Pursuing a Business Strategy of Offshoring to India - Essay Example

Critically examine the added value to an organization of pursuing a business strategy of offshoring to India, analysing the HRM (Human Resources Management) implications of doing so” Abstract Offshoring is a modern issue and it involves Managers of all functions. In particular, Human Resource Managers have dealt with the aspect of talent pool that is vital in offshoring. This paper examines offshoring, its advantages and disadvantages; it makes specific reference to India as one of key offshoring players. It also refers to the HR implications that companies will face when they pursue offshoring. Offshoring is a relationship between a business and an external provider that is contractually bound. This relationship has become extremely popular in many business activities. Offshoring when it is combined with reengineering or a shared-services model give additional value to the changing business environment. The current global financial crisis has affected the whole business system including the off shoring industry. The companies have as primary goal to achieve cost efficiencies, increase productivity and performance, motivate employees and make them more engaged and invest in innovation. There is a great expectation from the companies on the role that HR will play in order to support the above mentioned areas. Introduction Offshoring has been a modern trend in business management. Offshoring is actually outsourcing that crosses national boundaries. It means giving some business functions previously done inside the organization in another country. The organization has to focus on its core competencies and skills and outsource the other important functions to companies located in another countries. The example of Nike is very characteristic. Nike preferred to focus on marketing and product design since these are the sectors that it believes they are its core competencies and outsource production to other countries. There has been a long discussion concerning outsourcing and British Trade Unions and US politicians have been campaigning to stop offshoring. The logic behind their campaigning is that outsourcing contributes to the rise of local unemployment rates. On the other hand recent studies have shown that for every dollar in US outsourcing created value of 78 cents whereas for the foreign country the value was 22 cents. This positive side is reinforced by the fact that offshoring contributed to the economic development of underdeveloped countries. In addition, it has been argued that professionals in countries such as India exhibit a high level of professionalism and education than their counterparts in Western countries. Offshoring has also certain problems i.e. the difference in cultures and communication problems. However, it can act as a talent pool to countries engaged in offshoring (Haag and Cooper 2006). Major Indian IT companies as a protection from possible changes in the outsourcing market, started to rely on Internet related businesses (Nasscom 2002). Why offshore? Why India? Benefits and advantages The reasons for offshoring vary from reducing labour expenses to attracting talents that are not available in the country, overcoming prohibitive regulations that hinder some activities to be done locally and entering new markets. India is one of the key players in the offshoring market and it has particularly specialized in the software business. There are various reasons for this. One is that in 1970s the Indian government required that all foreign organizations that want to do business in India they must have Indian majority ownership. Multinational companies especially U.S. organizations like IBM thought that the Indian government may decide to take over so they left the country. This made imperative for the Indian government to create schools that would train students in technology. Another reason was the technological evolution (Internet, modern telecommunications) enabled the companies around the world to do computer – based work. This type of work can be done all over the world. A further reason is that in the year 2000 corporations rent the services of some service providers in order to renew their. A lot of this type of business was done in India because it is a country where English was widely spoken and there was a large number of highly educated software engineers. In addition, India was preferred because the salaries in the country were significantly lower than in developed countries. Offshoring has been proved profitable, the organizations were satisfied by the performance of the labour force in India so they continued to invest in the country. Indian service providers that provide offshoring services are Tata Consultancy, Wipro and Infosys. Other countries involved in providing offshoring services are Russia, Ireland, Poland and the Czech Republic. A country that has similar characteristics with India i.e. highly educated population, English spoken is the Philippines. The Philippines provide mainly call centre and customer support work offshoring services. China has also become a provider of offshoring services and it has become the location of U.S. companies for manufacturing offshoring. Offshoring has become a priority of the Chinese government and it has judged it as imperative for the development of China in the future. English has become a course in Chinese schools and thousands of software engineers graduate each year. Although these countries have benefited from offshoring mostly software and call centre work, U.S. in 2000 and in 2001 faced an economic decline which has become even worse today. As a result unemployment rates increased and mostly technical workers reacted against offshoring. A further reason that hindered the evolution of offshoring was the increased concern on data security and privacy issues. Companies as a result turned to rural outsourcing i.e. the work is done inside the country in locations where salaries and operation costs are lower. This was an alternative to international offshoring and this way the negative aspects of offshoring were reduced. Another type of offshoring is “nearshoring” i.e. the work is done in a neighbour country. Nearshoring is preferred by organizations that do not want to deal with issues such