Outsourcing Must Be Stopped - Literature review Example

Stopping Outsourcing

The outsourcing market has in the recent years experienced a spectacular growth, with indicators showing a possible continued growth in the future. The Sourcing Interest Group, which is a leading information exchange forum for companies involved in sourcing information technology, shared services, and business processes, pegged the outsourcing market globally at over $100 billion in the year 2005. Another company, McKinsey, which is a leader in consultancy and offers advise to its clients on the value and merits of outsourcing, gives estimates of the current outsourcing business as ten percent of the total possible. This shows that there exists a huge market that is yet to be tapped. This research paper seeks to analyze the global outsourcing industry. Furthermore, it will then go ahead to show why this presently preferred business service delivery arrangement should be abolished.

Introduction

Outsourcing involves an organization transferring its regular business activities, which include processes and functions, to outside service providers who provide the services back as defined in typically long-term contracts. An outsourcing arrangement mainly involves the ownership and control of the business’ activities being put in the hands of a service provider. The company doing the service provision then assumes ownership and management of each of the business’ processes, including resources that are used in delivering services to the business. Typically, this involves the transfer of the facilities, the people, technology, and equipment to the company providing the outsourced services. Due to the magnitude and the involved complexities, outsourcing relationships, in many cases, tend to be propositions that run for relatively long periods of time, typically ranging from five to ten years.

Many companies are beginning to realize the benefits and potential that outsourcing can bring. This has especially been the case in the recruitment process outsourcing (RPO). In a 2012 Staffing Industry Analyst’s Contingent Buyer Survey, contingent workforce managers were probed to determine whether they used RPO in their organization. RPO was defined as the partial or total outsourcing of permanent recruiting or placement duties. The obtained data for several years was presented as below;

Graph Retrieved from http://www2.staffingindustry.com/row/Publications/CWS-3.0/Archive/2012/September-12-2012/Trends-in-RPO-Usage

The chart above shows a continuous upward growth in the adoption of recruitment process outsourcing. The same has also been reported in the outsourcing of other business processes.

The transfer of the ownership of a business’ activities to another company is what essentially differentiates this kind of business relationship from other kinds. It involves the buyer purchasing time. Alternatively, if the service provider owns the process, there are high chances that the purchaser is doing outsourcing. For instance, utility companies that bring in help from outside to fix computer bugs are not outsourcing. On the other hand, those that transfer several of their business processes to outside service providers who will provide customer care services and billing to the company over an extended period is outsourcing.

According to Bampton and Cowton (p. 13), outsourcing is an old phenomenon whose presence has been felt since the Second World War. It is a trend that eventually became remarkable after 1990. From some estimates, the United States’ services and value added goods from external sources stood at about 20% in 1946. Over more than fifty years later, this proportion has more than tripled to over 60%. Rob Aalders repeated the same in “The IT Outsourcing Guide,” that drums support for outsourcing as an old phenomenon. He points out that over fifty years ago companies had been involved in the outsourcing of legal services, advertising, production and maintenance (Aalders, p. 38). According to Quelin and Duhamel (p. 647-661), outsourcing has to be accompanied by the transfer of human resources and materials to the service provider. The provider is tasked with substituting domestic services in either a long- or medium-term relationship with a customer enterprise (Quelin and Duhamel, p. 617-621).

Current and Future Situation

There have been significant changes associated with the global outsourcing industry since it became a buzz at the turn of the millennium. The global economic crisis has been a major challenge to the industry since 2008, from whose impact it is still recovering. There has been a sluggish recovery in the industry with great belief that the demand for the industry’s services will rapidly increase over the coming few years. According to a study by KPMG, the current outsourcing industry is dominated by Information Technology, Accounting and Finance processes. The same study provides that while outsourcing, achieving operational effectiveness is what is majorly focused on by enterprises.

What most enterprises looked for from outsourcing was cost reduction at 87%, process standardization at 74%, and greater operations scalability at 82%. On strategic focus, the core areas were access to better talent at 70%, improved analytical capabilities at 62% and access to better technology at 62%. The study also found out that outsourcing customers did not expect suppliers to deliver innovation, only industry understanding, stability, and delivery excellence. Another finding of the study was that the clients in the industry were getting what they were paying for with performance meeting. They were, however, dissatisfied with strategic areas including achieving innovation, talent access and improvement of analytical abilities.

