Why Organizations Outsource and the Risks and Benefits Associated with Outsourcing - Literature review Example

Why organizations outsource and the risks and benefits associated with outsourcing Name Professor Institution Course Date Why organizations outsource and the risks and benefits associated with outsourcing In normal cases, not every company can be able to supply all their needs. As such, they need the assistance of other firms to do so, by a creating outsourcing relationship. Numerous firms currently outsource their activities in order to enhance operational effectiveness and increase concentration on the major competencies. Kakabadse & Kakabadse (2000, p.670) claims that outsourcing encompasses several business processes like management of information technology, manufacturing, logistics, human resource management and financial services. According to Harland et al. (2005, p.832), the outsourcing’s drivers and advantages have broadly been documented in several literatures, but serious opinions have also been put forth indicating potential weaknesses and risks. Based on the outsourcing topic, this essay will discuss some contrasting views and perspectives from the academic literature in relation to outsourcing and the different types of outsourcing. Also the paper will analyze why organizations outsource and what are the risks and benefits associated with outsourcing. In the business arena, outsourcing is defined as an aspect of contracting out ones business process or processes to the third party (Contractor, Kumar V & Kundu 2010). Blinder (2006, p.115) contends that it is in the 21st century that the word "outsourcing" turned out to popular in the US. In some cases, outsourcing has involved transferring assets and workforce from a company to company. Outsourcing has also been used to illustrate the process of transferring control of services to other corporations. Outsourcing can domestic or foreign contracting, and may also include relocating or off-shoring one or many business functions to another nation (Beaumont & Sohal 2004, p.689). This essay, however will discuss offshore outsourcing where two firms enter into a contract entailing exchange of the services and payments. Research has established that this form of outsourcing help companies perform better in their major competencies and reduces expertise or skill shortage in activities they intend to outsource. According to Vinaj et al (2008) there are four major types of offshore outsourcing, which exist today including information technology outsourcing (ITO), business process outsourcing (BPO), offshore software development, (Software R&D) and knowledge process outsourcing (KPO). Zafar (2013) holds that in information technology outsourcing, companies enter into a contract with another to provide programming services, supplying computers, internet services. In may also be in form of software development and maintenance. In the Business process outsourcing front, the process entails contracting of the functions and operations of particular business processes to a company considered as a service provider (Mehrotra 2005). This process has been linked Coca-Cola Company, which outsourced some segments of the supply chain. This type of outsourcing is a typical back office outsourcing, which consists of internal functions like finance, accounting, and human resource. In the Offshore Software Research and Development, the supplier who comes from a different country provides services which deal with software development (Willcocks et al. 2004, p.8). The major reason behind applying an offshore software development type of sourcing is attributed to the higher cost of development from local service providers. Agarwal & Nisa (2009) posit that in the Knowledge process outsourcing context, core information-based business process is outsourced. Such activities are competitively vital for the value chain of a company. They maintained that KPO needs superior technical and analytical skills, including a high level of expert knowledge to conduct. KPO are conducted to increase specific expertise and knowledge, create extra value creation, reduce costs and improve skilled labor Baitheiemy (2003, p.87) claims that whereas outsourcing is regarded as a powerful method of cost cutting, performance improvement, and focus on the major business activities, outsourcing approach normally fail of expectations of the management. In a survey done about outsourcing in medium-sized firms, empirical evidence as suggested by the CEO holds that that carefully created outsourcing approaches increase the firm’s general performance (Baitheiemy 2003, p.87). The CEO claimed that they were able to double their