Outsourcing in Business Firms - Essay Example

Outsourcing in Business Firms Outsourcing describes the process of contracting some of a company’s functions to an external company. This means that some of the tasks that would otherwise be handled by the company’s own team of personnel are given to a contracted firm. Where this is done with members of another country, it is called offshore outsourcing. Any business, small or large, may decide to outsource in order to streamline its assets for best advantage and therefore enable the company meet its target goals and objectives (Hill, 2009.p.304). This paper seeks to assert the vital role and importance of outsourcing in today’s business world. Thus for most companies and economies, outsourcing cannot just be a matter of convenience, but is rather convenient indeed. The paper will also analyze key challenges facing outsourcing while putting a special emphasis on the possible solutions based on Kaplan Norton’s Sore Card. Outsourcing has become a routine in most business organizations. Organizations decide to outsource various tasks due to some important reasons such as cutting down operating costs, getting access to dynamic capabilities, enhancing company focus and saving internal resources for other important purposes. Invention of technologies and dynamic market changes has called for outsourcing in business organizations. Outsourcing helps ensure efficiency and continuity in business since in the business world, workers may not always guarantee living up to expectations. For instance expanding information technology and development of new business models has had substantial impacts on the sort of out sousing relationships applied in different business models (Engardio, 2006). It is true to state that some companies have engaged in strategic outsourcing of mainly “noncore” activities. This implies that these activities are not constituent part of the particular company’s distinctive competencies and thus do not substantially affect the company’s competitive advantage. The company will resort to outsourcing in order to gain immediate access to specialized professionals for the functions being outsourced hence eliminate the need to train personnel for these functions. This is very important as it helps enhance the company’s product differentiation (Hill, 2009.p.306). Furthermore, by outsourcing, the company is able to concentrate on more important activities rather than get involved in every single activity. This is important because companies outsource with an aim to strengthen their business models so as to enhance profitability. Quite a number of companies have engaged in outsourcing and especially so in manufacturing functions. For instance, Gap Inc., does not make its jeans and clothing, Nike does not make its own shoes, and even Apple Inc., does not make any of its products (Hill, 2009.p.304). Having mentioned that most companies engage in outsourcing manufacturing functions, it is necessary to note also that a lot more different “noncore” functions are usually outsourced. For example, over the years, both Microsoft and Dell have totally outsourced their customer technical support teams and have established qualified customer support operations in India at only a fraction of pay compared to the US team. Another example is where BP outsourced to Exult (a San Antonio Company) a substantial part of its human resource function through a 5 year deal at an estimated cost of $600 million, and in a few years after this deal, Exult was given a 10 years HRM contract by the Bank of America to cover all the150000 employees of the Bank at a cost of $1.1 billion. In yet another outsourcing deal worth $4 billion, American Express fully outsourced its IT functions to IBM for a seven year term (Hill, 2009.p.304). While outsourcing, it is crucial for an organization to right-size its contract manufacturer so as to secure more convenience. Outsourcing is a vertical integration and reduces business costs and therefore intensifies pressure on rivals (Porter 1990).The organization should consider the fact that not all companies in a position to cater for the organization’s demands can be able to handle the amount of business that the organization may offer. In right-sizing its contract manufacturer, the organization has to put into consideration Kaplan Norton’s score card. The organization’s financial perspective should be pivotal (Kaplan & Norton, 1992). This is due to the fact that in any outsourcing relationship what matters most is the amount of money the organization gives in exchange. Both the organization and the outsourcing company want to measure the amount of revenue that they are bound to get out of the relationship. According to Michael Porter (1990) companies that achieve a competitive advantage must carry out innovations in their product offerings, in their services and in the way they conduct business and operate in the market place. Therefore the organization should weigh and determine whether outsourcing with a smaller or a bigger company will help it get the right projection in the dynamic market and boost its performance as well as block any potential competitors (Porter, 1990). Failure to determine the contract manufacturer’s interest in the business can have adverse effects on the organization’s performance. For instance in 2008 when Dell company outsourced its computers operations to India and developed major call centers in Chennai and Bangalore, there ensued a lot of complains on poor customer service and the outsourcing company was not ready to take control of this because it had little interest in the whole deal (Manning, 2008). According to Forster & Browne (2007) predicting with reasonable accuracy is crucial in outsourcing. This is due to the fact that although uncertain, forecasts lay out the foundation for an organization’s credibility with another company. Tony Hsieh C.E.O of Zappos company in his interview in New York Times was quick to note that outsourcing with companies to provide customer care services in call centers entirely relied on whether these companies were able to please and meet the customer’s needs. Therefore, although there is no guarantee that a company will forecast accurately, it is important to consider reasonable accuracy. This accuracy can be boosted by making forecasting an institutional process which is collaborative and cross functional within an organization. Based on Kaplan Norton’s score card, is crucial since it enables a contract manufacturer to oversee the amount of revenue that he is bound to generate from the organization (Phelan, 1999). When forecasting, all the foreseeable risks are also put into consideration hence helping ensure more efficiency in the whole process of outsourcing. Therefore, necessary measures should be taken to ensure that the forecast is attainable and enables the contract company to predict the amount of revenue that will come out of their services (Mintzberg, 1987). Minimizing an organization’s inventory liabilities is also a crucial factor which calls for outsourcing (Rothman, 2003). Inventory liabilities are often ignored and even unclear in some organizations. In order for the organization to acquire business growth as reflected in Kaplan Norton’s score card (1992), inventory liabilities should be at centre stage of any outsourcing project. Engardio (2006) asserts that eliminating price surprises is a principle which must be adhered to when a company decides to outsource its tasks. Speeding through the sourcing process can result into inaccuracy and mistakes which are difficult to curb when they have occurred. Also Kaplan Norton’s scorecard is clear that in measuring an organization’s