The Need, Benefits and Disadvantages of Outsourcing - Essay Example

Outsourcing number) submitted) Outsourcing In order for a company to besuccessful in the current, competitive global market, firms must take complete advantages over all business processes, through which they can, posses and contain a steady competitive advantage over their rivals, competing in the same business. Outsourcing has turned out to be a key business aspect, providing many firms with the chance of hiring an outside firm, to help in the completion of their production processes, and a well reduced cost but high productivity rate (Engardio & Burrows, 2001). Nevertheless, the decision to undertake outsourcing is a sign of future increase in profits. A number of factors have become considered before a firm can decide whether outsourcing is the right path for the firm to take. One of them has the complete knowledge of outsourcing. According to the online business dictionary, outsourcing is the sub contracting, contracting or externalizing a firms none fundamental processes to free up personnel, cash, facilities and time, for other functions that the firm holds competitive advantage (Engardio & Burrows, 2001). The essay aims at explaining on the need, benefits and disadvantages of outsourcing. According to the publication by the business weekly, even if the total demand may slow down for tech goods, constant financial pressure will rise on firms like; Lucent, Motorola and Hewlett Packard to reduce their costs. According to Michael Marks, the CEO of Flextronics International Limited, getting rid of factories is the best way of doing it (Engardio & Burrows, 2001). The financial officer of Solectron Corp accepts that it is beneficial for companies to outsource after signing with Nortel Networks Corp, a $10 billion deal in production. According to the International Business Machine Corp, growth is the key reason that led them to agree to take over a number of computer operations of the famous auto parts developer Visteon Corp. this is a deal valued at $2 billion over a period of 10 years (Hechinger, 2003). This is among IBM giant outsourcing deals. To many organizations the objective of outsourcing is to improve the company’s financial competitiveness, majorly through reduction of costs (Hechinger, 2003). The author argues that, companies that specialize in various support functions work cheaper since they benefit from various scale of economies, use the latest technology and expert knowledge. Service contracts with external suppliers provide the opportunity to buy services in relation to the firm’s needs. This can also lead to save operational costs. The other organizational perspective is to prevent replacement costs when workers retire or resign from their job industry (Engardio & Burrows, 2001). Human Resource Outsourcing firms provide various management and workers courses in training to keep the staff on the right path. Whether it becomes viewed as harassment training and safety compliance, or ways of handling a tough employee, a compact management training program is always and will still remain a must for every company. A number of organizations make the decisions outsource mainly since they want to try and focus on their key competencies, and check minimal value in creating in house processes out of these main competencies. Human resource outsourcing helps in reducing the overall work load of the present Human Resource staff. According to him, this gives the firm an opportunity to focus on its strategic decision making process, and development of the major competencies. Outsourcing HR processes can provide managers with an opportunity to pay close attention to their main businesses, instead of spending their valuable time on different HR processes, which are constantly turning out to be complex and more advanced. HRO reduces attrition; losing an indispensable employee can cost the management tens if not hundreds of thousands. In The United States alone, the annual cost of an employer turnover is close to $5 trillion. There is an article by Dean Meyer from the website SOURCINGmag.com titled the Four Advantages to Outsourcing (Meyer, 2005). This article focuses on four vital points that should be viewed seriously when trying to establish whether a company will gain from the process of outsourcing. The four advantages listed are; i. Outsourcing can save the firm money ii. Outsourcing can help the firm in risk sharing iii. Outsourcing can help in the accommodation of peak loads iv. Outsourcing can help in the development of the company’s internal staff The article by Meyers goes further in explaining the advantages in detail. The first advantage of saving money occurs since the economies of scale save more money when the unit costs decrease, as the volume rises. The external service providers can obtain economies of scale not present to individual companies, when they put together the volumes of different companies. This in ordinary ways implies that when a company produces its units whether service or products at small costs, each unit produce higher profits (Meyer, 2005). In a number of cases, this fewer cost is only possible when firms outsource some or its entire production. Just like any other business, outsourcing has some stipulations that should be met before money becomes saved. Listed below are the three fundamental conditions that should be met; There must exist economies of scale; Outsourcing must show that the production cost will decline, hereby, increasing the firm’s profit per unit. These economies of scale must be accessible through corporate boundaries; outsourcing firms will only accept to become involved if they will realize that they have a number of clients for their operations (Meyer, 2005). The total savings should be enough to outweigh the extra cost of paying all the other shareholders profit. Other firms claim that outsourcing is essential if the firm’s profit increase by a minimum of 20% after the total fees and costs. The second advantage is risk sharing. Just like in the article, the portfolio effect’ is a commonly used the term in the financial sector by which firms share their risks. In the investment sector, it is only best to spread the firm’s portfolio instead of putting the entire firm’s money in a single stock (Meyer, 2005). Spreading the risk enables the firm to reduce its total risk. This is the similar case to outsourcing. According to Meyers, diversifying through outsourcing gives the firm an opportunity to remain successful even when faced with problems. The third advantage is that outsourcing can help in the accommodation of peak loads (Meyer, 2005). The article claims that outsourcing is useful in the reduction of fluctuations in the headcount that could come from the rise and fall in product demand. In order for outsourcing to be successful, a company should be keen in determining the areas that outsourcing will be financially helpful. The other benefit has managed to obtain through outsourcing, according to the author is an efficient HR system leading to soft cost savings (Meyer, 2005). The Human Resource Outsourcing organization takes over a number of tiresome administrative duties relating to employment According to the author, these duties