Spread of Outsourcing - Term Paper Example

OUTSOURCING Outsourcing gain more popularity in early 21st century because of the spreading awareness of using online technologies to communicate and expand through virtual network, whereas virtual network has also provided ease to outsource and has enabled organizations to cover up their weaknesses through virtually outsourcing. Outsourcing involves transferring of activities, functions, raw materials and employees to the outsourced partner (Brian, 2004). Outsourcing has number of advantages such as it Cuts cost and increases profit margin, allows organization to focus more on core competences, allows organization to provide products and services to consumers on much cheaper rate, it allows best utilization of time and factors of production, and with activities it also transfers the risk attached to those activities. With advantages, outsourcing has some disadvantages as well, which includes Increase in unemployment in outsourcing country, it often eradicates direct communication between an organization and its clients which hinders organization to build strong relationship with employees, it rises the risk of losing control over operations, it makes the sensitive information vulnerable as chances of leakage of information increases with outsourcing, and it makes organizations largely dependent upon the outsourced partner (Bettis, Bradley, & Hamel, 1992). There are number reasons which explain why organizations outsource their functions and business processes, one of the basic and major reasons is that it saves money and allows organization to pool that money in more productive activity There are many things which companies consider while looking to outsource as the success of outsourcing such as, Companies’ capability to manage in mobile locations; Companies’ capacities to expand and to build outsource partnerships, and companies’ skills and abilities to what to produce and not to produce while being competitive in the market (Boudreaux, 2008). There are number of exogenous factors which also need to be considered by companies while looking for outsourcing, which are Political stability of a country where function or process is outsourced, Language skills of outsourced partner, Infrastructure stability of outsourced partner, and flexibility of intellectual property rights and business contracts in the country of outsourced partner. Companies should concern about handing over technology to other businesses as this practice is quite worrying for them who outsource functions or business processes in order to save money. Companies should keep in mind while outsourcing that one wrong decision to select outsource partner can ruin the business (Fischer, 2009). US has a big outsourcing market therefore other countries such as China and India are making efforts to attract US outsourcing. Countries have changed their tax policies, property rights, regulation policies, exchange rates to attract outsource business usually from USA companies (Vietor and Veytsman, 2007). Purpose “The purpose of this study is to outline reasons to outsource, to have a deep look on advantages and disadvantages of outsourcing, to understand what companies look while looking to outsource and what are the concerns of outsourcing company, and to understand the attraction of US market in terms of outsourcing” Introduction Today outsourcing is a commonly used term around the globe; it refers to the act of contracting a business function or a process by a firm to another firm. Outsourced function or process can be performed internally but may incur more cost than outsourcing. Outsourcing involves transferring of activities, functions, raw materials and employees to the outsourced partner. The term is often misunderstood as off-shoring which means taking out a function of business and reallocating it in another country (Friedman, 2005). Outsourcing involves two organization in exchanging services and payments. It allows organizations to maintain focus on core competences and get the work done by others where it lacks expertise and skills. Outsourcing gain more popularity in early 21st century because of the spreading awareness of using online technologies to communicate and expand through virtual network, whereas virtual network has also provided ease to outsource and has enabled organizations to cover up their weaknesses through virtually outsourcing. In this way organizations can employ their scarce resources for a productive purpose of enhancing core competences and allows them to cut costly and more time consuming procedures (Gupta, A 2008). Advantages Outsourcing is a popular phenomenon these days; it has become a center of attraction with the evolution of globalization for all large and small organizations. It has number of advantages which might not have been possible with internal production, these advantages are discussed below (Mol, 2007): Cuts cost and increases profit margin Outsourcing allows organizations to stop performing those functions and processes which are costly to perform internally, by outsourcing those areas an organization can cuts cost by a large margin and can enjoy large profit margins. Enhances core competences Outsourcing allows organization to focus more on core competences so it can be enhanced and result in competitive advantage over others. Through outsourcing organization can outsource the inefficient function or procedure thus allowing the organization to be more centralized towards core competences. Cheaper prices Outsourcing allows organization to provide products and services to consumers on much cheaper rate that might not have been possible through internally performing the inefficient area, it eventually increases sales and allows customers to buy at much affordable prices. Best utilization of time By outsourcing processes an organization can cut production time of those inefficient processes which are costly to perform and can utilize that time in a much productive activity. Best utilization of resources Outsourcing allows organizations to best utilize their resources. Now organizations can get the best out of their factors of production through productively utilizing those resources which were previously engaged in performing a costly and time consuming activity. Transfers the risk of operations When a company outsources its activities, with transferring the control on functions and activities, it also transfers the responsibility of performing those areas and risks attached to it. Disadvantages Everything has some pros and cons, so does the outsourcing. It is beneficial in many ways but it has some disadvantages as well. Disadvantages attached to outsourcing process limits its use and some elements of the process become a source of anxiety for organizations. Disadvantages of outsourcing are discussed below (Sako, 2006): Increase in unemployment Outsourcing increases unemployment as with a goal to cut cost and provide cheaper products\services to the economy, it transfers some of the functions and processes to other organizations in country or out boundary, hence with transferring processes and functions it also transfers the source of employment for many individuals, for whom those transferred activities were the source of income. Often eradicates direct communication between a firm and its customers Outsourcing often eradicates direct communication between an organization and its clients which hinders organization