Outsourcing When It Makes Cents - Research Paper Example

Outsourcing — When It Makes Cents Introduction In pursuit of Competitive Advantage (Porter 1980) production units gradually moved away from the local areas and were relocated to countries where labour was much cheaper and abundantly available. This was the first step towards outsourcing, though it did not come to be popularly known as outsourcing for several years and overseas production units was the term generally used in the early stages. The foremost reason, for relocating production units overseas was the rising cost of production, while the second was the adoption of free trade policies that led to tremendous market expansion. Thus, having overseas production units and markets became the norm for major business organizations. This eventually, led to the phenomenon of global competition. The competition was so fierce that businesses that failed to keep up with the changing: trends, technologies and competencies — swiftly faded away into oblivion. Thus, to cope with cut-throat competition organizations developed expertise in every area of business, be it: production, marketing, human resources, finance, etc. to name just a few. To gain and maintain the competitive edge over competitors, businesses continuously re-assed their processes, technologies and the availability of lower-priced resources. Subsequently, the supply and value chains came into existence as production of goods/ services became increasingly specialised fields, where the partners provided expertise and quality at lower-cost, adding immensely to the profits of the company (Feneestra 1998). As a result of the significant difference in the bottom-line, companies grew more eager to make the most of expert yet low-cost goods/ services provided by outside vendors. Hence, outsourcing to the best resources around the globe became the accepted strategy to help companies: economise, focus on core competence and improve returns on investment. Information Technology – Making It Possible The advent of Information Technology (IT) had a profound impact on the way business was done in the global scenario. IT made it possible to have access to multiple overseas locations in real time; after the promulgation of world-wide production, world-wide networks emerged as an innovative extension of the firm (Borrus et al 2000). The ability to communicate instantly finally established ‘outsourcing’ firmly in the global B2B (business to business) sector. Outsourcing became the mantra business organizations lived by. There was no question that every organization would be outsourcing; the only decisions to be made were: ‘what,’ ‘where’ and ‘how much’ they would be outsourcing. Furthermore, such prompt communication networking led to the establishment of meaningful collaborations and partnerships. This provided fresh information for organisational learning and exchange that further improved outsourcing; resulting in increased cost efficiencies and quality consciousness. On the other hand, the B2C (business to consumer) sector also benefited enormously from the ability to reach a wider audience/ market through the internet and mobile phones, consequently ensuring a place for small and mid-sized players as well. Outsourcing — Cost-Reduction Outsourcing made economic sense, especially for a company’s non-core activities such as: administration, customer service and back-office operations. This made it possible for the company to utilize its resources on core competencies. In its report Forrester Research states that outsourcing infrastructure management and application services expect a saving of between 12%-17% annually; this means that US companies alone are sitting on a $ 10 billion savings through outsourcing (Appendix 1). What’s more, access to low-cost goods and services gave a boost to small and mid-size business units, enabling them to form collaborations and partnerships by means of outsourcing major portions of their work at one/third the cost. An entire network of virtual employees came into being, thriving on work provided by small and mid-size American, European and Australian companies. Cost-reduction also meant that where, previous only a few had leverage over niche segments, now there were numerous players in the same field; offering competitive solutions while maintaining quality expectations. The playing field became considerably even for all levels of contenders, be they MNCs or start-ups. Ultimately, the consumer or end-users also benefited, as companies offered lower prices for goods and services to stay even with the competitors and retain market-share. Moreover, the addition of a diverse work-force meant that fresh ideas were regularly flowing through companies, allowing them to understand the diversified customer base spread throughout the globe; leading to increased customer satisfaction and innovate product and service offerings that improved their profit still further. This also became important in view of diverse customer base that was culturally different and varied communal environments. Outsourcing & Human Resource Management Outsourcing, gave human resource management (HRM) a new dimension. While there was no doubt that it offered huge cost-reductions and increased profits to business, it also simplified HRM to a great extent. It not only provided cheaper labour, it drastically cut-back the cost of maintaining a huge work-force and the ensuing expenses related to it. Outsourcing meant that the company had to neither provide infrastructure (space, furniture, equipment and additional facilities like cafeteria, etc.) nor did they have to pay out extra benefits like: bonuses, health insurance, travel allowance, etc. Moreover, smaller business units could even do away with the entire HRM department! All in all, who was left to be managed? Having a smaller number of workers, who are actually on the company payroll, leaves very little for the HRM department to do. In view of the fact that when a job is outsourced, rarely does it involve the same terms of employment, since the entire purpose is to save costs, this includes the expenses that go into maintaining a regular work-force. Conclusion Expanding markets have made the need for cost-reduction more acute in order to retain competitive advantage. All companies can benefit from outsourcing non-core activities to reduce operating costs and improve return on investment, be they small, midlevel or MNCs. Additionally, they can take advantage of the expertise offered by third-party vendors/ outsourcing agencies and even form collaborations and partnerships to ensure continued benefits and profits. Moreover, outsourcing translates into savings in countless other ways; companies are saved from investing in; latest technology, training, infrastructure, insurance, allowances, etc. Instead, they can simply find the best minds, with maximum experience and minimum costs to get the job done. MNCs have been outsourcing entire services, product lines and in some cases entire manufacturing plants, for immense value derived from such projects. General Motors, is one of the best examples in this category, it outsources several components and parts of its motor cars to vendors all over the world. Meanwhile, companies that enjoy brand equity can even outsource production entirely, while just stamping the company label to add brand value. This translates into huge savings, requiring no investment for establishing and maintaining a manufacturing unit. As far as services and back office operations are concerned, they are perhaps the most commonly outsourced activities and greatly reduce the financial burden of a huge workforce. Thus, it can be concluded that outsourcing does make cents in all the above mentioned scenarios and especially to drive core-competencies of businesses. References Anderson, P. &., & Tushman, M. (1990). Technological Discontinuities and Dominant Designs: A Cyclical Model. 35, 604-633. Borrus, Michael and Ernst Dieter and S. Haggard eds. 2000. International Production Networks in Asia: Rivalry or Riches? Feenstra, R. (1998). Integration of Trade and Disintegration of Production in the Global Economy. 12, 31-50. World Wide Web Forrester Research report available at: http://www.networkworld.com/news/2007/083107-outsourcing.html Porter M.E. (1980). Competitive Advantage, Free Press, NY Read More