Effective Outsourcing Allows Companies to Focus on Their Core Business - Essay Example

?Effective outsourcing allows companies to focus on their core business In the current competitive global economic environment, companies have to apply every possible strategy that will enable them maintain their profits at a good level. One of these strategies is outsourcing. This has emerged to be one of the fastest growing business sectors in the world with countries like India leading in the business. This strategy has not only become a tool for maintaining the profit levels for outsourcing companies but also, as a source of revenue for the destination country. For example India has about 5-6% of the global outsourcing market share and from it, it was able to generate revenue of US $ 10.9 billion in the year 2008 (Bijan 2009). By description, outsourcing is a process by which a company contracts a third party to perform for them a particular function that is not considered as one of the company’s core activities. The third party can be another company or a person. Outsourcing is more prominent in countries with high wage rates where companies outsource their non-core functions to countries with low wage rates for example China and India. The main advantages or reasons for outsourcing include gaining access to globally competitive capabilities, control and reduce operation costs, accelerate re-engineering benefits, share risks, and reduce time and efforts for marketing. It also enables a company to utilize resources that are not available internally, free their resources for development of other resources and improve their focus on the core business activities of the company (Bijan et al 2002). The intention of this essay is to show how effective outsourcing enables/allows companies to keep a focus on their core businesses. Various writers have identified various dimensions that should be considered when making outsourcing decisions. This paper gives a discussion of four of these namely, core competencies, spatial, geographic and product innovation dimension. Under core competencies dimension, a company should not only consider growing in size and scope but it should also ensure that it maintains it specializes in and sustains focus on its core competencies. This means it should not only focus on repetitive tasks but extend to include a wider range of activities. These include knowledge-intensive tasks and sensitive functions for example R&D and design. This will enable the company to increase knowledge from external sources and hence be flexible in responding to challenges and pressures from competition (Stark et al 2006). According to (Bijan et al 2002) the process of outsourcing non-core activities allows a company to step up its resource allocation and managerial attention to those tasks it does the best. These tasks constitute the core business activities/core competencies of the company. This leads to workers and managers being more committed to the company’s core activities. This in turn increases flexibility and responsiveness which generate beneficial impacts on the performance of the firm. Such a specialization leads to high quality production. This is important in the current local and global sectors and markets characterized by very competitive pressures, complex technologies and short product life cycle. Another dimension to be considered in outsourcing decision making is spatial dimension. In this dimension, the company should explore the geographic span of the outsourcing activity. This includes the spatial distribution of all activities that are to be outsourced and the geographic extend of the value chains that will result from this. Dhanapal et al (20080 explains that this dimension has to receive adequate attention because it can result to larger inventories, greater flexibility and longer lead times. Larger spatial span can also result to coordination and communication difficulties and lowered advantage of costs that are fixed in nature. The company therefore has to consider the competitive advantages of the territories and competitive strategies of their firms. In the functional dimension, the company has to assess the type and breadth of the activities to be involved and the impact these activities. At the same time, the company should also assess the quantitative relevance of the outsourcing process and its effect on the innovation performance of local outsourcing. One particular aspect that needs to be considered here is division of labor that is regionally confined and offshoring. The company should also differentiate between R&D, production and services. From this dimension, a company may look for regional or local markets when outsourcing services as compared to other type of products. Under the product innovation dimension, a company should assess its characteristics, human capital endowment and fixed investment intensity so as to give an estimate of its innovation production function. The company should also compare its financial and physical resources with those of other firms of varied sizes. Greater firm size has a positive effect on innovation since larger firms face less financial constrains. However, they are also subject to bureaucratic dysfunction and controls which may affect their power to translate their R&D efforts into innovations (Stark et al 2006). According to King (2001), contracting is the foundation and the beginning of an outsourcing business relationship. However, contractual arrangements are normally hard to specify and monitor and this can create room for post-contractual opportunism. This makes it difficult and threatening for companies to enter into any type of business activities involving contracts, for example outsourcing. Despite the threats, a