Outsourcing and its Advantages and Disadvantages: the case of Marks and Spencer - Essay Example

Outsourcing and its Advantages and Disadvantages: the case of Marks and Spencer Table of contents Chapter One Introduction – General description of the topic Chapter Two Outsourcing –definition and characteristics Advantages and disadvantages of outsourcing Effects of outsourcing on the organisation Outsourcing and markets Chapter Three Marks and Spencer – an example of outsourcing success Chapter Four Research Methodology: Design and approach Participants Analysis of results Conclusion Chapter One Introduction – General description of the topic Specifically referring to the corporate activity, it has been accepted that whenever a company produces something internally that others can buy or produce more efficiently and effectively, it sacrifices competitive advantage (Quinn et al., 1990). Moreover, in recent years, the growth of contracting has led to the popularization of the concept of 'core activity'. Conventional wisdom states that core activities stay in-house; non-core activities can be contracted out (Domberger, 1998, 35). In this context, business process outsourcing has its roots in operational deals from a decade ago, but it's looming large in collective consciousness of the business world today and becoming, if not popular in any statistically confirmed sense, then certainly a popular consideration (Bielski, 2004, 43) It should also be noticed that the demand for outsourcing is growing in Europe. Datamonitor predicts there will be 286,000 outsourced workstations in Europe, the Middle East and Africa (EMEA) by 2007, or 16.1% of total call center workstations, from 149,000 or 11.6% in 2002 [10]. Under the above terms, British businesses have no choice but to take advantage of lower IT costs in India and other offshore locations, despite signs of a backlash from those concerned about the impact of offshore outsourcing on UK jobs [8] Furthermore, on one estimate [7], America accounts for over 70% of all offshoring business. The second biggest market is in Britain. Big companies there regularly announce that they are moving service jobs abroad, many of them involving the wholesale transfer of call centres. In late October, the HSBC banking group announced that it is taking 4,000 jobs from Britain to India, and earlier this month Aviva (the Norwich Union insurance group) said it is transferring 2,350 jobs, also to India. Chapter Two Outsourcing –definition and characteristics According to one of its most common definitions, outsourcing (or contracting out) is the delegation of non-core operations or jobs from internal production within a business to an external entity (such as subcontractor) that specializes in that operation. Outsourcing is a business decision that is often made to lower costs or focus on competencies. A related term, offshoring means transferring work to another country, typically overseas. Offshoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another [9] In the above context, the search for improved flexibility has, according to Baglioni, become employers' new frontier in the management of labour (1990, p. 12). Flexibility can have a variety of meanings (OECD, 1986; Brunhes, 1989), but fundamentally three forms of the concept can be distinguished (Harrison and Kelley, 1993, pp. 213-214). Functional flexibility is the ability of the enterprise to redeploy labour to cover new work tasks or new production methods. The second form is wage flexibility, in which the enterprise attempts to link wage payments to productivity and product demand. Finally, numerical flexibility is the ability to adjust labour inputs to product demand (Benson et al., 1996, 61) On the other hand, global sourcing involves setting up production operations in different countries to serve various markets, or buying and assembling components, parts or finished products worldwide [Davidson 1982; Kotabe and Murray 1990; Kotabe and Omura 1989; Moxon 1975]. By effectively coordinating sourcing activities, firms may secure lower cost structures and achieve high-quality outputs. Moreover, by operating in several countries, multinational firms have the ability to coordinate manufacturing activities on a global scale to exploit not only their competitive advantages but also the comparative advantages of different countries (Kotabe et al., 1995, 184). Advantages and disadvantages of outsourcing Outsourcing interacts directly with the organisational operation. One of the firm’s areas that are influenced more from outsourcing is its strategic planning. A noticeable example of successful cooperation between outsourcing and firm’s strategy is that of Marks & Spencer which was related with a particular contracting style based on trust and long term relationships with suppliers (Domberger, 1998, 3) It has also been found that HR outsourcing is a big business, in the $30-to-$40 billion per year range. Despite the occasional horror story that causes a company to "back-source," there are no indications that this is a fad that will pass. In fact, what began as a large-company phenomenon is now becoming more commonplace among mid-size and smaller companies as they see less risk in the experience of the early adopters. It should be mentioned that sending HR activities offshore has not had much play: Only about 3 percent of HR outsourcing is offshore. Activities that do not require direct employee contact, like claims processing, may be sent offshore, but so far, companies seem reluctant to have their employee's questions answered by someone with a foreign accent located in a call center in another country (Bielski, 2004, 43) Moreover, a Gallup survey [6] of 150 British businesses released by Proudfoot Consulting shows that just over half of those polled outsource some part of their business, with 44 per cent of British firms choosing to keep all business functions in-house – significantly more than their US counterparts at 33 per cent. The survey of 925 senior executives in nine countries and six sectors, found that in firms where outsourcing had failed, 15 per cent had brought functions back in-house. According to a recent study {2006, [3]), most pharmaceutical organizations are now shifting their IT-support functions to third-party vendors. This is the hottest trend in the outsourcing industry. Previously, only the IT sector and customer service industry were the part of outsourcing boom. However, the situation has changed now with the globalization of pharmaceutical companies. About 50% of the respondents in pharmaceutical industries said that they outsource helpdesk operations. About 40% companies employ a hybrid model that maintains a balance between outsourced and internal operations. In this context, one of the world's largest law firms has signed a £5.5m deal with service provider Savvis to manage its networks [4]. Effects of outsourcing on the organisation Outsourcing has