Current Issues and Trends of Global Outsourcing - Term Paper Example

GLOBAL OUTSOURCING STRATEGIES: CURRENT ISSUES AND TRENDS Semester: Year: This case study has focused on the process of outsourcing and various things of a business associated with this process. A company develops different strategies for establishing effective outsourcing strategies. For this reason the company has to undertake different various steps. This case study describes the important steps associated with outsourcing process. A detail description of outsourcing process has been mentioned in here. This paper also deals with the views of different authors regarding outsourcing process and theories. Companies implement various theories of outsourcing for getting different benefits from this process. This paper shows that along with several benefits, outsourcing process also has many issues and risks. Outsourcing’s impact on IT industry has been mentioned in this case. In this present time, with the changing business environment there is a huge development in outsourcing process. Companies are implementing effective strategies in outsourcing process for reducing its various costs. Introduction Outsourcing is one of the most effective costs saving strategy which is used in the business for getting various benefits. In this process a company forms contract with other business for enhancing its business operations. Outsourcing involves in transferring of assets, funds, employees etc from one company to another. Domestic and foreign contacts are included in outsourcing process. In this process the company also involves in transferring work to different companies rather than doing it internally. Another name of outsourcing is “contracting out”. The companies mainly involve in outsourcing process for strengthening its weak areas. This process plays a vital role in reducing various cost of the company by per unit. Outsourcing is an important part of downsizing. Overview on the Outsourcing Concept Outsourcing has become a significant part in the business process of successful companies. In the present time various outsourcing processes are experiencing huge growth for competitive business process. Globalization has enhanced the practice of this process. There are different types of outsourcing process which facilitate the company to improve its business operations. Major two types of outsourcing concepts are Greenfield and conventional. In Greenfield outsourcing process, a company purchases new services from other company and uses it in-house. In conventional outsourcing process company transfer its employees, equipments, facilities and technologies to its service providers. Business trend plays an important role in implementing effective outsourcing strategies. Evolution of Outsourcing The process of outsourcing started in the latter part of 19th century. From that time onwards different companies of the world are practicing outsourcing process till now. During 1950-1960 many big firms expanded their business activities for getting the benefits of economics of scale. The competition became tougher in 20th century. Many more companies got involved in this process. The companies were facing problems in managing their business process and structure. For this reason the companies were following the trend of outsourcing to compete with each other. Presently the companies are focusing more on outsourcing process for reducing its various costs and to implement various effective measures. In the modern business environment outsourcing has become a part of strong business strategies. Initially outsourcing was only confined to administrative works. But with time, business technology, business process and various transformational functions of a business are being outsourced. Nature of Outsourcing In the changing business environment the process and nature of outsourcing has changed a lot. International trade and acquisitions have increased the growth of outsourcing process. Recent developments in this process are resulted for the improvement of information technology. It facilitates the companies to enhance their business activities by maintaining low costs. Outsourcing decisions involve many types of factors like cost, time, employees etc. The process of outsourcing was started long back. According to business needs and requirements many terms and conditions are added to this process for increasing its effectiveness. Outsourcing Drives and Potential Benefits In the modern business environment, all the vital persons of a company get involved into the process of outsourcing. The process of outsourcing is not very each. For implementing different outsourcing process a company has to understand and adopt changing business circumstances. It helps the firm to enhance their performance level. A business can outsource its required things by following different types of outsourcing process. The company gets various benefits by implementing outsourcing process. This process helps to increase the commercial profit of a company by facilitating it to utilize the resources of other company at a low cost. Therefore huge amount of money is saved by this process. Outsourcing helps the company to improve its service quality and to expand its business operations. Literature Review According to the authors Gottschalk and Solli-Saether, companies follow different theories for implementing outsourcing process. Companies select outsourcing theory as per their needs and requirements. As per these authors the strategic theories of outsourcing involves in the development of a company’s strategy for achieving its goals and objectives. Strategic