The Motivation for Outsourcing - Research Paper Example

?Introduction In today’s global world, outsourcing jobs is increasingly a fact of life. Outsourcing may be necessary to retain a competitive advantage, as other firms are outsourcing to take advantage of lower costs and higher quality. That said, outsourcing may not always be acceptable to the affected employees. Employees may be cynical about the changes brought about by the outsourcing, which leads to decreased employee morale. There are ways that firms should approach outsourcing decisions, namely communicating directly with employees in an effective manner. There are also ways not to approach outsourcing, which involves blindsiding employees and lying to them, as OzBank, the case study detailed below, approached their outsourcing. Moreover, appointing an effective, transformational leader to guide the process is essential. Why Outsource? Guang Qu et al. (2011) researched what characteristics regarding IT firms made the firms more likely to outsourcing. They found that industry munificence and dynamism was positively correlated with the amount of outsourcing done by the individual firms in the industry. On the other hand, industry concentration is negatively correlated with outsourcing, due to the power and resources such firms have. They also found that high capital intensive industries are less likely to downsize than low capital intensive industries. This is because high capital intensive industries do not put a premium on risky and novel practices, which outsourcing is considered to be. Cox et al. (2011) also studied outsourcing with regards to IT firms. They identified two different categories of IT outsourcing – IT outsourcing with regards to core value-chain operations, and IT outsourcing with regards to support activities. The main outsourcing in the core value chain operations is distribution, whereas, with support activities, human resource management and facilities management are the two main support activities which involve outsourcing. They state that firms outsource because they want to retain a competitive advantage, including costs savings and quality improvement. Outsourcing may also increase flexibility of the firm, as well as restructure the firms’ costs. The focus of their study is on IT firms which are in the public sector, as opposed to the private sector, and the research method was case studies with semi-structured interviews. They found that, with the firms in the public sector, that the cost savings was the most important factor in the decision to outsource, and that the firms which did outsource found that there was also a quality advantage to doing so. This is because there is generally a larger pool of skilled workers to draw upon when a firm outsources. That said, there might be a disadvantage to firms which outsource due to industry perception of these firms. Oh et al. (2006) studied this factor. They found that, with regards to investors, one half of the investors in IT firms responded negatively to announcements that the IT firm would be outsourcing, and one half of the firms reacted positively. The positive reactions came when the level of transactional risk for the firm was low, and the opposite when the level of transactional risk was high. The key drivers for negative reactions were “the relative size of the contract, the inability to monitor the vendor’s performance, the asset specificity of the IT outsourced resources, and the relative size of the vendor” (Oh et al., 2006, p. 299). Lee et al. (2000) further studied information systems (IS) outsourcing. They identified five research issues with regards to this. The first was why firms used outsourcing for acquisition. In particular, a firm must decide whether to make or buy developed technology. The next issue is the motivation for outsourcing. Lee et al. (2000) notes that there are inherent advantages and disadvantages to outsourcing. The advantages include cost reduction and quality enhancement. The disadvantages include loss of control, loss of qualified personnel and loss of flexibility. The third issue is outsourcing scope – how much is outsourced? They state that firms may decide upon either a partial or a total outsource of a certain commodity or technology. They must also decide whether to outsource long term or short term, and if they will deal with multiple vendors or a single vendor. Whether they outsource for services or assets is another consideration regarding outsourcing scope. The issue of performance, whether the outsourcing is a success or a failure is another issue. The fifth issue is the different options available, which means that firms look at all the options for the IS needs and decide whether outsourcing, or another option, is most attractive for their needs. Human Consequences of Outsourcing Kostopolous (2010) did a study of employees who survived either layoffs, outsourcing or offshoring. They found that, in terms of employee morale, layoffs were the most malignant of the three. In particular, they found that layoffs made the surviving employees feel that their jobs are insecure, and that they had a lesser attachment to their employers than those that did not experience layoffs. Moreover, those left behind in the wake of layoffs were more likely than non-layoff survivors to express an interest in leaving that firm. Offshoring, in which employers