This is called outsourcing. Many large companies now outsource jobs such as call center services, e-mail services, and payroll. These jobs are handled by separate companies that specialize in each of the services by means of contracts. Today more and more companies are resorting to outsourcing. This is attributed mainly to the increased efficiency and cost cuts. Earlier small companies and companies which were newly established would resort to outsourcing, but today even giants like IBM are making use of it.
In July 2002, a deal was negotiated between International Business Machines Corp. and Fidelity's Employer Service Co. According to the deal, Fidelity's Employer Services Co. unit was to take over key human-resources functions for 260,000 IBM employees and retirees. Fidelity was to hire 450 of IBM's 1,200 U.S. human-resources employees. Among the jobs Fidelity would handle for IBM were health-plan administration, career services and pension administration. IBM would continue to provide other functions in house, including payroll (Johannes L. and Armstrong D. 2002).
According to the article "The benefits of outsourcing for small businesses (n. d)", "Though reducing expenditure is not the prime reason for outsourcing, it is certainly a major factor. Outsourcing converts fixed costs into variable costs and releases capital for investment elsewhere in the business. Outsourcing makes the firm more attractive to investors, since of the ability to pump more capital directly into revenue-producing activities." Though true for small companies, it applies equally well for giants like IBM. In the case of IBM this is exemplified by the fact that the human resource functions of 260,000 workers and retirees have been taken over by Fidelity which has specialization in the field. If the former were to do the same job, it would certainly prove more costly than that of the latter. The funds saved, if invested elsewhere in the company would improve revenues. Also this would make IBM more attractive to investors, as the saved capital can be invested in the revenue generating areas and core fields.
Increase in efficiency:
As IBM is a research oriented company specializing in manufacturing computers, it has a high research and development expenditure. Fidelity's cost structure and economy of scale can give IBM Corp an important and strategic advantage. This would help in decreasing the labor costs. The success of IBM depends upon short term projects that it undertakes. Hiring and training workers for short-term projects can be very expensive and short term employees don't always live up to the desired expectations (The benefits of outsourcing for small businesses). IBM's deal with fidelity will play a leading role in improving overall efficiency by decreasing labor costs. About 450 workers in IBM Corp.'s Raleigh employee service center will transfer to Fidelity Investments beginning Aug. 1, as part of an agreement that allows Boston-based Fidelity to administer IBM's pension plan, the 12th largest in the United States (450 IBM employees to transfer to Fidelity. July 2002). The transfer of 450 out of 1200 members in the human resource division would certainly decrease the labor costs by more than one third in that particular division. Also as the number of employees is decreased, it increases the scope for other employees to make their jobs secure. More security means more productivity which in turn means more efficiency.
Focus on core businesses.
IBM, too, like any other company has