as time, language and cultural issues that may have otherwise appeared Captive Centres can be considered as another type of offshoring. U.S. and European businesses have set up captive centres i.e. offshore companies that their purpose is to provide internal services in some occasions these services are sol to customers. Other types of offshoring are: moving business activities to another country as a direct employer and moving business activities to another country as an indirect employer (e.g. part of the mother company that provides services abroad). The most popular type is establishing business relationships with a third party overseas. Finally, some multinational corporations have offices internationally in order to serve their international customers and to take advantage of the labour available. These companies are IBM, HP, and Accenture etc. The types of activities most likely to be offshored are manufacturing and production followed by IT support, IT development, financial backup support, product development and accounts. (Cipd, 2006). There also some other activities that they are off shored but to a lesser extent in comparison to the above mentioned. These are: secretarial services, research and development and HR. (Cipd, 2006). Public sector outsources activities like product development and call centres. The companies that want to outsource production they would like to outsource it as a direct employer rather than giving it to a third party. The Advantages of Offshoring The organization has more time to focus on its core competencies. The organization has access to high-quality services The core business competence becomes more efficient and productive At the same time the organization by implementing offshoring may have increased productivity in areas that are non-core to its business Business operations can be better streamlined Training and manpower costs are reduced Organization becomes more flexible. The control of the business is increased Investments in technology and infrastructure are reduced Capital expenditure is reduced Management becomes more efficient since the problems associated with managing more people are reduced. The offshoring company manages its people There is better response to the demands of the customers Cash flow is improved The risk is shared with the offshoring company Operation costs are reduced Productivity in all sectors of the company is increased The Disadvantages of Outsourcing In certain occasions it is better to conduct the business process rather than giving it to another company When outsourcing is related with tax and payroll issues then there is a confidentiality risk in outsourcing In some cases it may be difficult to manage the offshore company Offshoring may lead to employee dismissals If the service provider goes out of business then the organization has to do the processes internally or search for another offshoring provider Company employees may become demotivated. If the offshoring provider offers its services to other companies then s/he may not be fully devoted to the organization The organization may lose control of the business process that is given to the offshoring company Hidden costs may arise. These hidden costs may be the legal costs of signing the contract with the offshoring company There is a danger of not paying too much attention to the customer Other problems may arise e.g. communication problems, poor quality of services, misunderstanding of contract terms etc. Benefits and Disadvantages of Offshoring in India India is the country that is a key play in IT outsourcing. India’s offshoring IT sector is growing rapidly. “ In 2004–05, the Indian offshore IT and business-process-outsourcing industry will generate approximately $17.3 billion in revenues and employ an estimated 695,000 people. By 2007–08, that workforce will consist of about 1,450,000 to 1,550,000 people, and the industry will account for 7 percent of Indias GDP” (http://www.mckinseyquarterly.com/Ensuring_Indias_offshoring_future_1660) It has cheap labour, highly trained engineers who speak also very good English, the government supports offshoring and it has advanced Technology. In addition to the high educational quality of Indian people, they also exhibit high professionalism. Benefits It is more cost-effective to outsource IT services to India. It can save up to 30% of the company’s expenditure. The company may implement projects that would have been extremely costly if they were done in a Western country. IT outsourcing helps reducing development, hiring and training costs. The services provided are of high quality. Indian’s engineers are highly trained and qualified The company focuses on its core competencies – non core activities are left to the offshoring partner. A highly skilled IT personnel offers expertise. The business becomes an expert Disadvantages The business may lose control on the project. When software is off shored transparency must prevail Communication problems. Communication is not personal since it is done through email or instant messaging. Time zone differences. There may be problems in the communication between vendors and customers since required online meetings may not take place due to the time difference. Cultural differences. Since vendors and customers belong to different cultures communication problems due to cultural differences may arise. The offshoring service provider may want to take over several projects and this may lead to a decrease in quality. Inexperienced customer. When the customer is inexperienced then in trying to satisfy him/her the project undertaken may not be go haywire. Although Indian offshoring has been proved quite successful the industry is still new. There are issues of political stability. Instabilility may affect economy. The events in Chennai (riots) led to many lost day of development and many software firms had to move from Chennai(Chiamsiri et al 2005) Mc Kinsey Global Institute Report (The Emerging Global Market 2005) mentions that although there is a great number of Indian graduates however they are not suitable enough for multinational companies. In addition, in Bangalore which is a city known for offshoring the wages rise, there is a high turnover of IT engineers, facts that make the supply of talents a difficult situation. This