Contemportary Developments in Management - Essay Example

Technological advancements, communications and most importantly internet technology have enhanced the trading efficiency and firms’ performance. Organizations in the developed nations especially the US have taken advantage of this evolutionary change and started sourcing organizational processes and service from across the border. Today outsourcing takes place across different departments fueled by efficient services at cheaper rates and quality performance. Senior executives and corporate leaders around the world agree that offshoring is good for the world economy. These executives also realize that offshoring can deliver more than just labor cost savings. Despite the anti-outsourcing rhetoric, the firms must remain competitive in highly competitive global market place. This paper will discuss how organizations have responded to this change and what has been the outcome. Outsourcing in the recent years is used in every aspect of business and differs from offshoring. The term ‘offshoring’ refers to relocation of jobs and production to a foreign country (Garner, 2004) while Olsen (2006) looks at it as contracting out business activities to foreign providers. Both differentiate between ‘offshoring’ and ‘outsourcing’. Outsourcing refers to relocation of jobs and services irrespective of the providers location whereas offshoring refers to relocation to other foreign countries where the provider may or may not be affiliated with the parent firm. Scott, Ticoll and Murti (2005) of PricewaterhouseCoopers, clarify that offshoring refers to the location of the work while outsourcing refers to who does the work. A company may offshore without outsourcing if the jobs are relocated to its captive unit or its own office in another country. The trend towards offshoring is likely to continue due to interplay between three factors – technological advances, economic and competitive pressures to reduce costs and improve productivity and institutional development in favor of trade liberalization. Firms tend to outsource the non-core and repetitive functions while keeping the core functions within their control. Pai and Basu (2007) refer to contracting of tactical non-core functions as process level outsourcing and the clients expect end-to-end packaged services that require little customization. The chart below demonstrates the amount of outsourcing that takes place across different functions: Source: Pai & Basu (2007). The shortage of qualified labor in US and Europe was directly related to outsourcing. This shortage was partly caused by the IT boom of the 1990s and the need for technicians for the new e-business (Gonsalez, Gasco, Llopis, 2006). The problem of fixing the Y2K bugs was another strong reason that increased outsourcing to India (Sourirajan, 2004). The US born engineers that entered the workforce were not trained in this age old technology. Besides it was considered low-wage, low-prestige job to work on COBOL and FORTRAN when technologies from Microsoft, Oracle and Apple were available. The Y2K conversion required well educated, computer literate English speaking programmers. This need led to the practice of outsourcing. Due to the economic situation in US, the high technology firms like Microsoft, Dell, Cisco, PeopleSoft, Oracle, Accenture, Ernst & Young and IBM, were under pressure to reduce costs. In the beginning of the 21st century the labor market was relatively poor. The business success of the large and medium corporations in the US is largely dependent on the consumer. Thus because of poor labor market, there was a downturn in the stock market. Investor sentiments were low and firms experienced reduction in trading volume. This affected the demand for computers and ultimately put pressure on the high technology companies to reduce costs. This is how offshoring increased during this period which was considered to be exporting good American jobs to low-wage nations (Sourirajan, 2004). The protectionists in the US allege that job losses are inevitable. The US high-technology industry is increasingly reliant on sub-contracted, non-unionized and illegal labor as well as exploitation of cheap labor in third world countries (Kakabadse & Kakabadse, 2003). The authors allege that the industry is centered on profit maximization with little or no concern for the nation. Based on various theories and business models, studies suggest that offshore outsourcing is preferred to domestic outsourcing or vertical integration of the firm. Three major reasons are responsible for this – lower cost of foreign production, improvements in foreign institutions and international communications, and reduce costs of international transactions associated with globalization (Spencer, 2005). While the costs normally relate to lower wages, there has also been reduction in trade barriers such as tariffs and reduced costs of international search and matching, which in turn creates thicker markets. Global integration provides further reasons for outsourcing like thicker markets due to combining of economies. There are several other features that encourage international outsourcing relative to FDI. These include higher fixed costs of FDI apart from shifting the up-front cost of production from final good-firm to component suppliers. In 2004 just before the elections in US, there were suggestions to reduce the ability of firms to allow overseas software engineers to be trained as these would