Do the Benefits of Outsourcing and Offshore Outsourcing Outweigh the Disadvantages - Essay Example

? Management Essay Introduction Outsourcing is a process through which national and international business firms transfer or outsource and their low end or non-critical business processes to some other firms. It offers strategic move to the business firms with an opportunity to gain strategic or competitive advantage in the long term. The outsourcing opened new avenues for business organizations to utilize large pool of skilled sets and expertise without incurring any significant investments. It entails very low cost burden for business firms and offers wide opportunity for business firms initiated the operation with proportionately low financial resources (Weerakkody and Irani 2009). Evidence to support that the benefits of outsourcing and/or off-shore outsourcing outweigh the disadvantages The concept of outsourcing has gained immense popularity and recognition in the field of information technology, legal, logistics, manufacturing, technical and customer support. There are various reasons or advantages responsible for motivating or encouraging firms or companies to outsource or get their work done through other players or partners. It is well known fact that every concept or technology contains some drawbacks and limitations acting as a hindrance in the path of successful accomplishment of the respective concept or technology (Tate, Ellram and Lisa 2012). The case of outsourcing is not an exception. It also contains various limitations or disadvantages creating negative impact on the benefits and effectiveness of outsourcing. However, technological advancement and enhanced security control features has provided new dimension and height to the concept of outsourcing. The outsourcing becomes more effective and filtered with the emergence of enhanced security control features and technological advancements. In other words, it can be said that history of commercial world contains numerous evidences and examples demonstrating the manner through which the benefits of outsourcing and/or off-shore outsourcing outweigh the disadvantages. The discussion related to whether benefits of outsourcing and/or off-shore outsourcing outweigh the disadvantages is presented through the following points: Enable to focus on core competency: The growth and expansion plans in every company led to the diversification and adds number of administrating functions to the existing functioning framework. The growth of large number of administrative and financial functions demands extra time and effort to manage those functions. It has been seen that company needs to allocate huge amount and money to manage these functions which in turn increases cost burden for companies. The cost burden creates negative impact on the operating and financial profit margin of the company. This extra cost burden put the companies in a vulnerable situation in a long time (Doh 2005). Moreover, it also led the companies to deviate from the core operations and focus on such back-ended and supporting functions. For instance, IBM (International business machines) continued to enjoy dominance in the field of mainframe computing for many years. The company continues to enjoy leadership in the manufacturing of personal computing device. The personal computing manufacturing industry entails huge capital expenditure and initial costs to initiate the manufacturing process. The huge capital expenditure deters the other players from entering in this industry. However, entry barriers in terms of huge capital cost and initial expenditure falls or reduces with the passage of time. The reduction of entry barriers led the other players to enter in the personal computing manufacturing industry (Clark, Zmud and McCray 1995). This scenario paves the path of entry of many other players like Dell, Toshiba, Hewlett-Packard, and many others in the personal computing manufacturing industry. IBM has started to face immense threat and competition from these players. In response to this, IBM has started shifting their business focus towards ‘business transformation services’ from ‘PC manufacturing’. The business transformation services have been commonly termed as outsourcing in the information technology industry. In this outsourcing service, IBM facilitates the task of development and management of information technology of other players. The task of developing and manufacturing information technology entails huge cost and specialized skills for IT players. The other IT players were not in a position to develop and manage their information technology due to high cost involved in it (McIvor 2005). The difficulty faced by other competing players in developing information technology for their business act as an opportunity for IBM. This opportunity has been availed by IBM through developing information technology for other players in return for a consideration. The transfer or endorsement of developing information technology on the behalf of IT players by IBM serves dual purpose. In the first instance, outsourcing avenue allows the IBM to focus on its core competency and provides an opportunity to enrich and expertise their specialized skills. On the other hand, other IT giants can easily focus on the managing their back-end operations, training and recruitment, focusing on their specialized information services, and reducing costs (Khosrow-Pour 2006). The development of information technology has not been specialized tasks for other players. Therefore, trail or an attempt to develop information technology for their businesses can prove risk and results in failure of their business operations. In this regard, it is pertinent for other players to outsource their information technology task to the IBM and focus on other specialized tasks. Improving customer services: Customer service has emerged as one of the significant function of every company irrespective of the size and nature of business. Customers has become an integral component of business functioning and it is pertinent for every business firms to involve and serve customers adequately in order to fain foothold in the market place. The increasing awareness and knowledge level of customers in present scenario has complicated the task of customer services to a wide extent. In the past years, the task of customer service was not being much complicated and it could be performed through business personnel. There was no need of any specialized agency or personnel for