The Impact of Outsourcing Business

The Impact of Outsourcing Business, Jobs and Economies of Wealthy and Poor Nations.

The truth about the speed, scale and unstoppable momentum of business processoutsourcing and offshoring. What will be the net impact on the American and European economies? How should company executives and union leaders respond to emerging markets? Can or should the offshoring process be reversed? Advantages and disadvantages of outsourcing?

Outsourcing is very controversial and affects every part of business from manufacturing through to design, software development, financial control, logistics management, customer support and sales. Outsourcing has been praised as cost-effective, efficient, productive and strategic - but also condemned as evil, money-grabbing, destructive, ruthless, exploiting the poor.

China is now seeing 100% salary inflation at top end and India is not far behind - acute shortage of experienced business leadership. Some companies are now thinking of moving operations to places like Pakistan (50% lower costs and over 200,000 IT graduates looking for work), Bangladesh or Vietnam. Changes are happening very quickly.

Outsourcing can generate weeks of hostile media coverage, widespread protests and industrial action. The issue is so sensitive that decisions are usually taken behind closed doors at the most senior levels in the organisation, and only announced after much careful research into how the proposals are likely to be received.

However, If handled badly, business process outsourcing can damage corporate image, weaken a brand, unsettle customers, and result in lower quality of products and services. But when handled well, the results can be good enough to save a failing corporation.

Various reasons why organizations outsource

A precise definition of outsourcing has yet to be agreed upon. Thus, the term is used inconsistently. However, outsourcing is often viewed as involving the contracting out of a business function - commonly one previously performed in-house - to an external provider. In this sense, two organizations may enter a contractual agreement involving an exchange of services and payments. Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as offshoring or offshore outsourcing (which are odd terms because doing business with another country does not mean you have to go offshore^. In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks, such as nearshoring, multisourcing and strategic outsourcing.
Organizations that outsource are seeking to realize benefits or address the following issues:

• Cost savings — The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.
• Focus on Core Business — Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialised IT services companies.
• Cost restructuring — Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
• Improve quality — Achieve a steep change in quality through contracting out the service with a new service level agreement.
• Knowledge — Access to intellectual property and wider experience and knowledge.
• Contract — Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
• Operational expertise — Access to operational best practice that would be too difficult or time consuming to develop in-house.
• Access to talent — Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
• Capacity management — An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
• Catalyst for change — An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
• Enhance capacity for innovation — Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.
• Reduce time to market — The acceleration of the development or production of a product through the additional capability brought by the supplier.
• Commodification — The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.
• Risk management — An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.
• Venture Capital — Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country^.
• Tax Benefit — Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
• Scalability — The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.
• Creating leisure time — Individuals may wish to outsource their work in order to optimise their work-leisure balance

Interorganizational Systems and competitive advantages

Global business constantly faces radical transformations stemming from advances in information technology (IT). The concept of gaining competitive advantages by linking information systems across organizations (e.g., supply chain integration) has taken on an overtone of dogma in many business circles. Such electronic linkages are known as Interorganizational Systems (IOS). Lately, the growing importance and easy accessibility of the Internet have propelled IOS to a new height. Undoubtedly, IOS can have a great impact on organizational performance and industry structure. However, IT such as the Internet is readily available to all companies, and most IOS concepts can be easily replicated. Followers often enjoy newer and better technology that enables them to offer comparable services in a short time and possibly at a lower cost. Late adopters can also learn from the experience of innovators and thus avoid problems and hiccups along the way. How, then can organizations achieve competitive advantages from IOS?

There are number of successful IOS such as the SABRE reservations system from American Airlines, the Apollo reservations system from United Airlines, the ASAP Express from Baxter Healthcare Corporation, and the Wal-Mart Supply Chain system. These are some of the rare few that have managed to sustain competitive advantages (albeit some for a short period of time) as other companies installed similar electronic capabilities.