The Transacting Out of a Business Function to Be Performed by Another Company - Term Paper Example

? Outsourcing Outsourcing is the transacting out of a business function to be performed by another company or individual. The practice of outsourcing an organization’s internal functions to a third party has been common in the modern economy since the early 21st century. Virtually all organizations outsource to third party companies in some way. Essentially the process being outsourced by the company is a non-core function. This practice of outsourcing gained popularity mainly in the United States, and from there-on proliferated to the rest of the world. For instance, a company may outsource non-strategic functions to companies that specialize in such fields of work. Additionally, outsourcing also includes the transferring of assets and employees to another firm. The term outsourcing extends over both domestic and foreign outsourcing, and it sometimes also involves the relocation of a firm elsewhere; this is known as off-shoring. The company that provides outsourcing services is commonly called as service provider Organizations enter into a business agreement with third-party service providers that involves an interchange of payments and services. Outsourcing helps firms perform efficiently in their core functions and minimize costs incurred and shortage of skill in disciplines where they deem outsourcing appropriate. Since the early 21st century, businesses have exceedingly outsourced to firms in foreign countries; this is commonly known as off-shore outsourcing. In consequence of the widespread practice of outsourcing, several appellations have been designated to refer to various parts of the relationship between the discipline of outsourcing and firms, such as strategic outsourcing, multi-sourcing and near-shoring. Outsourcing offers more room or elasticity in controlling unnecessary expenses and spending where it is indispensable. Outsourcing gives organizations the advantage to spend on only the services that are absolutely needed and also the precise periods or times in which they need them. This reduces the expenses incurred on hiring and training of employees (Haugen, Musser and Lovelace, 2009). The biggest transition in outsourcing has come from the rapid increase in the number of firms or small groups of professionals using computer technologies to utilize outsourcing as a source or path for building pragmatic service providing businesses or systems that can be operated from any part of the globe where internet access is available. Such service providers are preferred by large firms for ephemeral employment of experts in specialized disciplines so as to have their projects or services worked on and delivered completely virtually or online. This suggests that there is a rapidly growing increase in the number of such businesses that function completely online that outsource to offshore firms to work and complete the work contracted out to them before the final service or project is sent to the end user. This is commonly practiced in website designing. Albeit outsourcing has been practiced by corporations so long work specialization has remained an important part of industry, it is rather recently that there has been a surge in outsourcing by organizations for the execution of non-strategic or non-core processes such as data entry, or billing. This is owing to the fact that such processes could be more efficiently executed by companies that specialize in the aforementioned fields respectively; this makes it more time and cost effective for organizations. Some companies outsource services for the execution of particular business functions, while others outsource services for the execution of entire processes. Outsourcing may take many forms but the two most common forms of outsourcing are: Business Process Outsourcing, BPO, and Information Technology Outsourcing, ITO. Furthermore, Business Process Outsourcing incorporates human resource outsourcing, HRO, call center outsourcing and accounting and finance outsourcing. Such processes for Business Process Outsourcing are contracted out for multiple years and involve a colossal sum of money. Famous firms that provide services of Business Process Outsourcing are Accenture, Capgemini, IBM, ACS, EDS, etc. (Cromie and Zott, 2013). Although there are multitudes of reasons behind firms’ motivation to outsource, but among the many is to avoid specific kinds of expenses; these expenses could be in the form of stringent regulations and rules, heavy energy costs, heavy taxes and unnecessary expenses that may be bound with labor union agreements and heavy taxes imposed by the government. A predicted or perceived profit both in the long and short run drives a firm to outsource. With the glistening possibility of decreased short run expenses, the executive managing staff of firms envisions a corridor for profits while the income standards of consumers is predicted to experience slow growth. This impetus urges firms to outsource due to less labor expenses. However, it is unlikely that a firm will spend on the training of overseas workers. Decreased regulatory expenses are also a push factor for firms aiming to saving money when outsourcing. When costs are compared between a domestically hired employee in U.S.A and an outsourced employee, a U.S. employee generally incurs heavy expenses due to heavy taxes on account of social security, medical facilities, health insurance, etc. than in a foreign country. Similarly when CEO pay is compared, executive salary in United States is approximately more than 400 times more than an average worker’s pay. For instance, in 2011, twenty-six of the biggest firms in the United States paid more heavily to their Chief Executive Officers than they paid for federal taxes. Hence, it shows that firms do not practice outsourcing for the reduction of managerial or executive expenses. Furthermore, some firms may also aim to save on internal expenses in order to direct funds and resources or make the budget more flexible towards strategic or core functions. For example, an organization may outsource landscaping operations that are not essentially a part of the core operations of the business. This leads to the outsourcing of specific specialized operations, for New start-ups, such as software publishers, that are short on time and money usually employ both internal and external outsourcing. They contract out with a number of service providers that handle virtually all processes of the company, ranging from product design and software coding to marketing and sales. The approach to outsourcing essentially involves four important steps: 1. Strategic thinking is done in order to develop and apply the business’ strategy and insights for the creation of competitive advantage for the firm in the future as to the practice of outsourcing by the company; 2. Selection and evaluation of potential and reliable outsourcing service providers and locations for the efficient execution of the company’s processes; 3. The working out of the legal matters for the contract development so that pricing and services could be bargained and arranged; and 4. This encompasses the outsourcing of managing or administering staff for the refinement of the established working relationship between the outsourcing service provider and the firm (Great Britain, 2004). Consequently, the success of outsourcing services is determined by the following three