situation has led countries such as Hungary, the Philippines and China to challenge India since these are also low wages countries with an abundance of engineers. SWOT Analysis of Offshore IT Outsourcing to India Strengths Opportunities Access to a diverse set of skills and support for new technologies Competitive costs Widespread use of the English language Mature, experienced and stable vendors Experience with remote engagement management Ability to normalise demand for staffing Accelerated delivery/reduced project timelines (leveraging time difference) Highly trained workforce Appreciation for software quality Development disciplines Government policies & Taxation The offshore market expanding into the activities at the higher end of the value chain Weaknesses Threats High communication cost Project management Transition Collaboration Cultural issues Continuing geo-political uncertainties Sometimes intensive training needed for developers The rise of alternative geographies Potential for backlash Time zone difference Building engagements too rapidly Geographical distance between vendor and client political instability (http://rphrm.curtin.edu.au/2005/issue2/india.html) India’s Attractiveness Versus other countries Source: McKinsey Analysis (NAASCOM 2003b) Outsourcing from an HR perspective Each business area is important for HR. HR managers have to control budgets and spending, improve employee performance, tie performance with pay, finding new work patterns, find new ways of innovating and keep talent. The following areas are important for HR (Brewster et al 2007): Hiring: Employees involved are highly technically trained and they will demand high salaries therefore the cost for outsourcing may increase. Compensation and Benefits: Due to the current financial crisis employees may get no bonus. Any bonuses will be strongly linked to performance. Training and Development: Large businesses invest in training , smaller ones tend to cut training budget therefore the quality of service provided by these companies may be decreased. The Role of the HR Function: When a business grows then many of the other business teams take over HR functions. When there is a decline, managers turn to HR in order to increase productivity. In difficult times businesses should explore the opportunity to improve things. They may implement training programs for re-skilling employees and do selective hiring with people that otherwise would be difficult to find during the boom years. It has been proved that offshoring to India and other countries was significantly beneficial for big companies. Having seen that, small and medium sized companies followed the path of the big ones and established offshore collaborations. The reasons for this trend were focusing on core competencies, competition with bigger companies and attracting talent. The role of HR in outsourcing/offshoring is multiple. The role of HR in pre-offshoring planning stage is: to consult with unions, plan manpower, employee redeployment, participation in the internal communication strategy, identification of training needs, implications of labour regulations both locally and overseas, risk identification, start to work on the design and redesign of jobs deriving from offshoring. HR at this stage should be involved in considering the implications of offshoring and transferring work abroad and in preparing the communication strategy. The HR communications include drafting employees Q&As. Consulting with the union representatives is very important since offshoring may affect internal employee positions. The union representatives have to be convinced that offshoring is beneficial for the company’s future. The role of HR when offshoring is implemented is very strategic and central for managing the change process. When the offshoring project is completed HR contributes in internal communication messages HR is also responsible for hiring employees abroad and retain talented people, managing ongoing training and training needs. Adding value to the organisation / How and Why There are some further advantages to the companies involved in offshoring and these are some intangible benefits. These are the following: 1. Process Documentation: A number of companies have developed strong regional relationship with their customers and employees that have been part of the organisation for a long time helped to it. These companies have some processes that are not well documented. Offshoring gives the opportunity to the company to document these processes since the offshore partner is an expert in it. 2. Process Re-engineering: Small and medium size companies usually do not have the money to initiate a reengineering in their administration processes. Innovative service providers may help to it. 3. Skilled Resources: Offshoring industry matures and offshore service providers have developed expertise on executing specific projects and task. This is a solution for companies that face difficulties in attracting talent or retain employees. Medium sized companies can benefit by utilising highly trained personnel offshore and reduce hiring and instead they may focus on their core competencies. 4. Higher Sampling For QA: The Quality Assurance function may benefit from offshoring. The experienced offshore vendors help in improving customer satisfaction and in resolving quality issues. 5. Cultural assimilation: There is the opportunity for company employees to interact with people from different culture (the employees of the offshore partner). This helps them understand different cultures which is very important in this globalization era. The benefits are not limited to vendors, there are benefits for the offshore companies a well (Hoag and Cooper 2006). The offshore companies that are well established encourage their employees to be certified according to industry standards (e.g. US certifications) and therefore build further expertise. This way employees develop long term career paths. They also have the opportunity to get accustomed to the customers’ systems thus enhance their domain knowledge. Critical analysis of HRM implications Human resources managers are in other words ‘people’ managers and they are responsible for a number of tasks related to employees. The human resource manager in a multi-national company has all