The Conception and Reasons for Outsourcing - Literature review Example

Introduction

The conception of outsourcing originated from the American phrase “outside resourcing”, implying to acquire outside resources. This phrase was later utilized in the economic terminology to show the utilization of external resources to develop a business. Outsourcing is an ancient practice, which was first used in the World War II. ASEFESO (2012, p. 14-6) defines 0utsourcing as “the act of transferring some of an organization’s repetitive internal activities and decision-making privileges to outside providers as stipulated in a contract”. Outsourcing differs from consulting in that it involves repetitive activities, and a contract is used (ASEFESO, 2012, p. 18). Needless to say, activities are not the only items transferred but the factors of production and decision-making rights. Factors of production are defined as the resources that make the repetitive activities happen, and examples include technology, equipment, facilities, people and other assets. According to Rajan and Sadhana (2007, p. 2), outsourcing involves the transfer of control from the organization to another.

Reasons for outsourcing

Outsourcing is a concept that has revolutionized how international companies do business. Though the conception of outsourcing had been present for decades, it was first introduced in strategic management in the 1980s through the theories proposed by Porter and Handy (ASEFESO, 2012, p. 17). This brought into focus how companies should formulate strategies and focus on the skills they have and outsource the rest to save on cost. Presently, outsourcing is considered a restructuring strategy for organizations that assist in building chief competencies. Arguably, the quest for a competitive advantage has been the impetus for outsourcing among companies. Globalization and competitiveness compel organizations to seek effective ways of developing and using information technologies information to attain competitive advantages and heightened performance (PavniCengage Learning, 2009, p. 1-2). The development of information systems has become particularly costly, necessitating highly trained personnel. To survive in the highly competitive business environment, organizations have to be efficient, and offer products and services at the lowest cost possible (Wiegmann et al., 2011, p. 24). Nonetheless, the preferences and requirements are in an incessant transformation. To deal with these challenges, organizations have adopted outsourcing that allows them to transfer the obligation of having specialists, equipment and facilities to a third party (Cengage learning, 2009, p. 3).

According to Wilensky (2012, p. 45-49), businesses that outsource experience reduced administrative expenses and increased operating income compared to those that do not. Cost cutting is one of the primary justifications for outsourcing among companies. Essentially, almost all businesses cite cost reduction as the primary impetus for adopting outsourcing (Cengage Learning, 2009, p. 2). According to Schierhold (2012, p. 4), nearly 80% of the companies that outsource have acknowledged a 4% decrement in administrative costs within the first years of adoption of the business model. Outsourcing has been widely used by companies to run their call centers. Running call centers can be costly for organizations (Cengage Learning, 2009, p. 2).

Additionally, outsourcing allows firms to concentrate on their major business processes and transfer the routine and time-consuming activities and operations to other external agencies and providers (ASEFESO, 2012, p. 21). By producing locally, many organizations find themselves allocating more time to the local activities. By manufacturing overseas, the production is done by the vendor, and this allows the organization to rely on the outsourced provider (Pavnik, 2011, p. 8). Rajan and Sadhana (2007) acknowledge that the operational activities of foreign production lie within the mandate of the outsourced vendor (p. 2). Outsourcing assists companies gain proximity to resources (Wiegmann et al., 2011, p.64-7). Eastern and Central Europe companies have been expanding to Northern and Eastern Africa to set up subsidiary companies. This has been attributed to the low costs of operation and availability of cheap resources (Wiegmann et al., 2011, p.65).

The benefits of outsourcing to the developing nations

In the past decades, international companies with organizations in developed countries have progressively turned to developing nations to expand their operations. In most cases, the commonly outsourced activities include information technology support, data entry, and accounting (Cengage Learning, 2009, p. 3). Examples of outsourcing include the American organizations that have outsourced jobs to China, British banking companies that have outsourced jobs to India and German organizations that have outsourced accounting services to Poland. Because of the use of the available resources in the developing countries, there has been an increase in the jobs available to the local people (International Bank for Reconstruction and Development, 2012).

