Advantages and Disadvantages of Outsourcing - Essay Example

Outsourcing refers to relocation of jobs and services irrespective of the provider’s location and happens when a firm contracts a business function with an outside supplier (Sourirajan, 2004). Outsourcing can take place within the same country but offshoring is relocating the jobs to another country. Thus, in general terms outsourcing refers to a buyer contracting with an outside supplier for services. Usually the firms outsource the non-core functions while keeping the core functions within their control. Outsourcing takes place in functions like human resource management, finance and account, information technology, facilities management, customer contact, logistics and supplies chain management. People see offshore outsourcing as jobs from UK being lost to India and other developing countries (Glick, 2003). Outsourcing comes with risks ass well as advantages o the firm that outsources. Due to the competitive pressure caused by globalization and internationalization, outsourcing has not become a survival issue, according to Kwintessential (2004). It helps to cut costs and keep prices down. Xanza, an IT services group has attained competitive advantage by outsourcing to India. They have been able to build science parks to take advantage of the economy. One third of the UK firms that have outsourced have expressed satisfaction. UK has been found to be the net gainer as the statistics from the Office for National Statistics in its latest Labour Market Trends survey (Computerweekly, 2005). There has been a steady increase in employment as ICT managers, as software professionals and as IT operations technicians. UK is a net producer and exporter of services because the exports are higher than the import levels in the IT sector. At the same time, according to BBC News (2008) salaries in UK have not risen in the last five years because ‘off-shoring’ of low-skilled jobs have deterred people from entering the industry while the pay for managers has risen. This has served as a deterrent for entry-level staff. Many outsourcing attempts have met with failures and communication has been cited as the main reason for this. Poor cross cultural understanding of how the other communicates, works, manages, and delivers results eventually leads to failure (Kwintessenatil, 2004). Secondly, the buyers normally have to transfer technical know how in outsourcing. The effectiveness of the knowledge transfer process is one of the critical success factors in the success of the outsourcing venture. The buyers may not share the complete knowledge with the suppliers which leaves a gap and which ultimately affects the final quality of work. On the buyer’s side, giving away total knowledge means transfer of intellectual property over which they are relinquishing their rights. The buyer’s have no control in the event the suppliers make use of this proprietary knowledge elsewhere. Business continuity risks may arise due to security breaches. There have been reports of unauthorized use of computer systems, leading to direct financial loss due to security breaches (Venkateswar, 2005). Failures can occur due to neglected business approach. Companies lack information to make meaningful cost/benefit analysis while they focus on unmeasurable service levels or cost metrics (Contractor UK, 2005). Outsourcing carries risk like currency devaluation and political unrest. These can cause major disruption for the outsourcing firm apart from the anti-West sentiments (Hemphill, 2004). Cost overruns have negatively impacted several IT outsourcing contracts. Cost overruns have been encountered by ICT projects being handled by companies like IBM, Accenture and Siemens among others. The failures have been associated with over-ambition, a lack of design and development before procurement, and pressures for efficiency savings overtaking the ability to deliver (The Register, 2007). According to Deloitte’s Enterprise Risk Services, outsourcing IT services creates strategic uncertainty because company’s reputation is at risk if the supplier lets identified down (Contractor, UK 2005a). To safeguard reputation when outsourcing a reputation risk management exercise should be undertaken which would then help to breakdown the key components of reputation. The companies could thus learn how to mitigate risks should the partners let them down. It has also been found that the IT contracts in UK are not based on a joint decision between the IT managers and the business managers. The business managers make the decision to outsource and the pass on the responsibility for the required services to the IT department (McCue, 2005). In not engaging the IT the company is not sharing the problem and failures are not surprising. Freshminds, a UK-based research company wanted to take advantage of the overseas talent. On behalf of one of their clients they needed to set up a three full-time staff and 20 consultants as the new research team. They have set up the offshore team in India but they have native-language speaking team based in the UK which has not affected the quality of service they deliver