The Complexity of the Business Has Changed - Essay Example

?Introduction Over the period of time, the complexity of the business has changed and organizations have now evolved into transnational organizationswith presence in many countries of the world. Such complexity and expansion in the size of the business is also a direct result of the need for having cheaper raw materials and resources so that organizations could remain competitive. (Dekkers,2011) Over the period of time, new dynamics have emerged which has allowed the organizations to try new methods of optimizing their production while at the same time minimizing the costs. The production and services decisions therefore during the late 20th century were started to be made based on the where the firm will be able to minimize its costs. As a result of this, the phenomenon of outsourcing emerged under which organizations decided to outsource some or all of their production and service functions in order to concentrate and focus on their core competencies. Most of companies either completely or partially outsourced their production and service function to other countries such as China and India in order to take advantage of cheap raw material and labor force. (Woodall et al, 2009) Opposite decision of outsourcing is the decision of insourcing wherein organizations attempt to produce themselves or provide the services through their own resources. Thus the decision to either outsource or insource depends upon different factors which combine together to allow organizations to decide as to which course of action to take. (Willcocks, 2010) This paper will provide the relative advantage of outsourcing as a viable alternative to the question of whether a firm should produce or make. Outsourcing Outsourcing is one of unique kind of phenomenon and emerged as a result of the different needs of the international organizations. The need to expand into new markets and urge to become cost efficient therefore has made organizations to continuously look for new ways for achieving such efficiency. Outsourcing also emerged as a result of this organizational need to achieve better efficiency as well as effectiveness in the business functions performed. (Gewald, 2010) Though the concise and precise definition of the term outsourcing has not yet evolved however, it often refers to a process wherein organizations actually contract out some of their business functions. Under outsourcing, two organizations therefore come under the contractual agreement to agree upon the fact that assigned tasks will be performed by the second party to the contract according to the specific requirements of the organizations. Over the period of time, organizations therefore contracted out some or most of their functions to other organizations with better resources and capabilities. Initially the trend was to outsource only non-core operations of the organization however, the requirement to achieve better profitability and become more cost effective forced organizations to also outsource some of their core functions too. It is also important to note that the overall process of outsourcing was regional specific wherein organizations from developed country attempted to outsource their functions to the developing countries. The overall purpose was to achieve the organizational objectives and become more efficient. Insourcing is however, considered as an opposite of the outsourcing wherein organization often willing to maintain their control over their core operations. In order to achieve this objective, the resources are however, shifted to the departments which specialize in performing such business functions. By insourcing an organization however, can contract with other contractors to perform the job however, the performance of the function remains within the boundaries of the area where the organization operates. This also means that through insourcing a firm actually attempts to utilize the local resources to complete its operations rather than letting foreign vendors to perform the same. It is also important to note that the process of insourcing has a favorable political connotation where many believe that insourcing can actually help a country to retain the jobs. As against the process of outsourcing where jobs are mostly relocated outside the borders therefore creating loss of jobs for such countries, insourcing can actually allow a country to retain its jobs. Insourcing is also considered as a process wherein a country with the help of foreign direct investment creates jobs through the local firms rather than letting these jobs to go off the borders.( Dobb, 1998) Outsourcing however, on the other hand tend to have relatively negative political connotations. Most people believe that outsourcing can actually result into the loss of jobs for the country. (Beladi, & Chakrabarti, 2008). The overall implications therefore are relatively difficult for outsourcing at the macro level however, at the micro level firms may benefit from the process of outsourcing. There are however, certain implications of the process of outsourcing also and it can become a significant political issue. It has been debated within the developed countries especially in the wake of current economic downturn that the American jobs have been relocated to countries like China and India. This has only become possible due to outsourcing because international organizations were ready to relocate processes and jobs in order to become efficient in their operations. (Jones, 2009) This was despite the fact that increasingly international firms were preferring outsourcing as a valid alternative for the option of buying a product or service. Earlier, firms were rather confused as to rather buy or make a product the relative advantages of the outsourcing could easily take care of the potential losses which could be incurred if firm decides to buy. Though the decision to make or buy largely depends upon the cost effectiveness, however there are different factors which distinguish it from the buy decision. The following section will discuss some of the key advantages of the process of outsourcing and how firms can actually take benefit from the overall process of outsourcing. It is also important to note that the advantages discussed are not only based upon the notion of cost and benefit analysis but they also include some important strategic benefits which an organization can get while at the same time availing the benefits of the overall process of outsourcing. Advantages of Outsourcing There are numerous advantages of outsourcing and some of them are discussed as under: Cost Effectiveness One of the most important advantages of outsourcing is the achievement of cost effectiveness which can allow firms to become more competitive. By contracting out some of the non core functions, organizations can actually reduce their costs by reducing number of employees and saving cost on technology and other issues. Organizations can actually achieve the same through cost restructuring, access to economies of scale which can offer consistent comparative advantage to the firms to become more competitive in nature. (Kang,& Hong 2009) It is also important to understand that the organizations looking to reduce the costs of their operations by mainly tapping and exploiting the wage differentials between the workers from developing and developed countries. The narrow gap between the quality of skills and the larger gap in wage therefore has allowed organizations to gain access to the cheap labor in countries like China and India. One of the studies suggested that the American IT firms would be able to save more than $21 billions a year by relocating jobs to Indian software programmers. What is also important to note that this cost reduction actually allow the firms to leverage that opportunity and add more towards the growth of the economy. Thus the cost reduction through outsourcing allow firms to become more effective in their production process while