theory of outsourcing comprises of various theories which facilitates the company to implement strategies. Game theory helps to determine the strategic behavior of an employee in a particular situation. Company’s function, environment and its structure depend largely on the employees strategic behaviors. The authors’ state that the resource based outsourcing theory helps the firm to develop its competitive advantage and value. By implementing resource dependency theory the companies depend on various external sources for getting resources. Companies allocate their resources as per their outsourcing strategies (Gottschalk and Solli-Saether, 2005). According to the writer McIvor economic theory of outsourcing focuses on governance and co-ordination of different business processes. With the help of transaction cost economic theory the companies can evaluate their existence. This theory helps the firms to understand and upgrade their business process. As a result the companies are able to improve their internal structure and its external business operations by outsourcing various things which are required in their business. This theory helps the firm to outsource various products and services and to achieve economies of scale. Organizations are able to reduce its production and transaction cost by this process. The author states that this theory also facilities the company to make contracts with different agents for supplying various things in the business. The firms make strong relationship with those agents for getting many benefits. Stakeholders of a company get involved for establishing outsourcing contracts with different agents. This outsourcing contract facilitates the agents to get many rights from the company. Economic theory also helps the agents to grow their business with the help of large firms (McIvor, 2009). As per the authors Insinga, and Werle, social theories of outsourcing highlights the relationship of groups, individuals and organizations. The different types of social theories are power politics theory, diffusion theory, exchange theory, relationship theory etc. These outsourcing theories provide various advantages to the business. Innovation diffusion theory facilitates the company to implement different innovative processes by outsourcing various technologies. By implementing this theory the company adopts important changes to improve its business process. This theory is based on two factors. One factor is adopting and another factor is diffusion. Adoption factor facilitates the company to use innovative process and things in its business operations while diffusion factor contributes in communicating innovation among the organizational members. The authors state that power and politics theory plays a vital role in decision making process of the company. Different organizational members hold various types of power with the organization. As per their power they implement different strategies of outsourcing for achieving organizational goals and objectives. The organizational members use their power and authority for implementing outsourcing decisions. Relationship theory of outsourcing focuses on the relationship of the companies with different parties with whom it is engaged with outsourcing contracts (Insinga and Werle, 2000). The Outsourcing Process To organize and develop outsourcing process a company has to pass through different stages. When these different stages of outsourcing are implemented successfully then the company achieves success in its outsourcing process. Various stages of this process help the company to fulfill its goals and objectives. Establishing the baseline: Company first develops its plan for outsourcing different essential things which are required in its business. Top managers and officers of the company assess its different needs for establishing outsourcing process. Goals and alternatives: Strategies of outsourcing are formed as per the goals and objectives of the company. In this step the firm decides which type of outsourcing process it is going to follow. Contract: For implementing outsourcing process the company forms contract with other companies. In this contact both of these company mention different terms and condition which for maintaining their business process effectively (Antras, 2003). Support: The Company which outsources its different services provides support to its suppliers for getting various services and products. The service providing companies gives strong support to the main company by providing good quality of services and products. Negotiation: In this stage the companies negotiate with each other on service quality, performance standard, pricing etc. Strong and effective negotiating terms facilitates the company to establish good relationship among each other (Besanko, David and Mark, 2001). Results: This is the last stage of outsourcing process. In this stage the companies involved in outsourcing contacts evaluate and measures the effectiveness different processes which are involved in outsourcing. As per the result the companies renew its contracts or make new contracts. Evaluation and Management The entire process of outsourcing is evaluated by measuring the performance of the companies. Its growth and development indicates the effectiveness of outsourcing process. The management of the company plays a vital role in this process. The managers take decision regarding the implementation of outsourcing process. They contribute a lot in designing the entire process of outsourcing. The company develops different teams which look after various outsourcing steps. The team manages all the functions involved in