Outsourcing and Their Impact on Stockholders Value - Essay Example

Outsourcing and Their Impact on Stockholder’s Value Introduction Most of the companies recently have returned to their basic operational strategies in response to the effect of globalization and the competitiveness in international market. Business enterprises have revisited and reformed themselves from concentrated to de-concentrated organizational institutions to remain close enough to their respective markets in order to take enjoy benefits from whatever resources readily available. In recent dynamic environs, it is very basic to develop strong bonding with market suppliers in order to gain control of the entire market chain successfully. Many researches (Brown & Wilson, pp. 19-22, 2004) done on outsourcing have indicated strategies in outsourcing and their effect on the shareholder value; however, there is still a lot to do with respect to the immediate effect of outsourcing schemes on international finance prosody. The paper quenches the thirst by concentrating on outsourcing schemes and their impact on stockholder’s value. Outsourcing refers to the techniques in transferring of different activities, processes, actions, or procedures to an unknown and irrelevant group for some sort of advantage that includes stepping down of cost, extended efficiencies, complete accession to flexible labor groups, and the capability to concentrate on gist of competitiveness (Steven, pp. 49-51, 2006). Offshore outsourcing includes transferring of different procedures and actions to a comparatively low cost region or country those results in foster increment in cost reduction and flexibleness both. The proper conduction of outsourcing business results in increment of value of stakeholder while the improper conduction results in disastrous impacts to the value of stakeholder. Outsourcing is not a new technique at all; outsourcing has subsisted from long time in the form of one business to the other forms. For instance, public has done outsourcing in terms of management of its money to different banks for a long period, furthermore different businesses or company’s bank on governments with respect to managing substructure of cities for hundreds of years and only some elite group today use to render their own energy services (Steven, pp. 49-51, 2006). The technique of schematic sourcing or outsourcing has the ability to unfold brand new business chances to grow and develop in international market. The processing of outsourcing mart in business in the US has reached to $543 billion manufacture, including industrial accounting for about 44% that makes about $239 billion and the department of logistics touching the heights with $81 billion making up 15% of the total market (Brown & Wilson, pp. 19-22, 2004). While the other side of the picture, finance and accounting sector, organization, client care, processing of financial dealings, and department of human resources and its management constitute 41% of the processing of outsourcing in business (Brown & Wilson, pp. 19-22, 2004). Thus, it is mandatory to consider the two different segments of manufacturing procedure and logistics. Until now there are only few researches done in this regard. In the year 2000, few experts (Cornelius, pp. 50-54) analyzed the impact of recent information technology external outsourcing on the wealth of stock of an organization for the seven-year time span starting from 1990; it had the sample size of about 76 announcements. He discovered that there exists a positive and significant value of market benefits in comparison of smaller and larger organizations and that of service and non-service industrial organizational companies. Another study (Burkholder, pp. 67-78, 2006) discovered that there exists a schematic and statistical important positive response of the market to outsourcing of business processes. It is mandatory for the organizations to judge the potency of advantages and the relevant risks when it comes to choose externally outsource logistics and manufacturing processes. The paper anticipates that the stakeholders would observe the significant cost reduction and improved functioning of outsourcing that would result in overbalance of significant political, industrial, and operational dangers. Moreover, these researches indicate that there exists a positive response in the stock market because of an announcement of information technology outsourcing in the recent years. The selection and execution of different sourcing strategies immediately affects the operational function. The functioning of supply string relates to organizational and monitoring evaluations in departments such as estimating and designing precision, supplier functioning, delivery functioning, capacity, and quality of the respective sector (TGRP, pp. 1-12, 2005). Although every organization will adopt monitoring evaluations to the best of their concerns, the functioning of an organization is the key factor in deciding the efficiency, dependability, and reaction of the supply string. Efficient skillfulness, dependability, and reaction of supply string have an impact on flow of cash, profits, company’s repute, and credibleness (TGRP, pp. 1-12, 2005). Therefore, stakeholder wealth undergoes a positive or negative effect depending on the situation. Stakeholder regards upper managerial hierarchy and implementation abilities by apportioning a bounty for it. This model indicates that outsourcing affects short and long-term schemes. The analysis from the respect of cost indicates that it is the one significant cause that companies or