include; responding to different inquiries by the employees, tax filing and payments, unemployment claims administration, workers health and benefits administration, and streamlining the Human Resource activities for an employee’s entire life cycle. Relieved from these non productive processes, management can now focus their resources on other revenue generating activities. He also states that the management should be at all times have knowledge of the continuously changing employment legislation in HR, tax laws and benefits (Meyers, 2005). Finally, outsourcing allows the company an opportunity to develop its internal staff. There are still a number of benefits executive, and managers get from outsourcing, human resources. According to him, one of the benefits is the reduced expenses related to employment (Engardio & Burrows, 2001). While there exists hundreds of ways of reducing costs, labor costs is one of them. Above tax overhead and payroll, there are still other expenses such as; recruiting fees, legal fees, and payroll processing. Human Resource Outsourcing brings together thousands of workers under a single roof and offers them small or midsized business commonly found in a number of corporations (Meyer, 2005). According to the author, by consolidating a number of vendors, organizations can effectively streamline their operations and reduce the overhead costs. Engaging in Human Resource Outsourcing brings a number of financial benefits in different sectors such as; Health insurance costs, legal fees, and human resource systems and infrastructure. The other benefit the author talks about is the minimization of Employment Risks (Meyer, 2005). Studies carried out indicate that there exists a direct relationship to a rise in the employment related lawsuits and hard economic times. Joined with the complex Human resource laws, a lot of employees find it hard to comply with the always changing employment legislation All these advantages prove that a firm can be able to achieve immense success through outsourcing. Just like any other business, outsourcing is not the only way for a firm to increase its productivity or reduce its costs in production. A number of disadvantages exist that firms should take keen interest. These can be classified into business strategy, economic, and disadvantages in human resource management. In the article ‘ Disadvantages of Outsourcing’ by K Sholastica, the author states that, while outsourcing can become found in a nation, outsourcing, presently refers to the dishing out of jobs to foreign firms, which become based in regions where the cost of labor is low (Sholastica, 2010). The article basis upon the theory, that outsourcing helps a firm save money. Economic disadvantages of outsourcing consist of 2 main issues; reduction in the maximum number of jobs available in the firm’s mother nation, and; the firm might lose some of its foreign exchange due to outsourcing. The disadvantages in business strategy include the possibility for possessing a compromised product or service quality, as well as outsourcing turning out to be a possible grudge factor (Sholastica, 2010). Anytime a company plans to outsource its service or production, they face the risk that the firm, to which the company outsources its production or service, may not possess the same high quality standards as the firm doing the outsourcing. By accepting to outsource its product or service, the firm essentially trusts the workers doing the job to hold up the firm’s quality standards. According to Sholastica, the output quality tends to become compromised because of unawareness of the culture of Americans among the working population (Sholastica, 2010). This, at all times, lead to the creation of cultural barriers and grudge amongst the workers and customers (Sholastica, 2010). Outsourcing can also create disadvantages when considered from the human resource perspective. Mostly, the workers completing the jobs are literally all over the globe from customers with whom they are working, and due to these geographical factors, disadvantages tend to arise (Sholastica, 2010). According to Sholastica, the difference in time forces the workers to work through the night, which has negative effects on their health together with their constitution. The other aspect is that the work is at times more of a clerical nature. This leads to a lot of philosophers who claim that outsourcing of skills kills the capability of a whole generation to reason clearly. Personal, political, and religious differences between the client and the employee may play a part in such scenarios. There exist examples of many companies that have decided to outsource different levels of their business. Technology giant International Business Machines Corp, or commonly referred to as IBM, agreed in 2003, to take over a huge sections of the auto parts maker Visteon Corp. in my research, companies such as IBM have managed to be successful through outsourcing (Hechinger, 2003). This is because it frees them from undertaking substantial investments in information technology, which might be useless in the future. This is a crucial learning point for companies planning or aiming to outsource. Nevertheless, companies should not participate in outsourcing if it is incompatible with the firm’s business activities (Hechinger, 2003). This can be because of the complicated nature of the engagements involved in outsourcing that could lead many mangers to avoid making rushed decisions concerning the matter. In the authors view, consideration of the cost is another reason why companies fail to have external vendors do their Human Resource functions (Hechinger, 2003). According to the authors, outsourcing of human resource functions is not the effective way to cost savings, especially if the firm already has an effective HR functions in existence. While outsourcing can be the best option to a number of companies, it is appropriate for firms to try their level best and introduce their own unique Human Resource activities before proceeding to Human Resource outsourcing. The authors state that an investment in internal Human Resource processes can also raise cost effective benefits to organizations as well (Hechinger, 2003). In conclusion, outsourcing has a number of benefits to firms. Not only does it free up a number of resources but it gives the managers an ability of running the company in an efficient and effective way. Nevertheless, outsourcing should only be done in cases where the processes are compatible to prevent disasters. References Engardio, P., & Burrows, P. (2001, January 8). Year of the outsourcer. Retrieved August 31, 2012, from Business Week, 95-95.: http://search.proquest.com/docview/236783167?accountid=32521 Hechinger, J. (2003). IBM gets $2 billion outsourcing job - most computer operations of visteon to be taken over as it diversifies from ford. Retrieved August 31, 2012, from Wall Street Journal: http://search.proquest.com/docview/398878777?accountid=32521 Meyer, N. D. (2005). 4 Advantages to Outsourcing . Retrieved August 31, 2012, from SOURCINGmag.com: http://www.sourcingmag.com/content/c05101a.asp? Sholastica, K. (2010, September). Disadvantages of Outsourcing. 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