good strategic approach to contracting like relationship strategy approaches help organizations to choose to outsource. Forming the contract from a relationship approach increases the chances that the contractors will deliver the expected results successfully. Friends are less likely to betray or let one another down as compared to total strangers. In a normal business environment, there is a possibility that the person or organization chosen as the third party could disappear, go defunct, or hold the organization captive. They can do this by making dramatic increase in prices without warning or consultation. Such a scenario is less likely to happen if friendship strategy is used as the strategy of forming the contract. Trust is an important element in the making of contracts. People or organizations that have been operating as business friends have grown to develop mutual trust. This makes it easy for them to enter into greater agreements like outsourcing unlike two people or organizations that are totally new to one another. People or companies operating as business friends know the strengths and weaknesses of the other party. The other party will obviously appreciate the privilege of tapping from the strengths of the other for example, advanced technology or good marketing strategies. King (2001), explains that the relationship strategy approach allows for the two parties to start the contract operate more smoothly by simply expanding on their existing business incentives. One example of an Australian company that has outsourced its services is Pacific FX Traders. The company has signed a business deal with IPscape for the purposes of upgrading its contact centre using IP-based tracking, alerting, routing and work flow management. By operation, FX traders offer marketing support services to Wealth FX, an educational center dealing with foreign exchange. The company uses a telemarketing business model which makes individuals to enter into a contract with the company after convincing them. IPscape platform logs all call information, manage workflow, generate interaction reports and provides per second billing that is visible. According to the general manager of Pacific FX, the company expects an estimate of 40% improvement in profits due to the outsourcing. Another organization in Australia that outsources some of its services is Alpha, an IT corporation. According to Beaumont and Costa (2002), the company had a dominant market share and had enjoyed monopoly for a long time until when direct competition was introduced. This presented a big pressure on the company’s level of profits. The company had higher fixed costs but its competitors who were ‘greenfield’ start-up companies had lower costs. This forced the Alpha to venture into outsourcing as a way of responding to the expected market performance and pressures to reduce costs. One similarity in the outsourcing decisions by the two companies is that both had an aim of improving their product delivery through outsourcing. The difference that comes out clearly is that Alpha Corporation was also motivated by the emergent competition to do outsourcing of some of its services. Therefore, the outsourcing was a way of cutting down on production costs so as to maintain their profit margins (Beaumont and Costa 2002). On the other hand, the decision for outsourcing by Pacific FX Traders was purely motivated by the need to deliver better levels of services. This was triggered by their incapacity to perform this task due to lack of appropriate technology as like those of IPscape. In conclusion, outsourcing can be said to enable companies to focus on their core business. This is achieved through performing of non-core functions through a third party while the company workers and managers concentrate on the company’s core activities. This leads to an improved product innovation capacity for the company. When making decisions on outsourcing, a company management has to approach the issue from dimensions such as core competencies, spatial, geographic and product innovation dimensions. In my opinion, outsourcing is such a good business strategy that lifts non-core commitments of a company to a third party so that they can handle the sensitive functions themselves. However, a thorough financial and economic analysis should be done so identify all hidden costs before venturing into the business. This will enable a company come up with good estimates of savings accrued from outsourcing verses costs incurred in the process. This information is very useful in determining whether to venture into the business or not, depending on profit or loss margins expected. That is if it is going to be more cost-effective or not. References Beaumont Nicholas and Costa Christina (2002). “Information technology outsourcing in Australia.” Information Resources Management Journal 15(3): 14-30 Bijan Moghimi, Reza Kazemzadeh, Asa Wallstrom (2009). “IT & IS Outsourcing Decisions – Advantages & Risks: A Study of ISPs in Tehran.” Intl. J. Humanities (1) pp 115-142. Dhanapal Dominic, Mahmood Ahmad, V. Murugesh, P. Sridevi (2008). “Multiattribute analysis of the offshore outsourcing location decision using a decision support system framework.”  International Journal of Business Information System. (5) pp 445 - 463 Leavy Brian (2004). “Outsourcing strategies, opportunities and risks”, Strategy and Leadership Journal, (6) pp. 20-25. King, William (2001), “Developing a sourcing strategy for IS: a behavioral decision process and framework”, IEEE Transactions on Engineering Management. (1) pp 15-24. Stark Justin, Arlt Mario, Walker Derek (2006). Outsourcing Decisions and Models - Some Practical Considerations for Large Organizations. Hewlett Packard Ltd. Melbourne, Australia.   Read More