performance and promoting convenience, it is important to consider the business structure and forecast on how it turn out to be (Kaplan & Norton, 1992). Outsourcing also helps enhance convenience by giving room for monitoring product quality before and after shipping (Hitt et al, 2007). This helps ensure that an organization’s products are at par with its competitor by ensuring that they are of the required quality. It is apparent that it can take a couple of years to mould and come up with a reputable brand name while if can only take a couple of hours to destroy this. Outsourcing is out to help maintain the brand name by ensuring that products are subjected to scrutiny during the manufacturing process and that they meet the customer’s demands of quality as asserted in Kaplan Norton’s score card. Outsourcing gives the organization quality time to check out for both the manufacturing line and the field for any discrepancies which can affect the quality of the product (Rothman, 2003). Outsourcing is very crucial in ensuring that product changes are effectively managed (Manning, 2008). Most organizations are faced with the challenge of ever-changing economy which is reflected in dynamic customer demands. Such changes are bound to put pressure on unforeseen pressure on an organization and hence affecting its performance. Therefore, to keep at par with the dynamic technological and economic changes, companies are forced to outsource some tasks (Engardio, 2006). A robust foundation has to be laid down before resolving to make such managerial changes. This is achieved through utilization of internal organization tools such as available data as to ho the product ought to be build and sharing this data with the potential contract company. Also communicating the proposed change appropriately to the contract manufacturer helps the organization accommodate the dynamic market effectively. This is because the contract manufacturer who is experienced and more exposed to such challenges has the capability to positively accommodate this change and it is reflected in the final product (Manning, 2008). Also a contracting manufacturer who is well conversant with his field is able to foresee certain technological changes and notify the organization in time so that the organization is well prepared to accommodate the coming challenges. Another principle that Engardio (2006) asserts ought to be adhered to when an organization is contracting with an outsourcing company is the principle of defining an exit path with the outsourcing company. This will help ensure that the outsourcing company provides its services as stipulated in the agreement to enhance convenience in the organization. More often trying to manage the end of a relationship is viewed as creating enmity and it is therefore left unturned until when the organization come face to face with this challenge. Therefore, regardless of a strong bond that may exist between the organization and the contracting company, the organization has a task of clearly outlining the limits of the relationship and conditioning on what it might not condone. This can be achieved by defining the obligations of each party to the contract and including all operational details with regards to terminating the relationship (Engardio, 2006). These details may include a termination for convenience clause which should be negotiated with the contracting marketer and his views reflected. In the termination clause it should be clearly explained how finished goods inventory and work in progress should be handled in case of such an occurrence. This helps ensure that convenience is observed and maintained within the organization (Rothman, 2003). Another principle which ought to be observed in order to attain maximum convenience from outsourcing is assigning work to the appropriate contract manufacture (Phelan, 1999).This is crucial as it can bring the whole market demand for the product stumbling down. This is the reason as to why all organizations prefer having competent staff members in the contracting company. This helps organizations ensure that the teams they are conversant with during the outsourcing process are the same teams that carry out the process of manufacturing hence maintaining convenience. As a result, an organization has to ensure that it makes a powerful positive impression when carrying out the outsourcing process by getting to understand where its needs more help and the manner in which this help can be attained (Mintzberg, 1987). Outsourcing is crucial in enabling an organization make both short-term and long-term strategic financial plans. According to Forster & Browne (2007) in today’s dynamic and competitive market economies, an organization’s sustainability and survival is largely based on its capacity to make both short-term and long-term strategic plans. The success of decisions that the company make when reacting to external and internal forces is determined by this capacity. With the day to day environmental changes experienced organizations are either categorized as being proactive in such a manner that they are in a position to define their own destinies and diligently work to achieve these destinies. Others are categorized as being opportunistic in that they are only out to eye at opportunities and take advantage or these opportunities when they sport them. Lastly, others are termed as being reactive in such a manner that they accept whatever the world gives them and as a result they are in a position to cope up with change (Mintzberg, 1987). Successful companies such as the National Stock Exchange and Honda Motors outsource chief financial officers hence have access to a wide range of oriented expertise experience (Forster & Browne, 2007). Business process outsourcing has also proved to play a critical role in enhancing a company’s convenience by facilitating the process of redesigning the whole business which ends up improving the whole business chain from manufacturing to market demand (Hitt et al, 2007). Business process outsourcing helps in ascertain the total cost in offshore manufacturing. Business process outsourcing also helps determine the appropriate labor force and production process to be involved in coming out with quality products to underpin an organization’s competitors (Hitt et al, 2007). This process helps an organization to come up with a cost model which analyzes the components and validity of the supply chain hence making it easy for the organization to point out where a problem lies (Rothman, 2003). In circumstances where an organization is not in a position to cope up with environmental directives in its production process, outsourcing becomes handy. These directives might be like those imposed by the European Union’s Restriction on Hazardous Substances (Mintzberg, 1987). In summary, outsourcing has evolved to become essential in an organization’s entire managerial structure. In 2005, New York Times published the top 30 benefits that accrue from outsourcing. Most of them are what the paper has just analyzed above (Rothman, 2003). Others include minimization of capital outlays, elimination of investment fixed infrastructure, controlling of operating costs, eliminating peak staffing problems and improving efficiencies trough economies of scale. Due to these undeniable benefits that come along with outsourcing, most prominent and successful companies are applying outsourcing to maintain their performance standards and cope up with the dynamic markets. 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Rothman, J. 2003.11 Steps to Successful Outsourcing : Acontrarian's View. retrieved on 13th April 2011 from http:www.computerworld.com Read More