outsource their jobs overseas with no layoffs, is the next most demoralizing form of downsizing. Offshoring, according to Kostopolous (2010), made the employees of that firm feel less affection for the firm and were more likely to feel that their employers were less patriotic than other firm. They were also more likely than other firms to feel that their firm is not doing well. Outsourcing, which is the other kind of downsizing Kostopolous (2010) studied, was the least harmful of the three kinds of downsizing. Kostopolous (2010) also found that employees who survived multiple outsourcing and/or offshoring felt less affinity for their employers and expressed stronger intentions to quit than those who survived multiple layoffs. Nevertheless, Kostopolous (2010) also found that management actions mitigated the damage done by downsizing. In particular, he found that management that takes the time to properly address the employees about the downsizing, and the reasons behind the downsizing, minimized the negative effects of the downsizing on employee morale. Guterriez and Dyson (2011) also studied the human consequences of downsizing, doing a case study of an Australian bank as a backdrop of their research. The bank that they studied was named OzBank, or this was the name that they gave to this bank, and this bank was in the process of outsourcing elements of its IT Department at the time of this particular case study. The recipient of this outsourcing effort was called Bower IT. In this project, the feelings of the employees regarding this move was paramount to the success of the project, as the decision hinged upon a certain level of acceptance by the OzBank employees for the move in question. The information for their study came from feedback supplied by the IT professionals affected by the move, as well as by the OzBank team that was managing the outsourcing contract. In this study, Gutierriez and Dyson (2011) noted that, at the time that OzBank announced its decision to outsource, the employees in IT at this bank had just come off a successful effort to thwart the problems that would be associated with the year 2000 – the “Y2K” issue which supposedly would cause disasters for IT systems all over the world. The staff had worked long hours to complete the work necessary to avert the threat. Therefore, when OzBank announced soon after this period that it would be outsourcing much of its IT work, the employees reacted with outrage about the betrayal. The employees demanded to know the reasons behind the decisions, and the management supplied them reasons. However, at the same time, management at this firm were making statements to the media which contradicted the reasons that they gave to their employees, which only enhanced the sense of betrayal and the feelings of the employees that they were being lied to. From this point on, the further comments made by senior management were treated with understandable suspicion. Added to this was senior management’s admission that there was no “Plan B” – if the outsourcing was a total failure, there was not a backup plan, because, as management put it, they were not going into the outsourcing project to fail. All of this – the lying, the perception that management did not plan properly, and the general condescension with which employees were treated – made the employees further outraged, even though senior management thought that all was well. 95% of the OzBank IT Employees agreed to work for the outsourced employer, probably because the ones who refused were considered to have tendered a resignation. The employees who accepted the offer to work for Bower IT found that their jobs did not change, for they had the same duties and job requirements as they did when they worked for OzBank. In order to smooth the transition for the employees, employees were invited to pose questions through the intranet that would be answered by senior management, and senior management held a series of meetings to answer questions. A forum was also arranged for the IT employees and the executive team which reported directly to the CEO. It was during this forum that the employees finally realized that they were no longer necessary to the bank, and the executive team handled their questions regarding this combatively and aggressively. The employees were given six month notice to find new jobs. Gutierriez and Dyson found that the employees felt that the six month notice period was too short. The affected employees were in shock for several months, because they had felt that their efforts to avert Y2K issues made them invaluable to the bank. When they found out how expendable they were, this was understandably a cause for consternation. Gutierriez and Dyson found that the communication to the employees was far too late, and that the employees should been told well before the decision to outsource was made that this would be a possibility. Because of the way that it was handled, the employees were suffering anger, depression and guilt about the situation, and morale was lowered considerably. This was demonstrated by increased employee absenteeism accompanied with an overall lack of commitment towards the firm. Even two years after the employees found different jobs, there was still a great deal of negativity towards the firm and the way that the firm handled the transition. The prevailing emotions regarding OzBank