the responsibilities of a normal HR manager plus the management of offshoring operations. S/he is responsible for international human resource management (Brewster et al 2007). International human resource management functions deal with a number of various activities relating to employees and partners. Staffing needs are very crucial, HR managers are responsible for finding employees of the company and of the partner. Other responsibilities are training, recruiting, improving performance and making sure that HR policies are in accordance with laws and regulations The main difference between domestic human resource management and international human resource management is that foreign operations require additional knowledge and responsibilities. These include cultural differences with the offshore partners, language especially where the offshoring organizations are non-English speaking, national labour law and regulations, local business laws, career paths, incentives and rewards and foreign exchange rates. The most important are cultural differences and the expectations of etiquette in business transactions and contact. IHR management people should not only understand these differences but inform other employees about them in order to avoid uneasy situations. However there are some ways in resolving cultural issues (as proposed by Karine Schomer) and these are the key to success since cross cultural competency may become the competitive advantage: “Get executives to value cross-cultural training. Make the training a team effort. Bring in outside experts. Train on both shores. Integrate training into new employee orientation. Reinforce the training with mentoring.” (http://www.sourcingmag.com/content/c060911a.asp) Human resources development deals with the company personnel and its area of interest is career and organizational development and training. Nowadays, international human resource management is the latest trend for companies that operate worldwide (Brewster et al 2007). Other areas that belong to the international human resource management are the following: making sure that the working environment is a safe place through confronting issues of illegal activity like drugs, helping employees and diversity. The international human resource manager must set a number of regulations that will act as guidelines. These regulations deal with the company and there are regulations that deal with foreign nations since they have different law. It is among HR responsibilities to maintain a strong employment brand. A strong employment brand means that employees are motivated and they are in favour of the organization’s global expansion and they do not feel uncertain and become unproductive. The employment brand defines the organization’s mission and the goals that all employees work toward. It does not set unrealistic goals and it attracts workers to become passionate about the company mission and objectives. The employment brand helps to create a sense of commitment among employees, a commitment that will remain strong in good and bad times. In case of job redundancies, an employment brand communicates messages for offshoring, the positions lost as well as the outplacement services provided. Managing the employment brand is one international human resources manager key roles. Conclusion Offshoring is going to grow further and it is going to cover a wide range of business activities since technological advancements allow every role to be relocated. Organizations want to be more cost-efficient and to focus on their core competencies. So far the type of jobs that have been outsourced are IT, product development and financial backup support. HR jobs have not yet been outsourced. India has been a key player in offshoring but China is challenging it since more and more Chinese people are learning English. Poland is number three and the other eastern European countries follow. These countries have a great advantage since they are close to Western European countries and they are low-cost The reasons for offshoring are: cost reduction, shortages of skills and improvement of company processes. If a company that wants to do offshoring focuses only on cost reduction then it must be ready to face many difficulties. Offshoring may decrease employees’ morale and lead to job losses. The organizations have to be aware of language and communication difficulties since these may hinder the smooth supply of products. There are also additional problems such as poor quality, difficulties in controlling management and high turnover of staff. All these reasons make imperative the role of HR. HR should lead offshoring projects and indicate if offshoring can be beneficial for the long term. The role of HR in off shoring and talent management is very important. The key to successful off shoring is finding highly qualified personnel and establish business there. It is more expensive to bring talent. The HR manager must be an expert in managing and retaining talent and have extensive knowledge of International Human Resource Management (Dowling et al 2008). There is however a number of companies that does not involve HR in off shoring decisions or they do not involve HR when the off shoring decision has been made. This represents an opportunity for HR to acquire more strategic role and to get more involved in off shoring. According to the Cipd report (Off shoring and the role of HR, 2006) companies involve HR more in the planning phase but the level of HR involvement varies from company to company. “Our survey shows that there is more scope for the use of HR expertise in early consultation with union/employee representatives as well as in considering the scope for employee redeployment. At the planning stage HR should also already be contributing to the internal communication strategy and identifying training needs. Other roles that HR should play in the planning phase include designing new jobs arising out of off shoring and identifying potential risks.” (Cipd 2006). The role of HR is ongoing. Once the job is transferred to the off shoring company HR has to make sure that the level of quality is high. HR is a strategic business function and it should be involved in all stages of off shoring. Bibliography Adler, N. 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