Outsourcing Management Issues - Term Paper Example

Management Outsourcing Introduction Outsourcing in business management refers to an arrangement in which an outsider company undertakes service provision that the company would have provided in house. In recent times, the outsourcing trend has become common practice in business management, especially in areas of technology and communications, which are essential components of management. Ideally, the decision-making systems within this structure of management make the business achieve unprecedented growth and business success. The aspect of outsourcing helps in the improvement of business relations with suppliers. On the contrary, outsourcing serves as a contributor to enhanced company performance as it allows a company to focus on its competencies. In the past, manufacturing companies had adopted the vertical integration form of management in which they involved themselves in all stages of production and distribution (Miltenburg, 2005: 30). However, the establishment of the outsourcing theory brought about significant changes to the management concept as it sought to enrich product provision and development. With these ideas in mind, this essay will delve on principles of outsourcing in management and activities that this aspect of business management oversees within a business environment. 2. Outsourcing activities Outsourcing is not entirely a concept adopted by the manufacturing industry, but rather it is a concept the service provision industry has also rolled out. Ideally, both of these industries have a direct application of the vertical integration in which there exists management control. The chain of command under this form of management results from one owner of the entire chain in which chain produces his or her own line of products. This makes the company buy less from other suppliers as it does most of the production for itself rather than have other supplier do the same for them. In essence, a manufacturing agency may have a set of activities like the sourcing of raw materials for production, transformation of the raw materials, production, supply of the finished products, and marketing. On the other hand, the activities with the service industry may vary, but a better-placed example would be the hotel industry where they would include managing of the premise, catering, asset management, landscaping, and supplying the kitchen with the items required. Therefore, both of these industries have available options that an outsourced team may find relevance in as a way of promoting concerted efforts on the core activities for a business entity. Subsequently, outsourcing as a business process becomes the analyzing of the enterprise processes in a business firm to ascertain whether business process should be in house or obtained from the outside. This is because many business entities involved in either service or the manufacturing sectors of the economy have disengaged from activities that attract dismal profits for their firms. With this, many businesses involved in service delivery have opted to outsource most of their activities that range from payment collection, customer service and call answering, and billing services among a list of others. On the other hand, the outsourcing aspect has been visible in the information technology departments within business firms as the number of IT professionals in the market has risen over time. In essence, the rapid transformation aspects that the information technology tends to experience makes it expensive for a business company to keep up. This is because of the regular trainings that the business would have to undertake to ensure that their IT department staff stays in line with the advancements. Therefore, this has resulted in many companies adopting outsourcing aspects that is relatively cheaper and essential in the continued running of a business. Certain areas within a company’s IT department have influenced companies to engage the services of professionals from the outside such computer software and maintenance, network monitoring and operations among many others (Knaus, 2007: 2). Mostly, the outsourced professionals work in tandem with the specifications of a business entity in that they would never use certain specifications on different companies. Therefore, the aim of the outsourced IT agency becomes part of the business organization as it focuses on the implementation of the strategies formulated by the company in line with an organization’s goals and objectives. 3. Off shore outsourcing As part of the outsourcing aspect, many business enterprises have adopted international outsourcing especially in the outsourcing of labor in foreign countries. Ideally, this aspect of management has led to the growth and significance of many domestic and international companies in relation to the modern world business. Many countries have opted to import services from off shore companies rather than contract domestic firms do the same because of the cheapness of the labor (Knaus, 2007: 3). Essentially, China and India have served as the prime contributors to the off shore outsourcing because of the availability of cheap labor options. These two countries receive outsourcing contracts form better performing economies as they strive to minimize on the cost of production. This has posed a threat to the domestic labor market of these better performing economies as offshore outsourcing has influenced job losses for many. The increased cost of operations experienced by manufactures has made them adopt drastic measures that would ensure that their profit generations remain high despite the high costs of production. Therefore, processing exports refer to the products