at the same time helping economy to become more effective and achieve growth at much rapid speed. Core Competencies One of the key reasons as to why the firms attempt to outsource is to free up their resources and time to focus on their core competencies. Core competencies are competencies which make organizations distinctive from their competition and define their competitive advantage in the industry. Each organization builds itself around its core competencies and therefore need to remain focused on developing the same. However, as the organization expands and becomes more diversified, keeping focus on the core competencies of the firm becomes difficult. One of the most important reasons as to why the mergers and acquisitions fail to materialize therefore is rooted into the fact that organizations are not often able to focus on doing what they are good at. (Rollins-Hinkle, 2001) Outsourcing therefore can allow organizations to shift their focus on their core competencies by contracting some of the functions which may unnecessarily occupy the resources and energy of the organization. Outsourcing functions like payroll, call centers, production etc, and firms can actually focus on improving their core competitive advantage and become more efficient and effective. This is because of the fact that the people, investments as well as the infrastructure is than focused on the development of core competencies of the organization. Organizations like Apple Inc have outsourced their production facilities to the companies from China thus freeing themselves to focus on the development of better designs and quality of the product. This shift in focus towards the refinement of core competencies through outsourcing some or all of the functions therefore can allow organizations to become competitive and understand their environment in most effective manner. Improving in quality Increasing competition and slow response to technological changes may compromise the overall quality of the products and services offered by a firm. Outsourcing can actually allow a firm to achieve improvement in quality of products and services with the help of core competencies of the vendors responsible for the delivery of product or service. (Slepniov & Waehrens 2008) The main idea behind outsourcing is not only to save the cost but also to take advantage from the strengths and core competencies of the vendors which are approached for the outsourcing purposes. For example, in order to better manage the information technology set up within the organization it is important to keep the whole infrastructure updated besides ensuring that the overall skill level of employees using such systems is also updated. This not only requires significant effort but also require more resources to be diverted to potentially non earning assets. With the help of outsourcing an organization can actually achieve such change and improvement in quality by allowing the vendor to undertake the task of managing the IT and other resources required to perform the function outsourced. As such organizations not only take advantage of the core competencies of their vendors but also reduce their cost to invest into infrastructure in order to sustain such non-profitable activities. With the help of outsourcing firms therefore can be able to achieve improvement in the quality of products and services offered. Access to knowledge Organizations are increasingly becoming learning organizations as the process of knowledge acquisition as well as practical application of the same allows organizations to become more competitive. Learning organizations also become more adaptive to their environment and hence are better equipped to deal with the challenges of the external environment. (Yakhlef, 2009) Access to better and more refined knowledge therefore is one of the essential requirements for the organization to succeed in long run. Outsourcing can offer that opportunity to the firms to have access to the diversified base of knowledge. For example, not all organizations may be well equipped with the required skills in information technology however, outsourcing can allow an organization to utilize the strengths of the vendors and gain access to qualified human resource base. Access to such qualified and skilled human resource base therefore improve the overall productivity and output level. (Sinha, et al 2011) It is also important to understand that the access to knowledge can also allow a firm to become more effective and bring positive changes within the organization. The transfer of knowledge and technology therefore can allow organizations to better assess their existing procedures and measure the same against best practices of the industry. As such outsourcing can provide an opportunity to the firms to effective perform the process of reverse engineering. Access to knowledge therefore would allow the firms to become more efficient and bring in international practices in its fold so that organization remains updated according to the changes taking place within external environment. Outsourcing as a change agent Some times organizations become complacent and do not have the will or motivation to change. The overall complicity and inertia within the organizations therefore may not allow them to effectively change it according to the changes taking place within external environment of the organization. Outsources however, can work as a change agent for an organization considering the fact that it can serve as a major step ahead for the firm. Outsourcing vendor, through its better technology as well as skill level can actually force the firm to take positive steps and bring in the required change within the organization. (Lacity, Willcocks & Rottman, 2008) The use of outsourcing agents as the change agents can also allow a firm to become effective in enhancing its innovative capacity. The access to knowledge as well as the willingness to change can allow an organization to become effective in terms of achieving the innovation and creativity. Better innovation and creativity invariably allow the firm to improve its speed and response toward the market. (Willcocks, 2011). As the organization becomes ready for the change and has access to the knowledge, it increases its chances to improve its focus and overall response towards the market. Better response to the changes towards the market may only be possible when the organizational resources are freed and firm reaches in a position to tap into the opportunities offered by the external environment. This could only be achieved when an organization actually outsource some of its functions in order to save time for itself to focus on its core strength. (Usher, 2003) Conclusion It is typically difficult to define what exactly the outsourcing is however, it commonly refers to the process of contracting out all or some of the production and service functions. Outsourcing however, can also be used within the perspective of whether a firm should produce or buy it from the market. This decision therefore is however, largely based upon the notion of cost benefit analysis however, there are other benefits also which an organization can enjoy if it enters into the outsourcing arrangements. One of the key advantages of outsourcing is the achievement of cost effectiveness as having access to the cheap labor force can allow international firms to exploit the wage differentials. The wage differentials between developing and developed countries therefore can allow a firm to ensure that it take benefit of the lower labor costs. It is also because of this reason that most of the international firms often relocate their production process toward developing countries. Outsourcing also allows a firm to focus on its core competencies and become more effective in terms of efficiency and effectiveness. Core competencies are those competencies which provide an organization an added comparative advantage in the market. 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