those steps and helps to implement effective outsourcing process. Practical Problems In the competitive business environment companies faces many problems while implementing and carrying out outsourcing process. With the increase of competition the problems with outsourcing are also increasing. Sometimes the problems of outsourcing overlap its different benefits which discourage the companies to get involved in this process. Current issues Time: Outsourcing process sometimes becomes very time consuming. With the changing business environment many complexities arises into the business. The management of the company has to handle those complexities and implement outsourcing strategies as the changing business environment. For this reason both of the companies involved in outsourcing process take huge amount of time for choosing outsourcing strategies and managing those strategies effectively (Costinot, 2009). Chance of losing vital skills: In outsourcing process, the firms often transfer its employees to different organizations, who are involved in outsourcing contracts. For a particular period of time the employees stay in those organizations and look after the outsourcing process. During this period of time the company has the chance loss the skills which it has developed for a long period of time through those employees. Therefore many business secrets of outsourcing company can be revealed by this process. Replacing contractors: When the outsourcing companies try to replace its contractors then it faces many problems. It has to abide by the rules and regulations of its existing contracts with the suppliers for replacing the contract. The outsourcing company also has to find out new contactors who can fulfill its needs and requirements. For this reason the firm needs to develop new contracts (Grossman and Helpman, 2005). Loss of control: The outsourcing firm cannot exert strong control on its different business processes which are outsourced from other organizations. Therefore the quality of work of outsourcing company depends largely on its suppliers. If the suppliers do not provide good quality of services or products then the reputation of outsourcing company gets damaged. The outsourcing company can guide the suppliers but it cannot interfere in their business activities. Legal issues: Both the companies involved in outsourcing process have to follow legal rules and regulations for performing their business functions. Many terms and conditions are mentioned in their contact which they also need to follow. Any violation of these rules causes serious problems for both of the companies who are involved in outsourcing contact (Grossman and Esteban, 2008). Overlooking Policy: The companies involved in outsourcing process often overlook the policies involved in outsourcing contracts. For getting undue advantages companies overlook many policies. As a result it causes huge loss in the outsourcing company. The companies involved in this process have to co-ordinate frequently for handling this issue. Risks Outsourcing process involves different types of risks. They are as follows: Sometimes goals and objectives of the outsourcing contract are not determined by the companies which create complication in the outsourcing process. The outsourcing companies often receive many undesirable functions rather than the function they want. As a result it degrades their service or product quality. Large organizations which outsource many services cannot put much attention on different outsourcing decisions. Therefore those organizations fail to establish effective outsourcing strategies which hamper its business growth and development. In many cases companies do not establish strong plans for implementing outsourcing process. For this reason those companies cannot measure the effectiveness of this process (Hummels, 2007). Outsourcing has a strong impact on other functions of the company. Ineffective outsourcing process causes strong negative impacts on other business functions. Often companies overlooks and employment laws while establishing outsourcing contracts which creates many legal complexities in the business process. Implementing outsourcing process without analyzing and understanding various business issues can cause various organizational problems where the growth and development of the employees get hampered (Hummels and Peter, 2005). Global IT Sourcing: Analysis, Development and Best Practices Considerations The global ITO (information technology outsourcing) for the year 2013 stood at $288 billion. It witnessed a 2.8% increase over its 2012 level. The ITO market is dominant in emerging economies in Asia Pacific region. Anticipated growth rate is more than 12% for countries like China and India. Figure 1: ITO service from 2011-2013 (in billion US$) The above figure represents the growth of IT outsourcing services for 2011, 2012 and 2013. 