operating income even before paying tax and the revenues also remained stable. Kotlarsky & Oshri (2008, p.229) argue that companies basically outsource to circumvent certain costs like peripheral business expenditures, higher energy costs, high taxes, high labor or production costs and excessive government regulation. In the case of US, the encouragement to outsource could be high for the companies owing to unusually higher corporate taxes and obligatory benefits such as Medicare, safety protection (OSHA regulations) and social security (Lewin & Vinaj 2006). Simultaneously, it looks as if U.S firms do not engage in outsourcing to decrease managerial or executive costs. For example, managers’ salary in the US in 2007 was over 400 times compared to average employees. This represents a gap of 20 times than it used to be in 1965 (Blinder 2006, p.117). In 2011, 26 of the leading US companies paid more money to Chief Executive Officers compared to what to federal taxes. Those statistics mean that the reason firms outsource services is not to circumvent general costs but to evade particular categories of costs. As stated earlier, companies rely on several processes and which they may not have expertise. In such a case, they may sort assistance in companies which specialize in such process to help them (Oshri & Ravishankar 2014, p.19). This makes the process more effective and faster. Some companies outsource to strengthen their core competence. However, the contrasting views have been made due to risks that are associated with outsourcing. Such risks are inequality, lack of data protection, process discipline, loss of business knowledge, failure of the vender to deliver, cultural diversity, conformity to government regulation, productivity fluctuations and turnover of key personnel among others. Harland et al. (2005, p.834) pine that whilst majority of IT firms as seen offshore vendor security strategies as impressive as and frequently better than their internal operations, certain risk like security infringement or intellectual property right breaches is considerably raised when operating globally. The company, which provides information technology services normally holds staff and company information which they can even leak to a competitor (Baitheiemy 2003, p.92). Similarly, the intellectual property rights are within their reach which they can ultimately deny the company. However, such cases can be resolved. For example, an Indian court recently portrayed a meaningful reaction to an issue of respect for and implementation of Intellectual Property rights in their relevant nations by awarding exemplary and in reprisal damages in violation cases (Agarwal & Nisa 2009). Companies must carefully assess business knowledge and determine if moving it to an offshore location will compromise the company’s ongoing ability to perform at the required levels. Another risk which outsourcing companies face is the business knowledge loss. According to Youndt & Snell (2004, p.341) companies are advised to cautiously evaluate its business knowledge and decide if transferring it to the offshore place will put them to risk of the continuing capability to operate at the needed levels. At times transferring the unit to a certain location or country makes it hard for a company to produce the number of goods they used to do back at their original plant (Massingham 2008, p.541). Such case leads to loss of customers. Moving a unit may also expose company secrets of business hence losing business to competitors. Vendor may also fail to deliver value in the product they supply. A widespread oversight for the information technology firms depends in not execution but the contingency plan to handle the risk which the vendor, for any grounds, has failed to deliver the required value as anticipated (Harland et al. 2005, p.836). Exposure or risks that may follow could compel the firm to suddenly change its outsourcing approach. Oshri et al., (2009, p.196) assert that government regulations may hamper outsourcing process between companies which comes from different countries. Such regulations have hindered financial and health care institutions among others. The team negotiating for the contract must make sure that the chosen offshore vendor is conscious of industry regulations and is willing to comply with sector-specific obligations and such compliance can be shown to necessary auditors (Vinaj et al. 2008). Cultural diversity has also contributed to the risks which face companies which involve themselves in outsourcing. Harland et al. (2005, p. 842) claim that even though most vendors hold cultural education courses, costs and problems linked with cultural arrangement might not