factors: A strong Executive-level support in the firm that is outsourcing is for stable and efficient achievement of outsourcing goals; strong communication between the firm and the employees that the firm is outsourcing; and the firm's ability to manage the third-party service providers. The employees who are responsible for outsourcing work from both the company’s and provider’s end need a proper blend of expertise in key areas like project management, communication, negotiation, the perspicacity to understand the conditions and terms of the outsourcing contracts and service agreements (SLA), and the disposition to adapt to new changes in business projects and environment as business is an ever-changing discipline. However, with its many benefits for firms, outsourcing has the potential of gravely damaging or exploiting workers, industries and poor nations. As a consequence, outsourcing, which is essentially offshore shifting of skilled work, has caused a political whirlpool and heated debates, especially in the U.S, as outsourcing has been defined as the “killer of American jobs.” This is because large American firms have started to outsource and exploit the low wages in poor nations. As a consequence, workers in the United States have started to consider outsourcing a threat to their jobs, since having been more educated in technology and provision of services, they have to compete against hordes college graduates in poorer nations like China and India who are willing to work twice as hard for a very meager pay. As an example, Apple Inc. has increasingly faced criticisms on its outsourcing practices; that it outsources the manufacturing and assembly operations of its products in China and that only the designing of products takes place in United States. This criticism has two aspects: One, having been a company indigenous to United States, it is not employing people in U.S but in China; Second, the conditions in which the poor Chinese workers have to work are very harsh and that their pay is meager. This has been strengthened by reports that about 6 workers in Apple’s factory in China have committed suicide and that Apple has never allowed media access to that factory until recently. As a result and due to the aforementioned reasons, in February of 2011, President Obama called the owners and CEO’s of big technology giants in the United States for dinner and urged them to shift their industries entirely back to the United States, as had been in former times. Although, this seems to benefit a country’s economy, but corporations are not willing to do this as this does not save them much money, since costs that could be easily avoided or controlled by them start to incur. In addition to the damage done to workers and poorer nations, companies also have to face multiple challenges that accompany outsourcing. First, management complications: This is caused by a larger physical distance between the higher managerial staff and the low hierarchy employees; this requires morphed and improved methods of management, since feedback may not be as smooth. However, this can be improved by adopting new methods of communication, such as instant messaging. Second, quality of service: The quality of service provided by a third-party organization may differ from domestically obtained services. This might lead to customer dissatisfaction and disruption of manufacturing operations as multi-year contracts could not be ended abruptly. Third, language skills: The problem of language barriers occasions potential problems in the area of call centers. This is because the services given to end-users are often of low quality. This already existing dilemma is further worsened when outsourcing is done to areas where the culture and first language are different, and that call center agents speak with different accents and have a weaker command on the language that further impedes communication. Fourth, security problems: Before a firm decides on outsourcing, it has to bear full responsibility for all the actions of its employees; this sometimes proves to be a problem for the firm because when these employees are transferred to another country due to off-shoring, their legal status changes. As a consequence, these employees are now directly answerable to the firm they have been transferred. This creates security and legal problems that ought to be dealt with through the legal agreement between the firm and the third-party organization. This is often solved by the hiring of an adviser provided by the third-party organization (Cunningham, 2002). The above mentioned dilemma faced by the firm leads to fraud practiced by the employees of third-party organizations. This becomes a big security threat for the parent firm whether embezzlement is practiced by its own employees, that are transferred, or the third-party staff. Although the general opinion that fraud is often committed by third-party employees is disputable, but more evidence is found that corroborates the view; for example in April of 2005, a colossal amount of $350,000 was stolen from several Citibank customers by call-center employees who had obtained passwords to customer accounts and transferred the money to bogus accounts. This was not noticed by Citibank until the customers themselves noticed differences in the accounts and alerted the bank. Fifth, qualification of outsourced workers: For engineering firms outsourcing sometimes seems to be least helpful in certain disciplines of business. For instance, the qualifications of college graduates of major economies such as China and India are debated to differ with American Education standards. This serves to be a deterrent to American firms, as they are distrustful of the services given by third-party companies in such countries. This gives rise to a very confounding situation for the parent firm because the Chief Executives of the company have to decide whether to have better qualified employees on big salaries or outsource employees, who are skilled on an average scale, on low salaries (Johnson, 1997). Therefore, companies who decide on outsourcing engineering functions have to assess and evaluate the expenses incurred against the capabilities of the workers provided by the third-party firm. In turn, this incurs more expenses to the parent firm since such evaluations need to be accurate and elaborate and generally requires the expertise of firms that specialize in such analysis. Lastly, unpredictability of the currently employed strategies serves to be a main aspect of the policies that are made on account of outsourcing activities. This is because the future of any specific skill-group is not known to the parent firm and the prospect of having spent thousands of dollars on a multi-year contract that is or will be a liability to the firm is deterring for the parent firms. In summary, outsourcing has become the true backbone of modern businesses, and as is predicted, it will continue to do so; but with the benefits of outsourcing come drawbacks that if not assessed properly can shake the very structure of the business. References Haugen, D. M., Musser, S., & Lovelace, K. (2009). Outsourcing. Detroit: Greenhaven Press. Johnson, M. (1997). Outsourcing. Oxford: Butterworth-Heinemann. Cunningham, S. (2002). Outsourcing. London: Euromoney Institutional Investor PLC. Great Britain. (2004). Outsourcing. London: Department of Trade and Industry. Cromie, J., & Zott, L. M. (2013). Outsourcing. Read More