organizations regard this strategy (Strassmann, pp. 1-53, 2006). Another important significance of outsourcing is that it deeply affects the income statement of the business organizations, as paying an outsource vendor is more convenient than possessing and campaigning pulses or paying the internal service providers. Moreover, this makes the achievement of increased functioning and extended productiveness possible when day-to-day business operations undergo complete attention. In addition to it, the other significant impact of outsourcing is that it affects the status of customer service, as the company becomes more efficient in quality while bearing the same or less expenditures. An organization develops reliability when it allows third parties to do any internal process. This reliability and dependence might go wrong and result in trap if the third party does not have complete knowledge and skill of carrying out the project. Experts define this situation as knowledge outsourcing that makes the supplier capable enough to perform the activities towards the end. However, seeing the other perspective, this phenomenon enables the company to develop and accept innumerable business opportunities, for instance, some of the advantages include the transfer of dangers to marketers, summing up and implementing best business exercises, keeping pace with the new technological advancements, enjoying benefits of economical scaling, and have more flexibility (Raiborn et al, pp. 347-356, 2009). Therefore, the investors and the stakeholders visualize the bright future ahead and regard it as a bounty in comparison to small firms. Moreover, lifting working capitals is much easier and the cash flow in the future is more obvious. That is how the capacity of outsourcing is an important strategic decision for organizations. The most significant yet complex face of businesses today is that of human resource management. The upper hierarchy in management feels it quite hard to employ human resource managers that can develop and maintain an efficient monitoring and control of the workers and ease them in increasing the functioning of organization. The increasing prices and the lifting inflation have made many organizations to see the new aspects of human resource, commonly known as outsourcing (Raiborn et al, pp. 347-356, 2009). The outsourcing in human resources managements delivers benefits to the organizations and provides certain barriers as well; however, the benefits are far more than the limitations. The benefits include cost reduction and increased functionality. HRM with respect to outsourcing enables the company to enjoy more benefits at a relatively low cost (Ivancevich, pp. 42-44, 2004). The companies in Europe and North of America are the chief advocates of outsourcing HRM affairs, since they confront the enormous challenge of limitations in finance sector and comparatively lifting considering rates in spite of increasing inflation. The upper management hierarchy feels it more convenient to reassign the employ selection and other management task to a third party who is skilled at it but have its base in some other region (Mullins, pp. 88-92, 2007). The fundamental task of an HRM supplier is to enroll and handle the employees while taking this load off from client’s shoulder. Therefore, the company or the client can attend more to its working projects and tasks relating to increment in efficiency of the company. The reduced pressure and responsibility from the client’s shoulder enables the company to undergo better functioning and increased efficiency (Mullins, pp. 21-26, 2007). The experts of HRM outsourcing, however, have a different opinion, according to experts, assigning certain managing tasks to an outside vendor can result in price or damage to the company’s repute. Moreover, this situation can also lead to breach of trust and rupture of privacy as the third party can strengthen its ground in company’s roots and can share these secrets to any outsider. The school of thought also indicates that the mode of transferring the wages and other modes of accounting and financial transactions can result in financial defalcation and other related things. Financial advantage The most significant benefit of outsourcing with strategic alliances is the financial enhancement, and subsequently, assurance of increased returns to the shareholders that is the topic of this paper as well. In specific, a company has to confront a huge number of HRM issues that requires financial resources, as well as time of the management that could have been useful in some other imperative matters. In order to avoid issues, companies usually hire tens and hundreds of HRM workforce to resolve these issues that affects the company financially in an adverse manner (Harris et al, pp. 49-52, 2003). In recent times, the size of an organization decides the number of HRM employees, where multinational companies have hundreds of employees in the HRM department. All this enforces a company to face expenditures involving salaries of HRM employees, as well as their auxiliary benefits (Marchington & Wilkinson, pp. 77-82, 2005). In the result, there has been trend setting of outsourcing HRM affairs that is enabling companies to make drastic reduction in their costs, and subsequently, it is benefiting shareholders with increased returns. Some studies have indicated even 100% savings after outsourcing, particularly outsourcing from developing regions that usually have lower rates of labor costs. Oracle Inc. is one of the significant examples that have been benefiting from this advantage