be trivial or just insignificant. Turnover of the most important employees during outsourcing period often affects the outsourcing process. Such cases have been witnessed in India, where rates of turnover are at 15-20 percent range (Agarwal & Nisa 2009). A higher rates of turnover holds indirect effects on an organization due to the fact, it prompts it to increase the time they spent training new employees and on knowledge transfer. Manning, Massini & Lewin (2008, p.37) affirms that to handle this challenge, clients must demand that such contract places a “liability” on the side of the vendor for the employees that is being replaced. At times firms undergo a 20 percent fall in terms of productivity in the first year of the contract, majorly because of time spent when transferring business and technical knowledge to the third party (Massingham 2008, p.541). Additionally, cost savings realized from the offshore agreement usually rise at the cost of employees’ lay-off. Such lay-offs can result into considerable morale concerns amongst employees who continues to work, which could sometimes result to discontent and work delays In conclusion, the essay has established that firms outsource their services or products so to reduce costs of operation, enhance performance and concentrate its fewer resources on its core business. Nevertheless, the exercise can also become risky when not appropriately carried out. Firm’s managers ought to consider various factors and how they will minimize risks before making ultimate real outsourcing decision. The essay has provided contrasting views in terms of risks and also advice on how reduce the risk of outsourcing. The paper also provides a strong message that great relationship with the vendor determines the success. It therefore concludes that risk of outsourcing outdo its benefits. References Agarwal, R & Nisa, S 2009, Knowledge Process Outsourcing, India's emergence as a global leader, Asian Social Science Vol.5, No. 1, p. 34-67. Baitheiemy, J 2003, The seven deadly sins of outsourcing, Academy of Management Executive, Vol. 17, No. 2, pp.87-98. Beaumont, N & Sohal, A 2004, Outsourcing in Australia, International Journal of Operations & Production Management, Vol. 24 No. 7, pp. 688‐700. Blinder, A 2006, Off-shoring: The Next Industrial Revolution? Foreign Affairs, Vol. 85, No.2, p. 113.128 Contractor, F.J, Kumar, V & Kundu, S.K 2010, Global Outsourcing and Off-shoring: An Integrated Approach to Theory and Corporate Strategy, Cambridge University Press. Harland, C., Knight, K., Lamming, R &Walker, H 2005, Outsourcing: assessing the risks and benefits for organizations, sectors and nations, International Journal of Operations & Production Management, Vol. 25, No.9, p.831 – 850. Kakabadse, N & Kakabadse, A 2000, Critical review – Outsourcing: a paradigm shift, Journal of Management Development, Vol. 19, No. 8, p.670 – 728. Kotlarsky, J & Oshri, I. 2008, Country attractiveness for off-shoring and offshore‐outsourcing, Journal of Information Technology, Vol. 23 No. 4, p. 228‐31. Lewin, A & Vinaj, C 2006, Next Generation Off-shoring: The Globalization of Innovation, Duke University and Booz Allen Hamilton. Manning, S., Massini, S & Lewin, A.Y 2008, A Dynamic Perspective on Next-Generation Off- shoring: The Global Sourcing of Science and Engineering Talent, Academy of Management Perspectives, Vol. 22, No.3, 35-54. Massingham, P 2008, Measuring the Impact of Knowledge Loss: More than Ripples on a Pond? Management Learning, Vol.39, pp.541-564. Mehrotra, N 2005, Business Process Outsourcing — The Indian Experience, ICFAI books. Oshri, I & Ravishankar, M.N 2014, On the attractiveness of the UK for outsourcing services, International Journal of Strategic Outsourcing, Vol. 7 No. 1, pp.18–46. Oshri, I, Kotlarsky, J, Rottman, J.W & Willcocks, L.L 2009, Global sourcing: recent trends and issues, Information Technology & People, Vol. 22 No.3, pp.192 – 200. Vinaj, C, Mahadeva, M., Sehgal, S & Lewin, A,Y, Manning, S & Russell, J.W 2008, Off- shoring 2.0: Contracting Knowledge and Innovation to Expand Global Capabilities, Duke University and Booz & Co. Willcocks, L., Hindle, J., Feeny, D & Lacity, M 2004, IT and Business Process Outsourcing: The Knowledge Potential, Information Systems Management, Vol. 21, pp 7–15. Youndt, M & Snell, S 2004, Human Resource Configurations, Intellectual Capital, and Organizational Performance, Journal of Managerial Issues Vol. 16, No.3, pp. 337–60. Zafar, A 2013, Boundaries between IT outsourcing and BPO are becoming blurred: Ovum, CIO Asia, viewed on 16th September 2014 from http://www.cio-asia.com/mgmt/outsourcing/boundaries-between-it-outsourcing-and-bpo-are-becoming-blurred-ovum Read More