eventually increase the quantum of outsourcing. This was proposed through visa restriction but this stemmed out of fear and apprehensions amongst those that have a lopsided perspective of the benefits of outsourcing. The “follow-the-sun” model has benefited one-person accounting firm in the US who can now process hundreds of tax returns overnight. This US based company hands over the work to SurePrep in California who in turn transfers it to its Mumbai subsidiary. This has enabled the US tax accountant to do more creative things and offer higher value services to their clients (Sourirajan, 2004). The UK is much conservative as compared to the US as far as outsourcing is concerned. UK’s Cooperative Bank feels it is not advisable to locate their bank’s call center in India since its call centers were a critical capability and should be right shored to its own people (Gottfredson & Phillips, 2005). These people are trained and managed by the bank themselves with a dedicated focus on the customer’s needs. UK-based HSBC offshores its call centers for the same reason – serve the customers better. Similarly, Harland et al state that some organizations do not attain the desired benefit of outsourcing. According to a survey only 5 per cent of companies surveyed achieved significant benefits from outsourcing. This was due to focus on short term benefits, lack of formal outsourcing decision making process, and increased complexity in the total supply network. Moller (2006) contends that offshoring financial services do not mean savings in cost and improving efficiency. In fact it can even cause the company to go off-track. Automating the processes can reduce the headcount so why should one offshore from UK? HP however has moved finance processes to India from UK as it found that that like-for-like costs fall by more than 50 per cent. India already reports of shortage of skilled manpower and hence has to pay high salaries to attract and retain the talented ones (Moller, 2006). Apart from this business processes should be standardized across departments or units before moving jobs offshore (Moller). Axa wanted to offshore its work to Pune, India but realized that it was running four separate systems for its different functions. It was a challenge to first create a single transversal finance system that could work across all locations with common processes. Axa team had to set up the offshore finance team from scratch but eventually it could meet its targets and is running the finance operation in India at about 40% of the former cost base for the operation in the UK. Outsourcing of HR functions has consistently been increasing and this requires that HRM professionals look more closely at employees’ perspectives on outsourcing, says Richbell (2001). During downsizing hiring of outplacement specialists takes place. Recruitment is increasingly done over websites. Counseling takes place through telephone helpline sans emails. At times transfer of human resources takes place from the outsourcing company to the vendor but these in UK have to be governed by various Employment Regulations and Rights Acts. The existing terms of service have to be guaranteed by the vendor (Lee, 2000). Research suggests that less than half of the downsized companies achieve a reduction in overall expenditures and less than one quarter show increased productivity. After outsourcing if the management fails to address the issue of staff reduction and corporate structure, it would negate the value of the entire exercise (Embleton & Wright, 1998). UK has an ageing society like Japan and this poses a number of challenges for the HRM. There is a shift in the values of the younger workers towards work and life. People are looking for flexible working arrangements and greater freedom. Diversity management approach would have to be adapted to focus on individual values and provide a wide range of working conditions (Macdonald & Hanaoka, 2000). Thus, before outsourcing HR functions, priority should be given to organizational culture along with strategic issues for sustained success (Ferreira de Sousa, 2003). Nike, the sportswear giant outsources a large part of its productions, sales and distribution and concentrates its energies and resources on activities that impact the customers directly (HRMID, 2005). This strategy helped Nike to overcome the initial years of struggle and attain phenomenal growth. The company has not looked back ever since. This strategy leads to growth which demands increased personnel and which in turn could lead to a bureaucratic attitude. Nike’s revenue increased from $71 million to $690 million in just four years and had they not decide to outsource, the number of employees would have increased and they might not have been able to contain bureaucracy. Nokia too experienced exponential growth and its payroll touched 80000 by 2000. They decided to outsource a fairly large part of its production. This enabled to avoid organizational complexity during growth. At the same time, when downsizing had to be done soon after the growth, the impact of the downturn was less. Industries like these with fluctuating demands, it helps to outsource at time of growth. Outsourcing even equals innovation for some like IKEA. When they entered the market they introduced quality products at affordable price. They could manage this by adopting a business model that allowed them dependency on outsourcing. Apart from production and delivery, they outsourced the