Seeing Beyond the Bright Side of Outsourcing - Essay Example

Seeing Beyond the Bright Side of Outsourcing In the age of globalization, the business sector had to ride the waves of rapid changes in its many structures to keep up with the upsurge of their competitors' innovations and strategies. In line with this, many global companies are lapping up their chances in doing away with unnecessary costs in production. One of these costs is the labor or employee wages. Highly urbanized countries have higher costs of labor, while developing countries are rich in human resources. This is why, to cut off some labor costs, multinational companies opt to outsource some of its jobs to other countries. At present, outsourcing has become a very popular source of competitive advantage. By paying other companies to run IT and other support divisions, many U.S. companies are cutting staffs, costs, and increasing efficiency. The immediate benefits can be great, allowing smaller companies to gain cheaper access to expensive technologies and allowing large firms to expand there IT usage without risk of obsolescence. As with any potentially rewarding activity, there are risks involved. Companies need to weigh the risks, rewards, and costs involved before making a decision to outsource. The more vital the task, the more care should be taken with this decision (Kakumanu and Portanova, September 2006). But, first what is outsourcing According to Webster's New World Finance and Investment Dictionary (2003), outsourcing is an increasingly popular process where a company contracts with another company to manage services that it needs but that it doesn't want to provide itself. Typically, outsourced services are non-core activities such as janitorial services, information technology, and food catering for the employee cafeteria. Sometimes companies outsource manufacturing and focus on sales and marketing. As such, outsourcing became popular because it allowed companies to reduce short-term costs. On the other hand, Laabs (1993) and Spee (1994), defined outsourcing as something that involves a long-term contractual relationship for business services from an external provider. These relationships are increasingly popular in a wide variety of business activities. Firms widely outsource in areas once strictly considered internal domains, such as human resources. Although most people think that outsourcing is a new innovation, outsourcing is already an older practice than some people realize. In colonial days, American businesses outsourced the production of covered-wagon covers and clipper ships' sails to workers in Scotland. The raw material for these products was imported from India. A couple of hundred years later, in the 1970s, computer companies began to outsource their payroll applications to outside service providers. However, most of these jobs were outsourced to companies in other states rather than overseas. It was in the late 1980s that the practice of outsourcing began to boom. During this time the field of information technology (IT) was growing rapidly, and the demand for IT workers who could develop hardware and software exploded. As the Internet and telecommunications fields developed, companies created thousands of high-paying jobs to attract talented IT employees to work for them. As the U.S. economy faltered, however, companies had to cut their IT budgets and began to seek a less expensive labor force outside of the United States (Dunbar, 2006). Moreover, according to Dunbar (2006), India, with its large population of English speakers and trained workers, transformed to become one of the first countries to benefit from the outsourcing trend. Americans companies began outsourcing some of their low-end IT jobs to India in the early 1990s and have gradually outsourced a wide variety of work, including call center servicing, medical transcription, tax return preparation, research and development, and medical data analysis. Cities like Bangalore have become well known for their skylines dotted with call center buildings that seem to have cropped up overnight. Providing customer service to American consumers for American companies, call center workers are highly educated and earn what are considered top-tier salaries in India. However, these salaries are still far lower than those commanded for the same jobs in the United States. Many Americans, particularly those who have lost their jobs to outsourcing, are frustrated about having to compete for their jobs with workers in foreign countries who are able to work for far less money. Figure 1 summarizes the most common outsourced sectors in businesses: Indeed, the benefits of outsourcing are very enticing to many businesses. Fact is that outsourcing could generate a savings of about 45-55%, with some even reporting 80%. As the process of outsourcing becomes increasingly organized and structured, more benefits are being realized and it is not anymore limited to costs savings. One key benefit is that it accords the companies increased business controls. Improvements cited that are associated with this includes better planning, higher levels of operational reliability and rapid implementation of new strategies and initiatives. These benefits, in the long run, add up to further increase in the productivity and cost savings for the company. In fact, Haag et al. (2006) enumerated the numerous benefits associated with outsourcing. These are: Increased quality and efficiency of a process, service, or function. Reduced operating expenses. Outsourcing non-core processes or non-revenue producing areas allows businesses to focus resources on their core profit-generating competencies. Reduced exposure to risks involved with large capital investments. Access to outsourcing service provider's economies of scale. Access to outsourcing services provider's expertise and best-in-class practices. Access to advanced technologies. Increased flexibility with the ability to respond quickly to changing market demands. Avoid costly outlay of capital funds. Reduced headcount and associated overhead expense. Reduced frustration and expense related to hiring and retaining employees in an exceptionally tight job market. Reduced time to market for products or services. At the downside, outsourcing is causing massive unemployment and is stripping the U.S. job market. The impacts related to eliminating these jobs are slowly turning up: most immediately it affects the individual who loses a job and their dependents; their surrounding community follows soon; it would eventually affect consumer-based economy. Consider the scenario wherein a company employs a whole