transition actions could be categorized in different ways, most of them negative. “Strong and vocal disapproval” was one of the categories of responses (Gutierriez and Dyson, 2011, p. 5). These were the employees who felt that their extra efforts regarding Y2K compliance made them valuable, and felt a deep sense of betrayal that they were let go like so much trash by their firm. “Disapproval yet acceptance” is another category (Gutierriez and Dyson, 2011, p. 6). These were the individuals who disapproved of the transition and the way that it was handled, yet, feeling that there was nothing that could be done, accepted the decision and advised others to stop complaining about it. “Depression and other psychological reactions” formed the third category (Gutierriez and Dyson, 2011, p. 6). This was the category of employees who dealt with severe emotional disturbances because of the firm’s handling of the transition; one chap even resorted to making veiled threats of violence. Gutierriez and Dyson (2011) stated that the reactions that the employees were feeling were the result of a breach of a psychological contract. A psychological contract results when an employee believes that their beliefs about their firm are reciprocated by the firm. When the employees found that this was not true, there was a deep sense of betrayal. From the point that the transition was announced, the employees stopped feeling that they were doing their jobs in betterment of the firm, and began feeling that they were doing their jobs because of official obligation. In contrast, before the outsourcing decision was announced, the employees felt a sense of pride and a sense that they were doing their jobs to better the firm. They sacrificed their personal life to work long hours for the firm, and they did this willingly. They did this because they felt personally committed to the firm. The employees felt that, just as they valued the firm, the firm valued them as well. This feeling of mutual appreciation was discarded the instant that the outsourcing decision was announced, for the employees felt their psychological contract was broken. Solutions for Helping Employees Accept Outsourcing Transitions OzBank is evidently a case study in how a firm should not approach outsourcing. They lied to employees and blindsided them. Then, instead of being up front with the remaining employees after the transition, that they would no longer have jobs and would no longer be necessary, the firm failed to be forthcoming about this. Instead, the employees had to find out about their obsolescence after the transition had already occurred. Consequently, they felt a breach of the psychological contract with the firm - instead of feeling that the firm valued them, as they valued the firm, they felt that they were expendable and that the firm tossed them aside in pursuit of bigger goals. While some degree of animosity may always come into play when dealing with outsourcing, there are ways to lessen the degree. One way is to appoint a transformational leader to oversee the process, one that inspires a great deal of trust. Jung and Avolio (2000) state that trust is what makes a transformational leader effective. This is because the transformational leader is leading through a period of transition, which results in fear, anxiety and frustration. Trust in the leader is essential to lead through the transitional period, and help the followers overcome their apprehension, and overcome obstacles. Jung and Sosic (2002) expand further on the attributes of a transformational leader which inspires this level of trust. They state that transformational leaders seek to promote collective motivations and outcomes. They do this by charismatic role modeling, promoting idealized influence; inspiring motivation by transmitting an appealing or evocative vision; intellectual stimulation, which means that they encourage creativity and innovation; and individualized consideration, which means that coaching and mentoring are a vital element in the transformational leader’s repertoire. They also express themselves in ways which are easily understandable to their employees. They help the employees see their role as being sacrificing for the greater good, and they do this by also sacrificing something to the desired outcome. Thomas (2010) states that a transformational leader is able to “enhance their followers performance beyond the personal and leadership’s expectations” (Thomas, 2010, p. 9). Thomas states that these leaders are effective in leading transformations because of the ability to identify the need of each individual, and is also able to lead so that the followers complete tasks that they previously had thought to be impossible. Moreover, the transformational leader is able to inspire admiration and emulation by his or her charisma. As for the details of how these leaders accomplish the transitions, they use a system of rewards, punishments and pre-emptive actions. These leaders have the ability to really work with members, and also are able to understand them and assist them (Thomas, 2010). This fosters a sense of shared vision, as the employees sense that their needs are being met, that the psychological contract is still in place, and they are still valuable. Beyond the valuable contribution of the right leader for transitional times are other practical tips that firms may use to