India is an excellent example of a developing nation that has benefited from outsourcing. India has been a key outsourcing partner for United States companies (Wiegmann et al., 2011, p.52-4). India is well known for outsourced call centers that offer call center services to different multinationals (Cengage Learning, 2009, p. 2). These call centers have played a role in India as they have offered thousands of Jobs to the qualified and unemployed people within India (Baccheta et al., 2009, p. 5-7). Additionally, outsourcing has assisted the developing countries through the transfer of technology from the developed nations (Wiegmann et al., 2011, p.74-7). For instance, India has benefitted from the transfer of computer technology from the United States. This is seen through the modern computer technologies that the multinationals provide to the outsourced companies to aid in the routine operations of the enterprise (Wilensky, 2012, p. 37-9).

Other countries that have been targeted for outsourcing include Mexico, Brazil, Philllipines, China, and Malaysia. Outsourcing in these nations has been an enormous lift to employment. It is anticipated that the number of employed people could rise by 30% in Mexico in the next six years (Brown et al., 2010, p. 4-6). Notably, the jobs that are generated by these companies are not only low-end jobs but also high-skill jobs years (Brown et al., 2010, p. 4-6). For instance, there is a Jack Welch Technology Center in Bangalore in India that designs planes. With the increasing number of people graduating in the developing nations, getting employment has been a challenging affair years (Brown et al., 2010, p. 4-6). As a result, most of the outsourced companies have been offering jobs to such individuals to aid them in gaining experience and attain a rung of the career ladder.

Limitations of outsourcing to the developing nations

Outsourcing is not welcomed by everyone in the developing countries. The primary reason for the anti-outsourcing band has been the cited loss of local cultures and the fast pace of life threatened by internationalization (Cengage Learning, 2009, p. 3). Many of the people in the developing nations live in the villages away from cities and are observant of their cultures. However, the advent of outsourcing has brought with it changes that are slowly eroding the cultural values of the people (Cengage Learning, 2009, p. 3). Additionally, expansion of multinationals to developing nations increases competition to the already existent small scale companies and eventually drive them off the industry. For instance, before the entry of British American Tobacco into India, there was a group of women who used to make locally incense sticks as part of the cottage industry but did not last for long after entry of BAT as the company also started producing incense sticks (Cengage Learning, 2009, p. 3).

Also, outsourcing has been criticized for offering poor working conditions to the people in the developing nations (Brown et al., 2010, p. 4-6). Notably, outsourcing companies have been accused of overworking personnel and offering low wages, particularly in the manufacturing sector (Brown et al., 2010, p. 8). For instance, many production businesses in China do not provide favorable working conditions and do not adhere to working standards as compared to the United States and other developed nations (Brown et al., 2010, p. 3). Notably, though some multinationals have strict rules on working conditions and the worker’s welfare, outsourcing implies that the new employee will work for the company but will not have similar rights as the one employed directly by the company (Brown et al., 2010, p. 4).

The level of economic growth attributed to outsourcing for the developing countries.

Outsourcing has had economic effects on developing nations. Though global outsourcing is responsible for the loss of a few job opportunities in the outsourcing company, it has been beneficial to the developing nations (Rajan and Sadhana, 2007, 2). This is because the establishment of companies in the developing nations brings economic gains to the country. Outsourcing makes the products and services of a multinational cheaply available to the locals in a developing nation (Rajan and Sadhana, 2007, 2). This is due to the low costs of production involved.

Global outsourcing has also played a key role in opening up markets to exports growth and employment creation (Rajan and Sadhana, 2007, 2). Outsourcing opens up the internal markets of the developing nations to imports and exports. For example, there has been an increase in the imports to China and India due to the increased outsourcing in the nations (Cengage Learning, 2009, p. 3). Notably, the total imports to India have increased considerably from $2.5 billion in 1990 to $8 billion in 2015 (Cengage Learning, 2009, p. 3).