town. When a company establishes an operation in a town, it also brings in other services like hospitals, school, electricity and water. If the company decides to move its entire operation off-shore in order to maximize savings and keep itself financially afloat, it takes with it the whole town. These have been the case in some U.S. towns wherein the closure of one company causes the collapse of the entire town. Economic effect is expected to continue to grow as outsourcing eliminates the jobs whose paychecks sustain consumer consumption. How much do we know about outsourcing There are differing estimates as to the number of jobs currently being outsourced and expected to be outsourced by the United States. In India, for example, there were 106,000 off-shored employments in March 2002. In about a year, the figure grew to 171,500. It is estimated that by 2008, off-shored employments could hit beyond 900,000. Since the mid-1990s, major U.S. companies have been sending significant portions of their software development work offshore-primarily to vendors in India, but also to vendors in China, Eastern Europe (including Russia), Ireland, Israel, and the Philippines. The big selling point for offshore outsourcing to these countries is "inexpensive good work." A programmer who earns as much as $63,000 per year in the United States is paid as little as $5,000 per year overseas. Companies can easily realize cost savings of 30 percent to 50 percent through offshore outsourcing and still get the same, if not better, quality of service. Another report conducted and released by Deloitte Research in 2003, painted a bleaker outlook. They estimated that outsourced jobs in India could very well reach two million and majority of these jobs will most likely be coming from the top 100 largest global financial institutions (Euromonitor International, 19 July 2005). The impact of outsourcing on the organization differs according to whether existing goods and services are affected, and the sector to which the organization belongs. If contracting involves activities not previously undertaken internally, the adjustment required is modest. Similarly, the constraints on organizational change affecting staff are generally less severe in the private than in the public sector. Employees in the public sector often have security of tenure over their jobs in excess of that provided by employment legislation applicable to all workers. While this may be a reasonable trade-off against the typically lower levels of remuneration in the public sector, these differences can slow down or even stand in the way of corporate restructuring. To the affected employees, the prospect of contracting out may seem like the threat of a hostile takeover bid. The activity with which they have been associated is about to fall under 'new management,' and their own job may be on the line. The employment relationship -- broader than a narrow interpretation of an employment contract -- is about to be broken, betrayed to the principle of economic efficiency. The level of anxiety tends to be proportional to the uncertainty that surrounds the impending changes. With it can grow feelings of resentment and anger at the prospect of 'unfair' treatment of staff. For instance, due to the capital-intensive nature of the semiconductors industry, with only large players having the financial muscle to invest large sums of money, there has been significant consolidation in recent years. Most of the smaller players have moved to less competitive areas or have been acquired. Even the larger players are facing significant pressure on margins driving them to outsource manufacturing. Another reason for outsourcing electronics manufacturing is the labor market. Not only are US salaries for skilled employees high, but also there may be a shortfall in suitably qualified engineers, which will push their salary levels still higher. The number of electrical engineering degrees granted in the United States in 2003 increased modestly from 2002, but not sufficiently to fill all the semiconductor and nanotechnology jobs available in the foreseeable future. To conclude, businesses should think twice before venturing into outsourcing. Even the government has also been slow in replacing the jobs that has been shipped out. In the past, when the U.S. turned from manufacturing to service-oriented, the government was able to absorb the impact of those who lose their jobs. Now, as service-oriented jobs are the one being off-shored, the government is having difficulty creating jobs for those who have been laid-off. The failure of the government to respond is due to its unemployment has a debilitating impact to the U.S. economy. Essentially, outsourcing should impose a "win-win" situation. While outsourcing may have highly beneficial benefits for many companies and nations, it also has many drawbacks. It is important that each government and company should accurately assess their needs to determine if outsourcing is really a viable option. References Dunbar, K.R (ed.). (2006). Introduction.At Issue: Does Outsourcing Harm AmericaDetroit:Greenhaven Press.Opposing Viewpoints Resource Center.Retrieved November 25, 2006 at Thomson Gale Database, University of Phoenix, http://www.galegroup.com. Euromonitor International. (2005, July 19). Outsourcing from the Indian Perspective (Article), UK: Global Marketing Information Database. Retrieved November 25, 2006 at Euromonitor Database, University of Phoenix http://www.euromonitor.com. Haag, S., Baltzan, P. and Phillips, A. (2006). Business Driven Technology, 1st ed. New York: The McGraw-Hill Companies, Inc. http://www.xreferplus.com/entry/5865151Kakumanu, P. and Portanova, A. (2006, September). Outsourcing: Its Benefits, Drawbacks and Other Related Issues, Journal of American Academy of Business, .9(2): 1-7. Retrieved November 25, 2006 at Proquest Database, University of Phoenix, http://proquest.umi.com. Laabs, J.J. (1993, October) Successful Outsourcing Depends on Critical Factors. Personnel Journal, 51-60. Spee, J. (1995). Addition by Subtraction. HR Magazine. 40(3): 38-43. Webster's New World Finance and Investment Dictionary. (2003). Outsourcing. Retrieved November 25, 2006 at Xreferplus Database, University of Phoenix, http://www.xreferplus.com/entry/5865151.outsourcing. (2003). In Webster's New World Finance and Investment Dictionary. Retrieved November 25, 2006, from DISPLAYURL "outsourcing." Webster's New World Finance and Investment Dictionary. 2003. Xreferplus. 25 November 2006 . Webster's New World Finance and Investment Dictionary, s.v. "outsourcing," DISPLAYURL (accessed November 25, 2006). Read More