ease the sense of frustration regarding downsizing. Reichers et al. (1997) state that there are ways that firms can manage the cynicism that may result in any kind of organizational change. They state that cynicism results when the employees have a lack of faith in leadership, especially if changes were attempted in the past and were unsuccessful. The cynics then bring about a self-fulfilling prophecy, as they attempt to block successful changes, which might bring about failure with regards to the changes. Cynicism may bring about a lack of commitment in the work force, increased absenteeism and increased grievances. To this end, Reichers et al. (1997) proposed a series of concrete steps that firms may take to lessen cynicism and encourage positive change. One is that, no surprise, management should keep employees informed of every step along the way of the coming changes. More than that, the employees expressed by wide margins in their study that they wanted to be a part of the decision-making process. Another step is that middle management needs to be rewarded for successfully communicating with their team about the changes. The employees also need to have information about why the changes are occurring – why is the outsourcing necessary? Not surprising employees with events is another concrete strategy – if there is an important event on the horizon, like the possibility of substantial outsourcing, then the management needs to let the employees know. Enhancing credibility is another concrete strategy, and this may be done by appointing a credible spokesperson who is well-liked and well-respected; ensure that the message is delivered seriously and sincerely, and that the message is more logical than emotional. Another strategy is using multiple channels to get the message out – employee newsletters, interoffice memos, face to face meetings and casual conversations are all avenues which should be used to disseminate the message. Conclusion As shown by the literature, outsourcing is a fact of life. Outsourcing is advantageous because of quality as well as cost issues. Unfortunately, employees may not accept the change, and the actions of OzBank demonstrate why. OzBank was deceptive with its employees, and blindsided them to the move. When the employees asked legitimate questions of executive, they were met with hostility and aggressiveness. Because of this, the employees felt bewildered, angry and betrayed, even two years after the fact. In short, OzBank shows what not to do. However, there is a way to ensure that employees feel less resistant to change. One of these ways is for the firm to appoint a leader to help transition, and this leader should have the characteristics of a transformational leader. This leader should be interested in the employees’ personal concerns, and should have ways to encourage innovation and creativity in the workforce, while modeling desired behaviors. Further, this leader should encourage sacrifice by demonstrating their own sacrifices. Beyond this, simple, effective communication with the affected workforce is essential. This means that employees should not be blindsided, they must feel that they are part of the decision-making process, they must be told why the move is necessary, middle management should be tasked to communicate with their team, and multiple avenues should be used to get the message out. Reichers et al. (1997) suggest that these moves may decrease cynicism about the changes, which will, in turn, foster better employee morale. Annotated Bibliography Kostopolous, K. (2010) Employee reactions to forms of downsizing: Are there any lesser evils? Industrial Relations 49(2): 95-96. The scope and purpose of this article is to describe different types of downsizing decisions, and how employees react to each of them. Kostopolous described a study conducted by researchers Carl Maertz, Jack Wiley, Cynthia Lerouge and Michael Campion in which employees reactions were gauged in response to different types of downsizing – outsourcing, offshoring and layoffs. Kostopolous stated that these researchers concluded that layoffs engendered the most negativity, following by offshoring, then outsourcing. Kostopolous is a research and teaching fellow in management at the Athens University of Economics and Business. A short search indicates that Kostopolous has written two other articles regarding businesses and innovation. The scholarly value of the article is lacking, specifically because Kostopolous is only reporting upon another study done by other researchers. As such, the objectivity is lacking, because the work is not his own, therefore he does not present different points of view or present a coherent view of the facts and evidence. However, the article is helpful to the research project at hand, because it is on point for the research question. Guang Qu, W., Pinsonneault, A. & Oh, W. (2011) Influence of industry characteristics on information technology outsourcing. The scope and purpose of this article was to provide knowledge and understanding about how industry characteristics impact decision-making regarding outsourcing. The researchers used the United States Bureau of Economic Analysis to get information regarding the types for firms which were outsourcing, in terms of the firms’ munificence, dynamism, and capital intensity. There is not information provided about the authors, and