Coporate International Outsourcing - Essay Example

Corporate restructuring, downsizing and layoffs have led to fundamental changes at the work place on a global basis. Corporate International Outsourcing or offshoring takes place when service functions are handed over to the providers located in one or more foreign country over which the former has no control, supervision and ownership (Kedia & Lahiri, 2007). Offshoring has been a part of the globalization process and it is based on the assumption that certain service functions cane be performed better, cheaper and faster by overseas providers. The business functions that are being offshored include software development, varied digitized business processes as order processing, insurance claims and billing, customer service, accounts and payroll, telemarketing, medical transcription, tax preparation, legal services, and even research and development. It thus becomes important analyze the impact that it could possibly have on the firms involved in this practice, on the less developed countries (LCDs) and the citizens of the developed countries. The firms that are involved in the practice should take the decision to offshore work only after serious consideration. Some companies’ outsourcing decisions have backfired and they had to reconsider their outsourcing mission (Ren & Zhou, 2006). DELL was forced to move back its OptiPlex desktops and Latitude laptops in November 2003 from India after complaints from customers of language difficulties and delays in reaching senior technicians. Lehman Brothers too had to shift their call center operations back to the US from India after they received complaints of service quality. There basically seems to be a lack of understanding of the economics of outsourcing. The call center supply chain strategy has not been studied. There are various costs that are not considered and people merely take into account the direct labor costs. Moller (2006) says there is a trend to export jobs to where it is cheaper and low cost economies in Asia are receiving all the jobs. This article points out the problems that the developed countries may face when jobs are offshored to less developed countries. The new labor-cost efficiencies may not last for long and this is the main reason why firms outsource. In India, in cities like Bangalore and Hyderabad, there is already a shortage of skills and above average salaries are required to obtain and retain them. The article also points out how firms could consider enhancing their own capabilities as technology has advanced and if systems are developed, cost benefits could be attained even while keeping business onshore. Automation can reduce headcount to such an extent that offshoring is not worthwhile. HP however has moved finance processes to India from UK as it found that that like-for-like costs fall by more than 50 per cent. The article goes on to state that offshoring financial services do not mean savings in cost and improving efficiency. In fact it can even cause the company to go off-track. There is a fear that the citizens of developed countries are impacted when jobs are offshored to less developed countries. Rüdiger (2007) examines the threat to the UK knowledge jobs when jobs are offshored to India. The author points out that while anecdotes that are read should and cannot be taken as a basis for policy decision making. The article first explains the situation in India with particular reference to Evalueserve, a Knowledge Process Outsourcing (KPO) company, specialising in a range of knowledge intensive business services. According to the Indian company geographical and cultural differences are no more important as the world has become flat but this has been opposed by the author. The article then reviews how India has captured the world attention and how the concept of outsourcing has changed over the years. Based on the theory of comparative advantage, most firms compare the wages in the developed countries with those in the LDC and then take the decision to outsource. The article gives a comparative chart of salaries in different functions. The article gives other reasons why firms outsource – focusing on core competencies being a strong ad valid reason. The article by Rüdiger further points out that the gain in LDCs result in loss for the developed countries. In India there has been a record economy growth (9.2% in 2006) and the situation of the poor people has improved phenomenally. This however leads to job loss in the developed countries. In both the US and the UK political pressure is being exerted to retain jobs onshore and reduce offshoring work to the LDC. As per the Forrester research both US and UK would lose millions of jobs to India by 2015. The author however disapproves of the way that media projects a negative image and figures about offshoring and the related economy. According to the author, India still has a long way to go in creating a knowledge based economy and it needs a strong basic education system. The author cites a recent World Bank Publication that confirms that India is at the bottom end of the index that measures the ability to create, absorb and diffuse knowledge. UK on the other hand is the world leader in knowledge services. Knowledge economies means open economies and this has been reflected in the increased FDI in the UK over the years. Increased FDI translates into more jobs and then not all jobs created offshore means job loss within the country. In fact job loss due to offshoring is very small. Thus, the essence of the article is that offshoring does not necessarily mean job loss within the developed country. Secondly, India and other LDCs have only information workers and not knowledge workers and hence offshoring should not be considered a threat by the developed countries The impact of outsourcing on the LDCs has prompted many countries to make efforts and capitalize on the opportunity. King (2007) discusses how new economies are opening and marketing their countries in a bid to get a slice of the outsourcing jobs. Estonia for instance has been able to offer a pool of talented, tech-savvy workers and a modern telecommunications infrastructure. According to King, the global market for shared services and outsourcing is expected to grow to $1.43 trillion by the end of 2009, from $930 billion in 2006. Many countries are joining in the competition and it is expected that India’s dominance in the outsourcing market would be diluted. The author gives the important factors that make and sustain a location as an attractive destination for outsourcing. Apart from costs, the other factors include the education and language skills of workers, the availability of labor, and attrition risk. Political and economic environment are equally important. To remain attractive, the LDCs have to invest in improving technology and infrastructure. The telecommunications infrastructure has to be modernized. Technology has to be used by these countries to transform economies. It also requires changes in policies and procedures. The protectionist attitude has to be done away with if a country wants the total support from the outsourcing company. Kenya wants to become an attractive IT outsourcing destination and it has to liberalize its telecom sector. This indirectly helps the LDCs as competition in any sector drives the prices down as Kenya found in its telecom prices. Shortfall of talented labor can be envisaged in each of the LDCs and this issue has to be addressed by such countries to remain sustainable. Thus the long-term implication of offshoring on the developed countries does not necessarily mean loss of jobs. The involved firms have to take into account the cultural factors amongst others before deciding to outsource. Thirdly, the developed countries have to improve their infrastructure to remain attractive as a destination for outsourcing and sustain this attraction in the long-run. References: Kedia, B. L. & Lahiri, S. (2007). International outsourcing of services: A partnership model. Journal of International Management 13 (2007) 22–37 King, R. (2007). The Outsourcing Upstarts. Available from: http://www.businessweek.com/technology/content/jul2007/tc20070730_998591.htm [accessed 10 August 2008] Moller, P. (2006). Offshore or offtrack? Business Strategy Review Autumn 2006, London Business School Ren, Z. J. & Zhou, Y. (2006). Call Center Outsourcing: Coordinating Staffing Level and Service Quality. Available from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=945278 [accessed 09 August 2008] Rüdiger, K. (2007). Offshoring, a threat for the UK’s knowledge jobs? Available from: http://www.ukibc.com/ukindia2/files/Offshoring%20-%20a%20threat%20for%20the%20UKs%20knowledge%20jobs.pdf [accessed 11 August 2008] Read More