013] Lewin, A. Y. (2012). Global Sourcing of Business Services: Key Findings and Trends from ORN Research. Duke University. [Online] Available from http://www.fuqua.duke.edu/offshoring/documents/pdf/research/presentations/p_iaop_ws_2012 [Accessed 27 February 2013] NASSCOM-McKinsey. (2005). The National Association of Software and Service Companies (NASSCOM)-McKinsey report 2005: Extending India’s leadership of the global IT and BPO industries. [Online] Available from http://www.McKinsey.com/Locations/India/Mckinseyonindia/ [Accessed 27 February 2013] Statistic Brain (2012). Job outsourcing Statistics. [Online] Available from http://www.statisticbrain.com/outsourcing-statistics-by-country/ [Accessed 27 February 2013] Read More