the lead author appears not have published any other articles of a scholarly realm. That said, the article is well-researched, and the article details a study that was conducted by the authors, so the scholarly value of the article is high. Moreover, there are 106 quality sources cited for this article, and all of these sources are peer-reviewed. This article itself appears in a peer-reviewed journal. The article also provides good objectivity, as all sides are presented with different sources, and each fact is backed up by concrete evidence. That said, this article is peripherally helpful in answering the research question presented, as it presents reasons why firms outsource, but does not present the reactions of employees to the outsourcing, which is the research question presented. Cox, M., Roberts, M. & Walton, J. (2011) IT outsourcing in the public sector. The Electronic Journal Information Systems Evaluation. 14(2): 193-203. This article proposes to add to the existing body of research regarding outsourcing by studying the reasons why public firms outsource, which is different than the motivations of private firms. They accomplished this by providing the audience four case studies of public firms who chose to outsource. The article does not provide the credentials of the authors. The search for other articles written by Michael Cox, the lead researcher, turns up nothing. However, this article is based upon scholarly literature, with over 50 quality sources from peer-reviewed journals. Moreover, the research that these researchers did is valid, as it relied upon case studies that the authors, themselves, conducted. The article is objective, as the literature review presented different sides, different viewpoints and different elements of the outsourcing process. However, as with the previous article, this article has limited relevance and usefulness to the research question at hand, as this article does not focus upon the question of how employees react to outsourcing, nor does it address how to effectively transition employees. Oh, W., Gallivan, M. & Kim, J. (2006) The market’s perception of the transactional risks of informational outsourcing announcements. Journal of Management Information Systems 22(4): 271-303. This article purports to explore the impact that informational technology outsourcing announcements have as far as the market’s perception. The researchers conducted a secondary research study that involved Lexis/Nexis research involving firms which announced outsourcing decisions in the period of time between 1995 and 2003. The authors’ credential are listed, and Oh, the lead researcher, is an assistant professor of information systems at McGill University, in Montreal, Canada. His brief biography states that he has published works in four other peer-reviewed journals. Michael Gallivan is an associate professor of CIS at Georgia State University, and his bio indicated that he had previously published in seven other peer reviewed journals. Juong Kim is an Assistant Professor of Accountancy at Concordia School in Montreal, Canada. The scholarly value of this article is high, as the literature review is based upon 76 articles from peer-reviewed journals. These journals provide a variety of perspectives, so the objectivity of this article is also high. The relevance of the article is peripheral, as it does not address the central question of how employees can transition properly when a firm is outsourcing. Lee, J., Huynh, M., Chi-wai, K. & Pi, S. (2000) The evolution of outsourcing research: What is the next issue? Proceedings of the 33rd Hawaii International Conference on System Sciences: 1-10. The scope and purpose of this article is provide a template and outline of how outsourcing research is evolving, and where outsourcing research is heading. This article provides secondary research to show how research is evolving, concluding that the research is evolving in five different directions, and that the future of outsourcing research is in the social view of outsourcing research, which would shed light on the relationship between the outsourcing companies and their clients. The article provides credentials for the authors, and the lead author is a graduate student at Korea Advanced Institute of Science and Technology, and has not published previously. The scholarly value of this article is limited, because it is based upon secondary research, and is not based upon any kind of original study by the authors. The article is also not objective, as it does not provide multiple points of view. That said, the article is based upon 63 peer reviewed articles, so it has a strong foundation. The article itself, however, is not peer-reviewed, as this is a presentation to a conference. That said, it does have value for the study at hand, as it is relevant in that it details where the research is going regarding outsourcing, and indicates that it is going in a social direction, which would implicate the study at hand. Gutierriez, F. & Dyson, L. (2010) Considering the human element of long-term IT outsourcing: The case study of an Australian bank. IBIMA Business Review: 1-11. This article’s scope and purpose are to provide literature review regarding how employees react to outsourcing. The brief description of this article is that, in addition to the literature review, a lengthy case study was performed on an Australian