to build strong relationship with employees and keep them loyal towards it. It may result in dissatisfaction at one end or sometimes at both ends. Danger of losing control Outsourcing also involves transferring of control to other entity, which may result in danger of losing control over many areas as outsourcing may result in delayed communications and project implementations. Where as performing internally an organization has full control on its activities. Vulnerability of sensitive information When an organization transfers the act of performing a function or process, it also has to share information which is sensitive to the organization. Therefore outsourcing makes the sensitive information vulnerable as chances of leakage of information increases with outsourcing. Largely dependent upon outsourced partner An organization becomes largely dependent upon the outsourced partner as it can create a big problem for the organization if an outsourced company back out from the contract. Major Reason to outsource There are number of reasons why organizations outsource their functions and business processes, one of the basic and major reasons is that it saves money and allows organization to pool that money in more productive activity where as companies who provide outsourced services carry less overhead expenses and they don’t need to provide customers with extra benefits therefore it is possible for them to produce at much low cost whereas offshore outsourcing is more benefited because of currency value differentials (Mittleman, 2000). Important aspects to consider while outsourcing There are many things which companies consider while looking to outsource as the success of outsourcing depends on decisions made on what, where, when and how. Therefore companies consider following aspects while looking for outsourcing (Gupta, 2008): Companies’ capability to manage in mobile locations, this usually depends upon networking and inclination towards online use and access to remote locations. Companies’ capacities to expand and to build outsource partnerships. Companies’ skills and abilities to what to produce and not to produce while being competitive in the market. There are some exogenous factors which also effect the decision of outsourcing and should be considered by countries while looking for outsourcing in other regions, consideration of these factors is discussed below (Gupta, 2008): Political stability of a country where function or process is outsourced. Language skills of outsourced partner, whether they can communicate well in the language of outsourcing country. Infrastructure stability of outsourced partner. Flexibility of intellectual property rights and business contracts in the country of outsourced partner. Handing over technology to other businesses Handing over technology to other businesses mean handing over a part or full management and maintenance of a company in other’s hands. When a company outsources its some or all activities, it hands over technology to other entity. Companies should concern about handing over technology to other businesses as this practice is quite worrying for them who outsource functions or business processes in order to save money, as it may result in losing control in outsourced part of management and maintenance and can affect the goodwill, market position and market share of the organization. Companies should keep in mind while outsourcing that one wrong decision to select outsource partner can ruin the business (Gupta, 2008). US outsourcing market USA is the most prominent country of the world, comprising fifty states and a federal district. Being the largest economy it attracts many countries for outsourced businesses. Outsourcing became popular in early 21st century and most of the organizations started to outsource for gaining more profit at less cost. USA outsourcing market is forecasted to grow at 4.2 % compound annual growth rate of five year, reaching $92 billion in 2016 (PR Newswire, 2012). Engaging of US firm’s in the process of outsourcing has allowed other countries to take advantage from performing those outsourced functions and processes as outsource partners from developing and underdeveloped countries in return enjoys the difference in currency values. USA is a large country in terms of area and population, therefore criticism on outsourcing from citizens’ point of view revolves around transferring of employment opportunities with outsourced activity (Vietor and Veytsman, 2007). What are countries doing to attract US outsourcing?  US has a big outsourcing market therefore other countries are making efforts to attract US outsourcing, China and India are taking lead to attract US outsource business. Countries have changed to attract outsource business; following efforts have been made by many countries (Vietor and Veytsman, 2007): Countries are offering services at possible low charges to attract US outsource market, in this USA can enjoy low cost production with high profit margins at competitive exchange rates. Countries such as India are unfolding privatization and encouraging countries to own local business, USA also getting attracted as flexible private property rules is the first consideration of foreign investors. Countries are breaking trade barriers and providing a free-trade zone to USA investors to invest and outsource freely. Countries are offering low tariff and tax rates which is a big attraction for US to get the work done at comparatively much lower tariff and tax rates. Even some countries are providing tariff free zones. Deregulation in countries is another big reason for USA businesses to outsource their activities in those regions. Conclusion To conclude, outsourcing has become an integral part of every business. Companies are looking more and more towards outsourcing to reduce their over all cost of operations. Companies are finding ways to attract offshore companies specially those which are located in US to get outsource business. Globalization has provided ease to companies to gain more advantage from outsourcing, while some disadvantages limits the use of outsourcing. References Bettis, R., Bradley, S., & Hamel, G. (1992). ‘Outsourcing and industrial decline.’ The Executive, 6(1): 7-22. Boudreaux, D. (2008). Globalization. London: Greenwood Press. Brian, L. (2004). ‘Outsourcing strategies: opportunities and risks.’ Strategy & Leadership, 32(6): 20-25. Fischer, T. (2009). What’s wrong with Globalization? North Carolina: Carolina Academic Press. Friedman, T. (2005). The world is Flat. New York: Farrar, Straus and Giroux. Gupta, A. (2008). Outsourcing and off shoring of professional services: business optimization in a global economy.USA: IGI publishing Hershey. Mittleman, J. (2000). The Globalization Syndrome: transformation and resistance. New Jersey: Princeton University Press, New Jersey. Mol, M. (2007). Outsourcing: design, process, and performance. Cambridge: Cambridge University Press. PR Newwire. (2012). Global Business Process Outsourcing Market to Reach $202.6 billion in 2016. Retrieved May 28, 2012, from http://www.prnewswire.com/news-releases/global-business-process-outsourcing-market-to-reach-2026-billion-in-2016-151710465.html Sako, M. (2006). ‘Outsourcing and off shoring: implications for productivity of business services.’ Oxford Review of Economic Policy, 22(4): 499-512. Vietor, R., and Veytsman, A. (2007). ‘American Outsourcing.’ Harvard Business School Read More