Benefits of Outsourcing: Macro - Term Paper Example

Your full full May 02, Outsourcing Before going into the discussion regarding benefits of outsourcing and its effects on consumer prices, let’s get a better understanding of what outsourcing actually is. Outsourcing means to transfer a business function or product’s manufacturing process to a third party or a company. The third party who is given the charge of operating any specific business function acts as the supplier for the company. When a company hires the services of some other company for any specific purpose like manufacturing process of a product, it means that the company has outsourced the manufacturing process to a third party. “Outsourcing is the latest buzzword these days for the cost and quality conscious companies all over the world, who are outsourcing their non-core business processes” (Hailey). Outsourcing involves a contract with a third party and includes a set of agreement between the supplier and the buyer company. Once an agreement is reached, the supplier and the buyer operate the business processes and dealings in accordance with the agreement. Those companies which provide the service to a buyer company regarding any business operation is known as a service provider company. Some of the common tasks and activities that are outsourced to the supplier company include data entry, billing services and marketing (Mclvor). Macro Benefits of Outsourcing There are a lot of valuable macro benefits associated with outsourcing of business operations to a supplier company. Outsourcing is one of the most important parts of any organization or industry. There are many companies which believe in outsourcing because it helps them in cutting the costs of manufacturing and labor. Some of the most observed benefits of outsourcing include saving money, cutting cost, increased speed of production, increased efficiency, access to specialized supplier companies, more concentration on the core business activities, improved customer satisfaction, achieving market domination, and improved compliance and security. In any domestic country, outsourcing results in less low skilled and more high skilled work. It is because when companies see that they have not got any high skilled labor regarding any specific business operation, they outsource that business operation to those companies which are highly skilled in those processes. High skilled work is also very important in achieving competitive edge in the market and this task can be perfectly achieved through outsourcing. Free trade is another aspect of outsourcing in which companies can import the parts of products from other countries. Those parts which are more costly to be produced in a home country can be imported from other countries where labor rate and manufacturing cost is less as compared to the home country. Free trade always results in increasing the real income because it not only improves the purchasing power of the customers but also results in increasing the productions for a company. While talking about outsourcing, let’s discuss some of benefits of outsourcing in detail. Saving Money One of the benefits of outsourcing is saving of money for the company which is believed to be one of the biggest incentives of outsourcing. “The costs associated with an in-house employee are generally higher than the cost of an outside service provider” (Horning). When companies outsource a business operation to some other company, it results in saving of time, effort, and manpower. Infrastructure expenditures are also reduced when companies outsource a part of the business. Outsourcing also reduces the cost of maintaining the infrastructure which results in increase in revenue of the company. Increased Speed of production Another benefit which comes from outsourcing of business processes is increased speed of production. When companies outsource a business process to other companies, speed of production improves because the non-core business activities are performed by the supplier companies which results in increased productions. Companies need to be able to manufacture and deliver the products to the customers in a quick time without losing the quality of the products. So outsourcing helps the companies in this regard by taking the responsibility of some of the business processes in order to reduce the workload. Access to Specialized Supplier Companies One of the most valued benefits of outsourcing includes access to specialized supplier companies. Companies can outsource a business operation to a specialized company related to that field. Those business operations which are not related to the actual or core business area are outsourced to those companies which are specialized in performing those business operations more effectively. In this way, the quality of the business processes also improves because every business process gets done by a specialized company in that specific field. Outsourcing and Innovation There exists a very complex relationship between outsourcing and innovation. The companies outsource their business activities depending on their innovative culture and profile. Innovation is an essential aspect of outsourcing because without innovation the macro benefits of outsourcing are either staid or un-engaging. Consultancy culture and the delivery culture must be considered differently by the client because when companies tend to outsource their business operations. Unspecified innovation is sometimes required to retain the value of the outsourced business process during the term of the contract with the supplier. Another relationship between outsourcing and innovation is that when companies want to develop an innovative product, they must outsource some business activities to supplier firms in order to develop a high quality product. Innovation and outsourcing act as the backbone for any company. Without innovation, the desired results from outsourcing cannot be achieved and without outsourcing the business processes, innovation in a product or service cannot be achieved successfully. “A 1% increase in foreign services purchased raises innovation and profits by 2.5% and 0.9% respectively” (Gorg and Hanley). Effect of Outsourcing on Prices Outsourcing results in lowering down the price of the product by getting the products manufactured at lower costs by some other firm. “Why produce something ourselves that we can get more cheaply elsewhere?” (Barrera). Outsourcing always brings a positive impact on the economy of a country by cutting down the costs of manufacturing and importing the high quality products from other countries at a lower rate. It not only strengthens the economy of a country but also results in increasing the purchasing power of the customers. When a product is imported from some other country, the buyer company sets lower prices for those products in order to attract the customers. When there is a free trade agreement between any two countries, outsourcing lets the companies set lower prices because imported products are usually less expensive compared to the products manufactured by the home company. Effect of Offshoring on Wages and Employment Offshoring brings negative impact on the low or medium skilled workers but it is beneficial for high skilled workers. Offshoring results in lowering down the wages for the low skilled workers whereas wages of high skilled workers get increased. Offshoring has resulted in widening a wage gap between low skilled and high skilled workers. Offshoring also results in decreased level of employment in a home country thus resulting in lower wages for the employees. Various studies reveal the fact that when countries offshore jobs to some other countries, unemployment occurs as a result. Some workers succeed in finding highly paid jobs but most of the workers remain unemployed or get a very low salary package. When companies offshore jobs to other countries most of the employees from the home country do not get a job equivalent to their previous job. And even if they succeed in finding jobs, they get lower salary packages as compared to their existing salary packages. So we can say that offshoring the jobs to other countries result in an increase in unemployment level in a domestic country that is why it has become one of the most controversial economic issues for every country. Works Cited Barrera, Albino “Who Benefits from Outsourcing?.” Who Benefits from Outsourcing?. 21 Sep. 2004 Relegion-online.org. 02 May 2010 . Hailey, Lehman "Going Beyond Money - Outsourcing Advantages." Going Beyond Money - Outsourcing Advantages. 5 Mar. 2010 EzineArticles.com. 2 May. 2010 . Horning, John "The Pros and Cons of Outsourcing Various Functions of Your Business." The Pros and Cons of Outsourcing Various Functions of Your Business. 26 Jan. 2010 EzineArticles.com. 2 May. 2010 . Gorg, Holger, and Aoife Hanley “Procurement that pays: Foreign outsourcing, innovation, and profit dynamics.” Procurement that pays: Foreign outsourcing, innovation, and profit dynamics. 07 Sep. 2009 Voxeu.org. 02 May 2010 Mclvor, Ronan. The Outsourcing Process: Strategies for Evaluation and Management. Cambridge: Cambridge University Press. Read More