manufactured through the process of international outsourcing by use of imported inputs. Moreover, the offshore-outsourced firms become the producers of manufacturing exports as their linkage to foreign buyers gave rise to this aspect of market trading. International outsourcing has generated interest for many researchers because of the relation between the choice of organizational structure and trading activities at the local and the international levels. Their subject of interest may also be on the factors that may influence a business entity to engage international outsourcing both on the theoretical and practical basis. However, there lies a challenge in the execution of this trading aspect in which an outsourcing contract may be incomplete in the event that the foreign buyer and a manufacturing exporter may not have a specified relationship. This means that a buyer and an exporter should ensure that their needs match in order for the product developed to meet customer expectation. Of course, the main reason behind this adaptation is that one party intends to acquire an essential component of their unfinished product at cheaper labor expenses while the other party seeks to edge out the competition with domestic companies that deal in the same line of production. In this regard, companies intending to outsource manufacturing activities or services from off shore contractors have done so in order to increase on productivity without having to spend on production costs at the domestic level. 4. Challenges for offshore outsourcing Despite the numerous advantages that offshore outsourcing may have, this aspect of trade without a doubt has its challenges. For instance, there is the problem of dependability in that a manufacturing exporter may fail to deliver to a foreign buyer making the buyer have to source for alternative suppliers for the same. The last minute change of suppliers may compromise the quality standards of the finished product in that there exist a high likelihood that manufactured exports may be of different components. Therefore, when a foreign buyer outsources through offshore manufacturing exporters then they become prone to failure and dissatisfaction from their partners. Contrary to the opinion business minds, offshore outsourcing does not imply that vertical integration has failed within a business strategy. The failures presented by offshore manufacturing exporters present influences traders to revert to vertical integration, which may be the best organizational structure that would promote successful dependability. Rather than having to rely on foreign direct investment to satisfy their production needs, many manufacturing agencies have opted to invest in their own facilities through the creation of value chains that would assure quality outputs. Therefore, they opt to make the transformation on raw materials from the initial stages to the last stage to ensure that they address the demands of their target market in the required time. For instance, the growth experienced by the Mauritius offshore textile industry was due t the fact that the industry players made intense investment in vertical integration rather than offshore outsourcing. Therefore, offshore outsourcing may have its benefits, but the risk levels for failure are relatively high because of the dependency that this service has over the acquisition of production materials. 5. Decision making variables i. Cost effectiveness In the attainment of an effective structure of management, several determining variables may make a business to apply the vertical integration management structure or adopt the outsourcing form. The first variable that draws a business towards to change its management or production strategy is cost implications that the business has to incur in the course of developing the finished products. Essentially, may prefer to acquire the essentials of production through the chains established under their management structure because of the lesser cost presented as compared to acquiring the same from other suppliers. However, a company might consider outsourcing as an alternative to acquiring products within the chain if the cost implications appear to be relatively the same. This means that they can have their intended services or products at the same cost, but the difference becomes that the products acquired would be of high quality as those contracted to provide the services are professionals in their fields (Miltenburg, 2005: 31). Cost may serve as a decision making variable that may influence a company to relocate to countries where there are lower costs of work as a manner of declining production expenditures. This may be an in house advantage to a company rather than outsourcing to domestic companies that may present higher costs of production. ii. Capital rationing Capital rationing as a propellant to decision making may refer to control over the funds that nan institution may have at its disposal by focusing on the cost implications of certain investments. In essence, a company may opt to adopt the full vertical integration concept of production, but it may not have substantial funds that may facilitate this process to the fullest. Here, the cost implication would facilitate a company to adopt the outsourcing aspect whether domestically or abroad because there are no settings up costs incurred. iii. Control and dependence The advantage of relying on suppliers from the outside is that there is the possibility of acquiring manufacturing products or services at lower costs. However, the danger lies n the fact that this creates a dependency the suppliers that do so at cost effective prices hence proving to be a challenge when the suppliers relocate or