of outsourcing to cut drastic costs. Management flexibility Besides financial cost-cuttings, management flexibility is one of the advantages of outsourcing that allows a company to concentrate on other issues that facilitate in reducing costs on the other side. In other words, outsourcing enables an organization to divide management responsibilities with strategic alliances (Raiborn et al, pp. 347-356, 2009). For instance, companies can take over the responsibility of recruitment and selection while allowing outsourcing vendor to manage complicated issues like salary accounts, benefits, monitoring, evaluation, etc. It is an observation that such flexibility enables management to focus on core policies for customers, as well as employees that in return, provide enormous benefits extrinsically, as well as intrinsically. Thus, with the help of outsourcing, management is able to work for the enhancement of company’s standing in the market, rather than staying busy in solving personal issues and monitoring employees for interpersonal grievances. Risk reduction Risk reduction is another crucial advantage of outsourcing that ensures increased returns to the shareholders. Experts have indicated that companies are nowadays putting efforts to arrange reduction of risks that will enable improvement of their standing in the market. Studies regarding risks have identified a number of risks associated with companies, such as huge rate of employee turnover, lawsuits, as well as liabilities (Mullins, pp. 88-92, 2007). In this regard, a number of organizations, especially small medium enterprises cannot pay the expenses of abovementioned complexities, and thus, outsourcing is the best solution to such problems that enable a company to overcome its financial problems by reducing business risks (Cornelius, pp. 44-59, 2000). In specific, a number of companies have now outsourced development of IT payroll systems, and some have even outsourced their human resources to avoid expenses, such as insurance plans, employee benefits, etc that has allowed them to manage their risk reduction factors in an appropriate manner. However, it is an observation (Raiborn et al, pp. 347-356, 2009) that outsourcing has not been a notion of success for every business organizations, and few studies have pointed out problems and issues regarding outsourcing with strategic alliances that have resulted in adverse effects on the companies’ financial, as well as market positioning. In this regard, it will be very imperative to discuss some of the drawbacks of outsourcing that comes along with the benefit of increased returns for the shareholders. Breach of privacy Breach of privacy has remained the major concern for critics and adversaries of outsourcing globally. Experts (Raiborn et al, pp. 347-356, 2009) have argued that strategic outsourcing, and especially HRM outsourcing is the major factor of distribution of company’s secrets to third parties, such as specifics of IT systems, employee details, customers’ details, etc that can be crucial and even adverse in some cases (York, pp. 23-25, 2009). Although such critics are correct at some point; however, (Professional Employer Organization) PEO-based HRM and strategic outsourcing is the innovative methodology that provides ranking and standing of outsourcing vendors that allows a company to select a reputable outsourcing vendor for specific purposes. In this regard, selection of reputable vendors for outsourcing IT-related projects, human resource, etc reduces the chances of breach of privacy. For instance, JPMorgan Chase is one of the companies that prefer only reliable organizations such as IBM for outsourcing its strategic functions. Poor management Although PEO rankings have been able to reduce and eliminate the disadvantage of breach of privacy; however, some experts have argued that usually companies outsource their functions in the other continent to reduce the costs that results in alteration of culture, values, and organizational standards (Burkholder, pp. 1-19, 2006). In other words, reduction of costs results in loss of organizational trust and management that in the end, affects the value of shareholders. In other words, companies acquire cost-effective outcomes in the short-run; however, studies have indicated poor management by outsourcing vendors due to low standards in the other region. In order to save huge costs, companies often rely on new outsourcing vendors that often offer low-cost outsourcing facilities to acquire the projects; however, such ventures usually result in a mess and waste of resources for the companies (Galanaki & Papalexandris, 2007). Thus, outsourcing may provide increased returns to shareholders in the short-run; however, it causes loss of reputation in the market that causes adverse effects on the company. For instance, Bank of American went through the process of outsourcing for its human resource, and confronted huge number of issues in terms of poor management, lack of control, lack of innovation, etc with its outsourcing vendors: Flatiron for FleetBoston and the Exult for Bank of America. In the result, the Bank of America had to turn back to its internal company structure for realignment of its HRM. Overall, besides IT and support functions outsourcing, HRM outsourcing has been a significant approach of reducing risks and increasing financial benefits of the company. Although paper discussed some of the drawbacks associated with HRM outsourcing that are similar to support functions outsourcing; however, PEO-based outsourcing will facilitate companies in the future to avoid such