final assembly of the product to the customer. It now introduces only new lines that fit the production-oriented business model. Decisions like these benefit both the customers and the company. Ryanair too adopted this approach which has resulted in cheaper air travel for the customers and a market share for itself which is above industry average. According to the report by HRMID, in the technology driven market, the ideal time to outsource is when the customers deem the cost, speed and convenience of the products more important than new features. IBM made a strategic mistake to outsource when the market was still evolving. Its rivals like Microsoft and Intel took advantage of this and entered the market. It is essential to recognize what the customers want and concentrate energies on that. A hasty decision to outsource can result in loss of core capabilities and technical know-how. Any decision to outsource must have long term perspective rather than immediate gains. Trifler (2005) states that the paradox in outsourcing is that it presents both threats and opportunities. Canadian firms are still unaware that China has risen as the world’s manufacturer and has become the fourth manufacturing power in the world (Le Goff, 2005). China ranks first in the world in the production of items like telecommunication devices, household appliances, textiles, and the pharmaceutical and chemical industry to name a few. Despite this, Trifler says, Canada remains ignorant of the offshoring possibilities and benefits that exist. The benefits outweigh the costs as consumers get a lower price and the producers can expand into foreign markets. The Canadian policy makers have to awaken to the fact that the unskilled workers in Canada will bear the brunt of the Chinese offshoring onslaught. Outsourcing carries risk like currency devaluation and political unrest. These can cause major disruption for the outsourcing firm apart from the anti-West sentiments (Hemphill, 2004). Besides, enforcing intellectual property rights, such as patents, copyrights and trade marks can be expensive and time consuming as the legal systems overseas differ from those in US. The Intel Chairman is reported to have expressed turmoil over the decision to outsource. While firm is obliged to increase the shareholder value by reducing costs and increasing profits, they also have a responsibility towards the US IT workers who help build the nation technology industry. If the government does not find the proper balance between the two choices, Intel would have to take a traditional approach of increasing the shareholder value. Outsourcing can lead to problems if there is no synergy between the two firms, especially when it is offshore outsourcing. Cultural diversity leads to problems especially when the developed nations outsource to nations like India. Cultural differences cannot be avoided and in fact both nations learn to accept and respect each others culture, values and beliefs although research suggests that managing cultural differences is the most prominent difficulties in managing outsourcing relationships. No doubt, initially Canada and Mexico were the preferred destinations by the US outsourcers because of proximity and culture similarity (Gonsalez et al., 2006) but today to combat the problems of cultural differences, high-tech firms like Intel, Adaptec, AMD, Intuit offer optional training to its employees in Indian cultural nuances (Crainer & Dearlove, 2005). AMD even flew teams of Indian workers to California and Texas for a month of cultural training with managers. Data protection is another major concern is outsourcing. The US does not have any laws that prohibit the movement and processing of data across international borders although EU’s Data Protection Directive requires that vendors must meet the very stringent privacy standards. IBM and Microsoft have addressed this concern by investing in dedicated communication lines (Rao, 2004). This is less of a security risk than internet to field international customer calls. Thus it is evident that outsourcing benefits the firms in more ways than one. It is beneficial for the customer and the nations as well. All issues can be handled by the firms outsourcing. Data protection privacy and secrecy can be maintained while cultural issue can be handles successfully also. It helps the forms not only to contain costs when the going is good but not feel the pinch of downsizing when the demand drops suddenly. Outsourcing strengthens the nation’s economy while there is no net job loss. Outsourcing does carry the risk of currency devaluation and political risk. It is essential to have a long term view of outsourcing because initially it may have a negative impact. Outsourcing can lead to innovation. Outsourcing can be done in any department and increasingly firms are also adopting outsourcing in HR but here the HR personnel should be involved in the outsourcing process. Outsourcing also enables 24/7 support and service due to nations having different time zones. In nutshell, outsourcing is here to stay and it is up to an individual firm to exploit and maximize benefits. References: Crainer, S., & Dearlove, D., (2005), Indian Think, Special Report, Business Strategy Review, Winter 2005, p. 51-56 Embleton, P. R., & Wright, P. C., (1998), A practical guide to successful outsourcing, Empowerment in Organizations, Vol. 6 No. 3, 1998, pp. 94-106 Ferreira de Sousa, J. 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