a series of effects on any organisational form. In this context, it has been found that HR outsourcing is having a number of positive effects. As companies enter outsourcing negotiations, they come with a greater understanding of the mission of the firm and its core business. They also come with greater clarity around the true and total costs of HR and what priorities to assign various HR activities. Within the outsourcing firm, functional areas of HR become revenue and profit-producing activities rather than overhead costs. The backroom becomes a business with real customers and incentives to grow. Those who have transferred to outsourcing firms report their satisfaction with having responsibility for client relationships, with the fast pace, with being paid on results (Bielski, 2004, 43) However, outsourcing is also related with a series of difficulties and failures [1], one of which lies in ensuring that communication and especially cross cultural communication is effective. Poor cross cultural understanding of how the ‘other’ communicates, works, manages, and delivers results eventually leads to failure. Regardless of bad experiences, it seems that the trend towards outsourcing and offshoring is set to continue. Companies need to be aware of the probable cross cultural challenges that will ensue and be prepared to overcome them in order to maximise the potential of their overseas ventures. Outsourcing and markets Outsourcing has ‘conquered’ modern markets. Sourcing advisory firm TPI states [5] that the UK represented over 37% of the €11 billion market for major outsourcing contracts awarded worldwide in 2005. Moreover, TPI reports that the US won only 25% of major outsourcing deals (those worth over €40 million), with Asia Pacific at 4%. But the firm notes that the UK's position is largely the result of a massive outsourcing deal between Reuters and BT, and it is unlikely that its lead will be sustainable in the long term. Without the Reuters/BT deal the UK would have been the second largest national market with 16% of new contracts worldwide, says TPI [5] Larger continental businesses are actively adopting outsourcing and even offshoring, especially when their employees’ careers can be protected or enhanced, or when the casualties are sub-contractors rather than employees [2]. Chapter Three Marks and Spencer – an example of outsourcing success Among the companies that have achieved a significant level of growth using outsourcing is Marks and Spencer. The performance of the specific company has increased mostly during the last years developing a model that should be followed as a pattern for most companies operating in UK market. The company has based its success to its cooperation with its suppliers – to the level that the latter have been used as ‘outsourcing’ providers providing goods of high quality within short time period. Chapter Four Research Methodology: Design and approach The research on the effects of outsourcing on the companies but also on the market will be based on data revealed by the firms operated in the global market. The specific data will be used to the evaluation of current situation (regarding the extension and the application of outsourcing among the international markets). Moreover, the data will be gathered using both a questionnaire as well as data revealed by multinational companies around the world. In this context, for the needs of the above research a questionnaire will be handed in the students of a university while a series of official data revealed at the company’s website will be combined to reach a ‘secure’ result. Moreover, the research will contain a series of potential answers from which the consumers will be asked to choose in accordance with the applicability of the presented rules on the specific case. The results will be analyzed using mostly the qualitative approach and the quantitative one will be used only in a limited areas, only when there are no specific results regarding a particular issue. Participants The survey will be conducted in a University area that could possibly offer the chance with a short interview of the participants. The people involved in the specific survey will be given the right to develop their own opinion although they are going to be given also a series of potential answers to choose from. A very important issue regarding the participants is that the latter will have to belong in all racial and social teams and there should be no differentiation based on colour, gender or wealth as this is the only way to secure that the result will present a subjective view of the high percentage of people living and activating in the particular country. Conclusion Outsourcing has been one of the most significant corporate strategies for modern multinational companies in order to secure their place in the global market. In most cases, outsourcing has been related with the high development of the firms involved however there have been cases where outsourcing has led to failure mostly due to the lack of sufficient and effective planning during the preparatory period. However, even given the above difficulties outsourcing still remains one of the preferable corporate tools for the achievement of a rapid development of the companies participated. The application of certain rules and principles however it has been considered as necessary in order to avoid possible pitfalls in the organizational performance. References Benson, J., Ieronimo N. (1996). Outsourcing Decisions: Evidence from Australia-Based Enterprises. International Labour Review, 135(1): 59-67 Bielski, L. (2004). The Case for Business Process Outsourcing: Yes, You Can Renovate Process and Cut Costs but Make No Assumptions and Get Specific. ABA Banking Journal. 96(5): 43-51 Brunhes, B. (1989). ‘Labour flexibility in enterprises: A comparison of firms in four European countries’ in Organization for Economic Cooperation and Development: Labour market flexibility: Trends in enterprises. Paris: 11-36 Davidson, W. H. (1982). Global strategic management. New York: Ronald Press Domberger, S. (1998). The Contracting Organization: A Strategic Guide to Outsourcing. Oxford University Press. Oxford Harrison, B.: Kelley, M. R. (1993). ‘Outsourcing and the search for flexibility’, in Work, Employment and Society (London), 7(2):213-235 Kotabe, M., Murray, J. Y., Wildt, A. R. (1995). Strategic and Financial Performance Implications of Global Sourcing Strategy: A Contingency Analysis. Journal of International Business Studies, 26(1): 181 Moxon, R. W. (1975). The motivation for investment in offshore plants: The case of the U.S. electronics industry. Journal of International Business Studies, 6(1): 51-66 Organization for Economic Cooperation and Development (OECD). 1986. Labour market flexibility. Paris Quinn, J. B., Doorley, T. L., and Paquette, P. C. (1990). Beyond Products: Services-Based Strategy. 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