liquidate their businesses. On the other hand, dependency aspect may also have a direct impact on customer-oriented operations in that when the supplier makes late deliveries then the buyer has no choice, but rely on these suppliers. This may be highly detrimental to a business as consumer satisfaction is one of the surest ways to making profits. iv. Value for the upward or downward systems A business tends to operate within different ranks that may either add value or devalue its outputs. This means that the value chains existing within the vertical integration system of management may have to extend upwards or downwards in order to maximize on profit margins. For instance, the capturing of higher retail presence may be through the setting up of retail outlets in order for the profits attained to be internal. v. The presence of a supply market and international issues Ideally, companies may opt to rely on vertical integration systems if unable to find reliable suppliers for the manufacturing products that they may require. Therefore, the option that remains has to establish an internal department whose sole mandate would be to focus on the execution of a company’s core competencies. On the other hand, the establishment of offshore outsourcing structures also has to rely on the cost implications and dependency concerns before embarking on the venture. For instance, a business may consider the requirements whether they are favorable for trading or on the exchange rates for currencies to avoid the incurrence of losses. 6. Decision making structures The first framework is the make or buys a model in which the reduction of costs is the basic factor before making any final decisions. The outcome is what matters most as the company evaluates the performance of their intended supplier as compared to that of the buyer internally. The formulation of this theory resulted from an economic perspective by Williamson Oliver as he advised that businesses had alternatives to normal business processes. Williamson intimated that taking the benefits according to the economies of scale is achievable through focusing on a specialized activity rather than diversifying. He added that firms could succeed internally in production through the vertical integrated structure without having to rely on suppliers from the outside. On the other hand, Williamson also asserted that successful production could also draw relevance from outsourcing meaning that both ways were probable ways to sustaining customer operations. By having suppliers from the outside, a business could easily acquire cheaper supply options meaning that it can cut on the costs of production. However, a company may opt to form mergers with suppliers in order for their market capture to be successful. Further, the Williamson’s decision-making structure states that asset specificity is another aspect that may influence on a company’s intentions. Asset specificity refers to the uniqueness of a company’s products that tend to attract demand due to this characteristic. The two components of asset specificity that are non specific assets that are external while specific assets are company owned and are irreplaceable because of their cost of acquisition, which serve as catalysts to the cost reduction measures on product. Therefore, assets involved in frequent trading may have an impact on the acquisition process because it helps in the elimination of the initial trading challenges experienced. Arguably, the acquisition of assets without having any prior planning involves the scrutiny of the managing team meaning that the process stretches. Subsequently, the management may opt to establish in-house production facilities to evade the disappointment that comes along with changing suppliers. Outsourcing may be a viable option for reducing production costs if the anticipated risks are non-existent or minimal. However, the delays that a company might incur when they opt to contract offshore manufacturing exporters may influence a company to stick to the vertical integration concept. The second decision-making strategy that a company may use before settling on outsourcing or verbal integration is the transaction cost theory where management focuses on reducing the costs of trading. The arriving of this decision may be through the information that the management team may have at hand or through the actions by outside parties like suppliers. Whichever way, the decision outcome is not absolute as they remain unpredictable on their impact on the business. Lastly, core competencies view may serve as the influence towards the adoption of outsourcing concepts in which strategy serve as the element of focus. In essence, when the management team realizes that certain activities form part of the core competencies then they retain them as internal activities. The externalization of activities may also be a probable approach when the management ascertains that they are only support mechanisms. This is what the outsourcing aspect within a management system becomes. Subsequently, the cost implications at this point do not determine whether the approach is viable as task execution and perfection for the company becomes the catalysts to the outsourcing concept. In this regard, outsourcing or vertical integration may be effective approaches to the achievement of customer operations and satisfaction without factoring in the cost implications that they may present. Bibliography Knaus, M. 2007. Macro economic issues of offshore outsourcing. Mu?nchen, GRIN Verlag GmbH. http://nbn-resolving.de/urn:nbn:de:101:1-201008142539. Miltenburg, J. 2005. Manufacturing strategy: how to formulate and implement a winning plan. New York, Productivity Press. Read More