Reports from the KPMG study suggested that organizations will adopt outsourcing as an important strategy in cost reduction and in the quest to remain within the growth trajectory. The study predicted the year 2013 as crucial in determining the future of Indian-based business process outsourcing (BPO) delivery. Growth in BPO services was expected to achieve a 5.1 percent growth in the year and further on a six percent growth by 2017. The projected IT services and global BPO services market was at $952 billion. North America was expected to dominate the sector at a $398 billion command of the market.

The biggest challenge for companies engaged in the outsourcing business has been the risk that comes with price fluctuations. There, however, exist other challenges (Tayauova 188-195). To start with, the act of reducing margin and cost so as to gain customers may compromise service delivery. For existing companies, there has been considerable competition from the market’s new entrants. Asian countries including Philippines, China, the Middle East and South America have been offering clients low-cost contact centers, information technology, and business process outsourcing services. The future competitiveness does not only require companies to have improved and timely service delivery, product innovation, and business process re-engineering will also be key in remaining successful for enterprises in this sector in the future.

Though outsourcing is considered to be a favorite trend for the future, with the promise of bringing many benefits to either of the parties involved, many voices question the phenomenon’s effects (Quelin and Duhamel, pp. 560). Among these voices is Henry Kissinger’s, who made sarcastic comments touching on the phenomenon at a lecture in Las Vegas. In the lecture, he wondered if America would still retain its great power or even remain dominant within the outsourcing context. His voice is joined by Gary Hamel’s, who has an excellent understanding of the phenomenon in the global sense and the speed at which it is revolutionizing business. According to Quelin and Duhamel (p 567) Gary Hamel, in his book, “Leading the Revolution,” says that the world has to be aware that a new era has been entered that is dominated by some major changes and further queries whether we are ready to accommodate such changes. The concerns raised by these voices have been considered to be important for many reasons.

To start with, though the process offers an easy way for companies to achieve their business goals, in most cases they have little control over the situation. This may eventually work to the disadvantage of such enterprises as the service delivery to their customers may not be to their satisfaction. Though the companies work under agreed terms in the contract, the little things that matter to the outsourcing company may not be fully met.

Another reason as to why this trend should be stopped is in the fact that confidential data may be leaked when the two companies interact. This may lead to business secrets being shared and then getting spread to competitors (Aalders, p. 52). This has the effect of exposing some businesses to disadvantaged positions against their competitors. The other reason as to why outsourcing should be stopped is the fact that there are serious quality issues among other problems associated with outsourcing. The quality of service delivery when a service is outsourced mostly arises when the services are sourced to a company that does not compensate its staff satisfactorily. Since the whole outsourcing affair involves strategies in cost cutting, the end-result may not fully comply with the intended quality standards if the service was delivered by its employees, who are well aware of the quality standards and satisfactorily compensated.

Another reason for outsourcing to be stopped is the fact that it leads to a decreased in-house capacity. This means that the company outsourcing services will not have a pool of employees trained in its business. This also leads to fewer individuals from the company’s country of origin being hired by the firm, especially if the outsourcing is done to an international company. This leaves the country in which the outsourcing company is a resident not having people skilled for service delivery in the industry or sector that it is involved in.

Business process outsourcing has been on the rise over the years. It is becoming more and more popular among various companies in different industries globally. The trend’s future projection shows that the trend is not going to slow down. However, this new way of attaining business service delivery is not all that good, given the various disadvantages that come with it. These disadvantages mostly touch on the quality of the delivered services and the development of skills required in certain industries in certain countries or regions where the company that outsources its services is a resident.

Work Cited

"State of Global Outsourcing Industry Amid Economic Crisis in 2013 | Backofficepro". Backofficepro.com. N.p., 2013. Web. 8 May 2016.

Aalders, Rob. The IT Outsourcing Guide. Chichester: Wiley, 2001. Print.

Bampton, Roberta, & Christopher J. Cowton. "The E-Interview." Forum Qualitative Sozialforschung / Forum: Qualitative Social Research [Online], 3.2 (2002): n. pag. Web. 8 May. 2016.

Quélin, Bertrand and François Duhamel. "Bringing Together Strategic Outsourcing and Corporate Strategy:". European Management Journal 21.5 (2003): 647-661. Web.

Tayauova, Gulzhanat. "Advantages_and_Disadvantages_of_Outsourcing: Analysis_of_ Outsourcing_Practices_of_Kazakhstan_Banks". Procedia - Social and Behavioral Sciences 41 (2012): 188-195. Web.