drawbacks and ensure increased returns to the shareholders by improving standings of the company. It is true that some companies have had bad experiences with the outsourcing, such as the American International Group that came near to bankruptcy due to its HRM outsourcing; however, it paid the price, confronted losses, and went back to its internal structures (TGRP, pp. 1-12, 2005). At the same time, JPMorgan Group has continued to outsource its functions to IBM and has been enjoying benefits. Thus, it is very imperative that companies should plan and select efficient outsourcing strategies to reduce costs while handling other issues as well. Besides HRM outsourcing and earlier discussions, few recent researches have pointed out towards new trend that is emphasizing only on reduction of costs rather than long-term relationship with clients and customers. A basic factor of such focus is the economic recession that is inclining every business organization to reduce its costs in order to survive in the market. However, experts have argued that such focus will only provide limited positive outcomes, and most companies will be disappointed later on due to adverse effect of limited vision and focus. In a survey, more than eighty percent of companies indicated that they were enjoying more than 25% percent of return on investments with their strategic outsourcing alliances (TGRP, pp. 1-12, 2005). However, more than fifty percent of the companies clarified that alignment of outsourcing vendors with the business policies and objectives is an important step that often becomes the decisive factor in terms of success or failure of an outsourcing project, and thus, in deciding increased or reduced value of the shareholder. In this regard, experts (Burkholder, pp. 1-19, 2006) have indicated an urgent need for altering perspectives of companies’ executives in their understanding of outsourcing ventures. Analysis has indicated that companies usually do not create an outsourcing plan and leave everything on the outsourcing vendor that later create contradictory outcomes, and may cause drawbacks discussed earlier in the paper. Moreover, companies should now start taking outsourcing as more than a way of reducing costs, essential for maintaining ranking in the market. Moreover, like every country has a different culture, similarly, every company has a different and diverse organizational culture, and thus, it is not necessary that an outsourcing plan successful for a company would yield similar positive outcomes for another company. Thus, it is important that companies’ executives should go for outsourcing through strategic alliances, but in a planned manner, in order to provide shareholders with an opportunity to receive increased returns. Lastly, evaluation is an imperative step that often does not receives its significant importance; however, companies’ executives should evaluate different aspects of their outsourcing projects to identify good and bad perspectives that may allow them to act and plan accordingly in the future. As earlier mentioned, selection of outsourcing vendor is as important as fuel in the car, and thus, companies should not take such steps and decisions in rush. Moreover, while confronting losses and issues with strategic outsourcing alliances, companies often blame their vendors for losses; however, they never evaluate their own plans and do not assess their outsourcing ventures according to their company’s policies that automatically results in reduced returns to the shareholders, and deteriorated position of company in the market. Conclusively, outsourcing through strategic alliances is one of the significant strategies to reduce costs within organizations, and it offers shareholders with a prospect to collect increased returns. In brief, companies should alter their perspectives and take outsourcing as a strategy of value creation rather than a limited intervention of costs reduction. Finally, the paper has discussed some of the significant aspects of outsourcing and its impact on shareholder value. It is an expectation that the paper will be beneficial for students, teachers, and professionals in better understanding of the topic. References Burkholder, Nicholas C. (2006). Outsourcing. John Wiley & Sons. Cornelius, Nelarine. (2000). Human Resource Management: A Managerial Perspective. Cengage Learning Business Press. Harris, Hilary, Brewster, Chris & Sparrow, Paul. (2003). International Human Resource Management. Chartered Institute of Personnel & Development. Marchington, Mick & Wilkinson, Adrian. (2005). Human Resource Management at Work. Chartered Institute of Personnel & Development. Mullins, Laurie J. (2007). Management and organizational behavior. Prentice Hall. Raiborn, Cecily A., Butler, Janet B. & Massoud, Marc F. (2009). "Outsourcing support functions: Identifying and managing the good, the bad and the ugly." Business Horizons. Volume 52, Issue 4, pp. 347-356. Steven M. Bragg. (2006). Outsourcing. John Wiley & Sons. Strassmann, Paul A. (2006). “Is Outsourcing Profitable?” Lecture Series of March 2006. George Mason University Press, pp. 1-53. TGRP. (2005). “Shareholder Value and Outsourcing.” A Trestle Group Research Publication. Issue of winter 2005, pp. 1-12. Ivancevich, A. (2004). Human Resource Management. Springer. York, Kenneth M. (2009). Applied Human Resource Management: Strategic Issues and Experiential Exercises. Sage Publications Inc. Galanaki, Eleanna & Papalexandris, Nancy. (2007). Internationalization as a determining factor of HRM outsourcing. 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