handling customers’ service functions. The situation has completely transformed in the present years. In present times, customers need specialized agency or staff members having sound interpersonal and communication skills in order to entail them higher satisfaction (Click and Duening 2004). The customers demand personal need and attention towards their queries, confusion or any other problems. The stiff competition in the market place among various players has also provided new dimension to the customer service function. The company capable of serving customers in a unique and personalized manner can only survive in the midst of such competitive dynamics. Such transformation and changes in the landscape of commercial world has demand business firms to allocate resources and facilitates strategies for customer service functions. The importance of customer service function has been evidenced by the appointment and placing of specialized customer service officer by many public and private firms. The firms like manufacturing, logistics, warehousing, etc seeking less involvement of customers discharge their customer service functions through appointing or placing specialized personnel for it (Tambe and Hitt 2010). On the other hand, business firms like banks entailing high customer involvement in their day-to-day operations require providing more space and resources towards customer service functions. The customer service has been visualized as a separate function in these firms. In this regard, many US banks like Bank of America, Citibank, JP Morgan, etc are engaged in outsourcing their customer service functions to the developing countries like India and china. A political report has evidenced that Bank of America has transferred and relocated its customer support functions to the Philippines. This transfer and relocation of customer support function is done primarily with the objective of cost saving and increasing productivity of overall business operations. The outsourcing of customer service functions allowed the Bank of America to provide faster, quality oriented with reduced turnaround time to its customers (Nitschke 2011). This step has been viewed as an attempt to increase the efficiency and pursue a strategy resulting in the shifting of resources towards long term goals and objectives. Senior officials of Bank of America mentioned that bank seeks to investigate economically attractive market areas in order to relocate business and functional areas of their business in such market areas. The outsourcing function of Bank of America has grown considerably in the recent years. However, problems related to the security and confidentiality of information was also some of the major issues confronted in the outsourcing process. Report named ‘England’s Sunday Times’ published by the Philippines reporters highlighted the rising concerns related to the threat and confidentiality of information regarding Bank of America’s outsourcing customer support functions (Harkinson 2011). The outsourcing of customer support functions to the developing nations led the financial data of banks customers in the hands of foreign contractors. The foreign contractors assumed the absolute freedom in utilizing the said data for their benefit and purpose. The practice of passing and utilizing information by the foreign contractors for their personal benefit pose a threat on the integrity and confidentiality of personal information collected by the banks from their clients. The issue has also attracted attention of various national and international media and regulatory forums. The regulatory authority of Philippines introduced data privacy standards in order to curb such practices. The privacy standards were introduced in order to comply and keep pace with the international data privacy standards. The US also pushed or introduced bill named Consumer Protection Act to monitor and identify illegal practices prevailing in the call centers (Harkinson 2011). The launching of such acts and regulations solved the security concerns related to the outsourcing of customer support functions. The regulatory frameworks played a significant in gaining customers trust and confidence in their operations and functioning. Moreover, the benefits and revenue collected by the bank through outsourcing customer support services surpassed all the security threats and concerns. The technological advancement also enable the business firms to create security filters preventing outsourcing firms from making disadvantageous use of customers personal information. The technological advancement coupled with strict regulatory framework like data protection act enabled the business firms to outsource their business operations freely (Herath and Kishore 2003). Lower costs and higher productivity Offshore outsourcing is primarily done with the objective of lowering down cost burden and gaining achieving production efficiencies. Manu national and international companies have identified that outsourcing paves the path of getting work done at significantly lower cost. The cost entails in outsourcing work to some other contractors of developing countries facilitates the company to get the work done at a small fraction of the total cost. The differences exist in the pay and living structure of developed and developing countries provides an opportunity to international firms to benefit from such variation or differences. There is significant difference in the pay and standards of living among Asian and western countries. The labor costs are significantly low in Asian countries as compared to western countries (Blokdijk 2008). It has been identified that companies gain almost sixty percent costs saving in case they are getting work done through Asian countries like India. Low cost do not necessarily means low quality or poor quality. National and multinationals are getting work done of higher quality with low costs. It has been seen that outsourcing work has been primarily suspected on the ground of low quality. The outsourced work is considered of low quality or not as per the desired standards seems no longer viable in the present world. The quality factors remain no more serious concern in the field of outsourcing. It is due to reason that firms of developing nations viewed outsourcing tasks as a path towards gaining foothold in the international market place. The outsourced firms are ensuring to deliver the assigned tasks in accordance of the desired quality standards. The compliance with the desired quality