2011 witnessed $246.6 billion exports compared to $251.7 billion in 2012 and $288 billion in 2013. IT outsourcing is incumbent on factors like level of expertise and fund availability. Countries import IT services from other nations owing to low cost advantage i.e. it would incur incremental cost if it would have produced in house. Other important reason is lack of requisite knowledge. Countries outsourcing IT services does not possess the level of expertise that is required to render the service in the host country. Moreover the cost of operations and labor are higher compared to the exporting country. Low exchange rate also influences the decision to outsource. Strong dollar will allow US companies to source IT services from countries like India, China etc owing to its wage differential and low cost advantage. These are the key reasons why companies outsource IT services from emerging countries. Recent developments are key determinants in the IT outsourcing industry. With the narrowing wage differential service importers are moving to new and cost effective locations like Latin America, Africa and some parts of Europe. Though major challenges facing the importers are the quality and the level of expertise, still it would provide incentives to move to such locations to leverage the wage differential. Owing to such dynamism, the ITO has witnessed changing practices and development of new service delivery models that aims at taking advantage of the onshore and offshore sourcing, increasing in house competencies, increasing in sourcing, service integration, better use of cloud services, low cost consultation and increased governance to manage risk, compliance, complexities and ensure better performance and compliance (Sparrow, 2003). Implications for IB Managers Outsourcing decisions are critical to business operations. International business managers should carefully consider the effect of their decisions. In house competency and fund availability are key factors that are to be considered for sourcing decisions. Owing to low cost advantage and lack of in house competency influences the outsourcing decisions of IB managers. Access to latest technology and enhancing productivity are critical implications that should be taken in account. IB managers should strategically plan so that the internal dynamics of the organization is not impacted by its outsourcing strategy. Along with enjoying cost advantage, increased level of expertise, technology access and increased productivity it should also manage its internal dynamics. In house strategies should include managing employee morale, fostering organizational culture and responding to community reaction. The outsourcing strategies that should be considered by IB managers are cultural dimension, HR scope and measurement of cost effectiveness. Managers should consider the exporting company’s culture. Contrasting cultures would result in poor information sharing and communication that will impact the productivity of the importing company. Licensing contracts should be for a long tenure. Long contracts will help reduce the costs, owing to amortization over a long period. IB managers should also consider the implications of wage differential trade off and exchange rates. Outsourcing decisions and strategies should focus on the above factors as they are incumbent on them. Low wage differential and depreciating currency will hinder outsourcing plans, thus managers should carefully plan when and from where to procure goods and services when the domestic cost of producing the same is high coupled with low level of knowledge (Sahay, Nicholson and Krishna, 2003). Conclusion Outsourcing has become a significant thing in the modern business environment. In this case study the concept of outsourcing has been explained in a detailed way. The process of outsourcing was originated long back. With the changing business environment this process has changed a lot. Maximum companies of the world are involved in this process for getting various benefits. The companies develop different outsourcing process for reducing its costs. In this case study different theories of outsourcing are highlighted which contribute a lot in enhancing the business process of the companies. Various authors have produced their view regarding outsourcing theories. For establishing outsourcing process the company follows various steps. The entire outsourcing process of a company is managed by its top managers and team leaders. Outsourcing process is widely practiced in IT industry. Companies transfer various technologies and services with the help of this process. This case study also highlights various risks and issues associated with outsourcing process. References Antras, P. (2003) “Firms, Contracts and Trade Structure.” Quarterly Journal of Economics, 118(4), pp. 1375-1418. Besanko, D, David, D and Mark, S. (2001) “Exploiting a Cost Advantage and Coping with a Cost Disadvantage,” Management Science, 47(2), pp. 221-235. Costinot, A. (2009) “On the Origins of Comparative Advantage,” Journal of International Economics, 77(2), pp. 255-264. Gottschalk, P., and Solli-Saether, H. (2005). Critical success factors from IT outsourcing theories: an empirical study. Industrial Management & Data Systems, 105(6), 685-702. Grossman, G. M. and Esteban R. H. (2008) “Trading Tasks: A Simple Theory of Offshoring.” American Economic Review, 98(5), pp. 1978-1997. Grossman, G. M., and Helpman, E. (2005). Outsourcing in a global economy. The Review of Economic Studies, 72(1), pp.135-159. Hummels, D . (2007) “Transportation Costs and International Trade in the Second Era of Globalization,” Journal of Economic Perspectives, 21(3), pp.131-154. Hummels, D. and Peter, K. (2005) “The Quality and Variety of a Nation’s Trade”. American Economics Review, 95(3), pp. 704-723. Insinga, R. C., and Werle, M. J. (2000). Linking outsourcing to business strategy. The Academy of Management Executive, 14(4), 58-70. McIvor, R. (2009). How the transaction cost and resource-based theories of the firm inform outsourcing evaluation. Journal of operations management, 27(1), pp 45-63. Sahay, S., Nicholson, B. and Krishna, S. (2003). Global IT Outsourcing: Software Development across Borders. USA: Cambridge University Press. Sparrow, E. (2003). Successful IT Outsourcing: From Choosing a Provider to Managing the Project. UK: Springer Science & Business Media. Read More