to their clients. There is no loss of quality control and the clients have not noticed any difference in service. With the new arrangements, the company can now offer the kind of local understanding and project management in the UK their customers expect (Osmond, 2004). In addition, the Indian workforce has provided them with a cost-effective way of undertaking the mundane aspects of research. The company made efforts to handpick talent from the UK but the jobs that did not bring excitement to the local people was sent to India. Indians they found are more process-driven and eager to take it than the people in the UK. While Indians are more thorough in routine jobs, the company derives mileage out of the UK talent as far as thinking about the problem or telephone interviews are concerned. This outsourcing has fetched the company a savings of 40% and even though the wages in India are rising it will be several years before they come anywhere close to the wages that have to be paid in the UK for similar jobs. This example demonstrates that the right decision about outsourcing is important. They have very successfully kept the core functions in-house while outsourcing the routine jobs for a much cheaper price that they would otherwise incur. Their decision has been very strategically taken and resulted in benefits to their client, to the company and to the Indian set up. Due to the increase in the offshore outsourcing market, companies from UK are offshoring through wholly owned subsidiaries rather than external service providers (ZDNet news, 2005). The sourcing strategies have become sophisticated as the outsourcing market comes of age. Companies have even started segregating the functions that should be outsourced and what can be brought back home to achieve the best results in the business processes. There are diverse opinions over the satisfaction level achieved by the companies but overall it appears that most companies are satisfied, and even feel it has helped them in attaining customer satisfaction. Thus the advantages of outsourcing far outweigh the disadvantages. Before outsourcing the situation has to be assessed and the outsourcing decision evaluated thoroughly. While there are diverse opinions by different studies on the satisfaction=n level of the companies, overall there are indications that more and more company are eager to outsource. This suggests that the companies are realizing the value and benefit of outsourcing. Most companies keep the core functions with themselves and outsource the routine jobs, which keeps the decisions and quality under their control. Most companies now strategically start their own set up overseas or have wholly owned subsidiaries through which they operate. To ensure that no cross-cultural misunderstanding occurs, companies even appoint a local language speaker in the UK as Frehsminds has done. Thus outsourcing is the way forward for companies that want to remain competitive in the market place. References: BBC News (2008). Offshoring bad for IT pay in UK. Available from: http://news.bbc.co.uk/2/hi/business/7419916.stm [accessed 15 June 2008] Computerweekly (2005). UK is net gainer from IT outsourcing and offshoring trends. Availabe from: http://www.computerweekly.com/Articles/2005/09/09/211722/uk-is-net-gainer-from-it-outsourcing-and-offshoring.htm [accessed 15 June 2008] Contractor UK (2005). Poor planning to topple UK outsourcing deals. Available from: http://www.contractoruk.com/news/001985.html [accessed 15 June 2008] Contractor UK (2005a). Risks of IT outsourcing exposed. Available from: http://www.contractoruk.com/news/001966.html [accessed 15 June 2008] Glick, B. (2003). All outsourcing roads lead to India. Available from: http://www.computing.co.uk/computing/features/2072354/outsourcing-roads-lead-india [accessed 15 June 2008] Hemphill, T. A., (2004), Global Outsourcing: effective functional strategy or deficient corporate governance, Corporate Governance, Vol. 4 No. 4 pp. 62-68 Kwintessential (2002). The UK and Outsourcing - Cross Cultural Implications. Available from: http://www.kwintessential.co.uk/cultural-services/articles/cross-cultural-outsourcing.html [accessed 15 June 2008] McCue, A. (2005). IT cynicism fuels outsourcing failure. Available from: http://news.zdnet.co.uk/itmanagement/0,1000000308,39231206,00.htm?r=3 [accessed 15 June 2008] Osmond, C. (2004). We offshored in India and it worked. GB Magazine. Available from: http://www.growingbusiness.co.uk/06959143453954051582/we-offshored-in-india-and-it-worked.html [accessed 15 June 2008] Sourirajan, S., (2004), GLOBALIZATION and OFFSHORE OUTSOURCING A Tale of Two Realities The Register (2007). Outsourcing overruns cost UK taxpayers £9bn. Available from: http://www.theregister.co.uk/2007/12/27/uk_public_sector_outsourcing_cost_overruns/ [accessed 15 June 2008] Venkateswar, N. J. (2005). Mitigating Operational Risk in Outsourcing. Available from: http://www.dmreview.com/specialreports/20050524/1028024-1.html [accessed 15 June 2008] ZDNet news (2005). Study: UK offshoring tide to rise. Available from: http://news.zdnet.com/2100-9589_22-5829075.html [accessed 15 June 2008] Read More