standards is significant for the outsourced firms as it determines and governs the path of their future growth as well. The delivery of high quality work encourages their growth and development and vice-versa (Rushton 2007). It will provide them with good brand name and recognition in the market place and thus increase the chance of approaching through international firms. The improved efficiency is another major advantage of the outsourcing avenue. The proper alignment of business goals with the outsourcing deliverables increases the quality of outsourced products and services. The alignment brings paramount increase in the efficiency and productivity of outsourcing deliverables. In present times, outsourcing firms provide with right kind of expertise and experience to the companies and thus helps in streamlining and improving their business processes. The efficiency in business operations and streamlining of business processes play a significant role in improving bottom line. Otis Elevator Company, an American US company offshore their software development task to the developing nation, India. The cost saving is the prime motivating factor encouraging company to endorse the software development task to Indian firms. The company gained significant cost savings on account of lower labor costs of developing countries. A report by CIO magazine revealed that Otis Elevator Company has spent around $420,000 in the form of transition costs to form a team of around 20 people in order to provide offshore services to the company. The company has successfully recouped the invested amount and saved around $1.4 million on account of offshore outsourcing services (Vogel and Connolly 2005). Managerial and strategic personnel of Otis Elevator Company have found that developing countries has abundance of technically trained and qualified workforce showing willingness to work even at lower wage rates. Developing countries offers various kinds of tax advantages and thus attracts many multinational business firms to outsource their business activities to developing countries. Examples of some of such tax incentives includes a ten-year tax holiday package for the companies engaged in research and development activities, or offering a flat deduction of 150 percent on expenditure incurred on scientific research and development avenues. Besides, time zones of developing and developed nations also vary significantly, thus offering the opportunity of continuous and regular work to the company (Grahl 2011). The software development task of the company goes on regularly without any time barrier and thereby improves market opportunities. However, Otis Elevator Company also faced various kinds of problems acting as a hindrance in the outsourcing path. The most common identified problems incurred in the offshore outsourcing projects related to different language styles and vocabulary, cultural factors, documentation styles, work ethics and so on. In addition, there were also some legal risks related to the transfer of intellectual property. The regulatory framework prevailing in home country holds no viability in other countries (Vogel and Connolly 2005). All the above said limitations act as a danger signs for outsourcing projects. It demands pre-emptive action on the part of both firms to avoid or eliminate the emergence of such bad signal in the initial stage. The formulation of clear task description in a common language, adhering with international regulatory norms and regulations in the event of legal issues, monitoring project report regularly, etc are some of the ways through which such warning signals can be eliminated in the initial stage. The company can avoid problems likely to emerge in outsourcing projects through facilitating mutual discussion and interaction with other party. Such discussion should be facilitated in initial stage or before commencement of project. Conclusion The above discussion related to outsourcing avenues in light of practical evidences led to the conclusion that there is significant rise in the number of national and international firms employing outsourcing activities. The outsourcing activities enable the companies to diversify their business portfolios along with focusing on its core competencies. The IT players witnessed that outsourcing activities enable them to focus on critical business areas and initiatives and transfers or endorse non-critical business functions to other companies specialized in that particular tasks. The benefits of outsourcing have been outlined in terms of labor cost, business efficiencies, core competency, and better customer services. The above stated list of benefits serves the critical aspects against which any proposed business avenues is evaluated and tested in order to determine whether the identified business avenue should be undertaken or not. Outsourcing activities also contains various kinds of tradeoffs acting as potential drawbacks in outsourcing. It is also pertinent to have an accurate knowledge of such drawbacks in order to determine whether the rewards or advantage of outsourcing outweigh its inherent risks or limitations. The major limitations identified in outsourcing activities relates to language and cultural differences, security threats, quality problems, difficulty in accessing project reports and progress, and so on. The intensity of such limitations and drawbacks is not as high that cannot be surpassed or handled by the business firms. The proper coding and documentation of work procedures and task descriptions can mitigate the language and cultural problems. Similarly, technological advancement offers the companies with enhanced security control features preventing the accessibility of personal information by unauthorized person. In all, it can be said that numerous advantages and potentiality of offering immense business opportunities under outsourcing surpass or outweigh the risks and disadvantages of outsourcing easily. References Blokdijk, G. 2008. 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Services Supply Vogel, D.A. and Connolly, J.E. 2005. Best Practices for Dealing with Offshore Software Development. [online]. Available at: http://www.intertechengineering.com/PDF/Best_Practices_for_Dealing_with_Offshore_Software_Development.pdf [Accessed on: 11 December 2012]. Weerakkody, V. and Irani, Z. 2009. A value and risk analysis of offshore outsourcing business models: an exploratory study. International Journal of Production Research. 48 ( 2), pp. 613–634. Read More