Bank, called by the researchers “Oz Bank.” There is not information provided about the authors, and a search indicates that the lead researcher, Frank Gutierriez, has not published previously. The scholarly value of this particular article is somewhat limited, as it is based upon a case study, therefore the data upon which this article is based is inherently limited. There is also not objectivity in this article. That said, the article is published in a peer-reviewed journal, and cites approximately 30 other peer-reviewed journals as its resources. This article has a high degree of relevance to the subject at hand, however, as it is centered around how employees react to outsourcing, which is on point for the research at hand. Reichers, A., Wanous, J. & Austin, J. (1997) Understanding and managing cynicism about organizational change. Academy of Management Executive 11(1): 48-59. This article was written with the purpose of understanding why employees get cynical during times of change, and how management can mitigate the cynicism. The researchers did qualitative research featuring structured interviews, surveys and follow-ups with employees of a parts manufacturing plant that was undergoing substantial change. All three of the authors are professors, Reichers and Wanous being professors of human resources and management, and Austin being a professor of psychology, and a Google Scholar search revealed that the lead researcher, AE Reichers, has published over 50 articles in the area of organizational psychology, as has JP Wanous. JT Austin has published over 30 articles on the issue. So, combined, the three have a wealth of knowledge and credentials. The scholarly value of the article is very high, because the researchers are so renowned and also because the article was published in a peer-reviewed journal. However, curiously, there was not a bibliography. As for the objectivity, there really was only one point of view, and the literature review did not cite many authors or other studies. The relevance to this project, however, is very high, as this project is focused upon how to ease employees into organizational change, and this article is also focused upon this pinpointed issue. Jung, D. & Sosik, J. (2002) Transformational leadership in work groups. Small Group Research 33(3): 313-336. The scope and purpose of this article is to explain the concept of transformational leadership, and to show how transformational leadership functions in small groups. This article did qualitative research with 217 Koreans working for large firms. The research featured surveys. Moreover, transformational leadership was measured by a Multifactor Leadership Questionnaire. Empowerment was also measured. Dong Jung, the lead researcher, has written over 20 articles on leadership, especially transformational leadership, so he appears to be an expert in this field. He is also an associate professor of management at San Diego State University. The scholarly value of this article is high, as the article cites over 50 quality sources which have been peer reviewed, and the article itself was also peer reviewed. The article is objective, as it presents several points of view in the literature review. This article is also highly relevant, as it explains how transformational leaders can ease employees into changing situations. Thomas, J. (2010). Bet you never heard of this leadership trait. Journal of Leadership Education 2(9): 1-3. This article’s purpose is to describe the leadership trait of the improvement of social skills. The author states that tact is the leadership trait in question which is important to develop. The author is a PhD, and has published many articles in organizational management and leadership. The scholarly value of this article is low, as it is not based upon a study and does not have any other articles in its bibliography. It does appear in a peer reviewed journal, however, and the author is a PhD, so this increases the scholarly value. It only presents one point of view, and the article itself is very short. That said, it is relevant to the study at hand, because it describes a leadership trait that is very important, that of being tactful. Jung, D. & Avolio, B. (2000) Opening the black box. Journal of Organizational Behavior 21(8): 949-964. The purpose and scope of this article is to show how trust and value congruence mediates the effects of transformational change, and the causal effects of transformational and transactional leaders. The study concerned 194 students who worked on brainstorming tasks under the auspices of transformational and transactional leaders. Jung and Avolio are both professors in the areas of management, and they both have been extensively published. The scholarly value of this article is high, because it is based upon a study that the researchers performed, and the bibliography featured over 50 quality, peer reviewed articles. The article had a high degree of objectivity, as different points of view were established, and it was based upon a high degree of facts and evidence. The article is highly relevant and useful to the project at hand, as it describes in detail the qualities of transformational leaders and how these leaders affect their followers. It also quantified the mediating factors of trust and value congruence, and showed the importance of fostering these traits in employees. Read More