Outsourcing Essay

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Outsourcing,  also known  as blind  off-shoring,  is a process  by which companies  hire other  companies, usually located in other countries, to perform lower level work. The main motivation  behind the practice of outsourcing  is for a company to minimize its costs while at the same time increase its revenue and productivity and thus gain advantage over other firms.

The 1970s saw a change in the outsourcing  trend where  global outsourcing  shifted  from  comprising solely manufacturing services to including information technology outsourcing (ITO), and later, business process outsourcing (BPO). As the name suggests, the former involves the provision of some or all information systems by one or more providers, which might include  data  conversions,  database  administration, help desk, and network  management,  among  many others. BPO, on the other  hand, takes place when a firm turns  over its management  to a third  party by outsourcing  call centers,  human  resources  administration, finance, as well as accounting functions. ITO and BPO are currently two of the fastest-growing sectors in outsourcing.

Today, India  in particular  has become  the  leading destination  for ITO and BPO because its cheap and skilled labor makes it a very affordable destination for foreign companies. Although the IT industry in India has been present since the 1980s, it was not until the following decade that Indian firms became the  outsourcing  destinations  for companies  around the  world, which included  firms such  as American Express, GE Capital,  and  British Airways. In comparison, the BPO industry  has been in existence for little more than five years, making it a fairly new, yet rapidly developing, sector  today. Presently,  India  is characterized by being home to numerous IT “giants” such as Infosys or Wipro, which are the leaders in this particular field. Moreover, trying to stay on top, India is actually beginning to outsource its outsourcing services, hoping that  such a step will place it ahead of other outsourcing nations such as China. Indian companies are hiring representatives  all over the world so as to ensure a broader  range of language skills along with other abilities to offer companies who outsource their services to this nation.

As the number  of companies outsourcing  to India increases, what has to be taken into account  is that not all of these transactions end up being a success. In the case of the insurance and financial firm Conseco, the  decision  to outsource  has definitely done  more harm than help, and it experienced  numerous  problems. On the other end of the spectrum,  however, is the air industry giant Boeing, which has experienced tremendous gains as a result of transferring manufacturing offshore.

Benefits And Risks

A company that decides to delegate some of its operations to a foreign country like India is able to focus on its core competency,  which is yet another  benefit to outsourcing  as core competencies  are where the success and the profit of the firm lie. After all, having all the responsibility of finishing the mundane and everyday tasks transferred  to a foreign company  enables the firm to dedicate  more  of its at-home  personnel and resources  to doing what truly distinguishes  the company  from its competition.  The improved  communication  system makes this process even easier as companies  in India can collaborate  daily with their customer  companies  so as to make sure that  everything is being done according to the predetermined standards.  In addition,  time differences mean that a U.S. company  can shut  down for the day while the partner in India is continuing on with the work, making the home company more efficient.

Yet another  important benefit that companies can enjoy when outsourcing  is having no overhead costs. Seeing that the offshore companies provide their own facilities and personnel, a U.S. firm does not have to deal with all of the  logistics associated  with building its own plant overseas, such as is the case with greenfield investments.  Specifically, there is no need to recruit, hire, or train new employees in addition to other expenses such as insurance, worker’s compensation, social security, and company  benefits, as all are put on the shoulders of the outsourcing company. The U.S. business reaps the benefits of having another firm provide them with a ready service or product.

The most controversial  issue with outsourcing  is whether  this business method  is a boon to workers and employees of particular firms and society in general. Namely, to many workers the word outsourcing is feared and despised, as they automatically assume that   it  goes  together   with  job  termination.  The truth  is, however,  that  although  outsourcing  does involve delegating jobs to people in other countries, it does not  mean  that  workers  in a home  country are left jobless. After all, in some cases outsourcing may create  services not  previously available, which means that new positions will be created and workers acquired  to fill those  job openings. In addition, hiring cheaper labor overseas enables companies  to hire more  “higher-end” skilled workers  or dedicate funds to further train current workers. Moreover, the common  mistake is to believe that every job can be outsourced; the truth  is that  jobs, especially in the service sector, which may require face-to-face interaction, can be very difficult to transfer overseas.

Despite  the  benefits  described  above, outsourcing does have its faults and shortcomings.  Many of the companies that decide to engage in this business method  share the common  fear of losing their intellectual  property  or trade  secrets.  Joining in with a firm in a foreign country requires the home company to share some of its strategy and strengths,  making both  easy targets  for the outsourcing  firms to steal and incorporate  into their own operations. As part of learning operations, offshore workers can gain knowledge that can be applied to other projects down the road. Seeing as most offshore workers act as contractors, there  is the possibility that  they might use the information  they gain to help competitors.  In other words, outsourcing  threatens  the safety of the knowhow of the home company.

Language  and  cultural  differences  can  pose  yet another  disadvantage for a firm that plans to engage in offshore outsourcing.  Customers  may find it difficult to communicate with customer service representatives when they are located in another  country. As a result, companies  might find that  they have many customers who, dissatisfied with the service, are looking for a different company. The need to study cultural differences is, therefore, a crucial step that every company should consider before entering into an outsourcing contract.

Outsourcing  is closely related  to  the  concept  of foreign direct investment  (FDI). Much like FDI, outsourcing  involves investing in a foreign country, only on slightly different terms. The main difference between  the  two concepts  is that  through  FDI, the home company is looking to sell the goods on the foreign market whereas in outsourcing, the services and the products  are brought  back to be sold or implemented in the company’s home facilities.

Because  outsourcing   is  becoming   a  dominant trend in today’s world, it should not be forgotten that the business strategy carries both benefits and disadvantages, meaning  that  not every company is set to gain from applying outsourcing.  It is a fault of many firms to not take into account  the risks of this business decision  and  instead  focus solely on the  good that  it can provide. It is imperative  that  a company do thorough  research  on the country  before plunging in. To make the process of outsourcing  more efficient, studies should be conducted illustrating the necessary steps  a company  should  take to successfully implement  outsourcing  strategy in a particular country. Such research can help eliminate some of the risks associated with outsourcing. In all, patience and careful planning seem to be the determinants of any successful business decision, especially one as complicated as investing overseas.

Bibliography:   

  1. Bhushan, “Offshore Outsourcing: India,” www.sourceexperts.com (cited March 2009);
  2. Alan E. Blinder, “Offshoring: The Next Industrial Revolution?” Foreign Affairs (v.85, 2006); Boeing, www.boeing.com (cited March 2009);
  3. Conseco, conseco.com  (cited  March 2009);
  4. Giridharadas, “In India, Outsourcing  Moves to the Top Floor,” www.globalpolicy.org (cited March  2009);
  5. W. Hornaday,  “Conseco  Shows  Outsourcing   Is  Not Always Best Call,” www.usatoday.com (cited March 2009);
  6. Harbhajan S. Kehal and Varinder P. Singh, Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective (Idea Group Publishing, 2006);
  7. McDougall, “8 Expensive Blunders,”  www.informationweek.com  (cited  March 2009);
  8. McDougall, “Boeing’s IT Outsourcing Deals Generate More Savings Than Expected,” www.informationweek.com (cited March 2009);
  9. Mitchell, “Debunking Myths of Offshoring Failures,” www.ecommercetimes.com (cited March 2009);
  10. Newhouse, “Boeing Versus Airbus: Flight Risk, Outsourcing Strategies,” www.cio.com (cited March 2009);
  11. Frédéric Robert-Nicoud and Bernard M. Hoekman, Off-Shoring of Business Services and  Deindustrialization: Threat or Opportunity—and for Whom? (Centre  for Economic Policy Research, 2006).

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