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Outsourcing has increasingly become a vital tool for the implementation of business strategy in many organizations. Competition continues to increase and organizations are being continuously forced to find ways to improve business performance and to obtain competitive advantage. Increasingly, organizations are looking beyond the traditional boundaries of the firm to obtain performance improvement. The growing prevalence of outsourcing service providers is shaping the development of competitive strategies as well. The BPO phenomenon has grown as organizations have been transferring responsibility for entire functions such as human resource management, finance and information services to service providers - sometimes referred to as 'unbundling' (Hagel and Singer, 1999).
What is outsourcing:
In this global environment where companies exhibit their economic development in various degrees, outsourcing has become one among their basic strategies in developing and improving themselves in their filed. Outsourcing or off shoring is the joining or partnering of business with another company or person from a different country to do a particular function. Outsourcing is being further made easy and helped with the development of telecommunication, information technology. Off shoring organizations specialising themselves in developed sectors, Kavcic (2009). For most of the companies, outsourcing represents an initiative for them to spread their global network of ownership, their franchise, knowledge and technology in acquired organizations across the world.
Ola B. (2001) argues that "externalization or outsourcing of employment relations is not only a matter of temporary, administrative or geographical distance between employee and employer but a contemporary form of externalization responsibilities which results in the consequent understanding of human resource policies aiming at employability". Furthermore, companies tending to outsource their business are becoming the dominant mode of growth for firms seeking competitive advantage in an increasingly complex and global business economy Adler (1997). The most important reason for companies to outsource their employees is to reduce their cost of reduction and to improve their quality level of services.
Almost most of the organizations nowadays are outsourcing in one way or the other. The most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO). Multi National Companies like IBM, Accenture and GE etc, are dominant outsourcing service providers in the information technology outsourcing and business process outsourcing fields. For instance, here in The UK, most of the mobile and broadband companies in communication sector like Virgin media, Orange, O2, 3 etc; have one of their support bases situated at India, mostly their system support base. Computer giants mentioned above like IBM, Accenture, Microsoft, Sun etc; all have a base BPO located at Bangalore, India.
The most important reason for companies to send their employees off shore to another country is to reduce their cost of reduction and to improve their quality level of services. In this global environment where companies exhibit various degrees of economic development, outsourcing has become their basic strategy in developing themselves. Outsourcing is being further made easy and helped with the development of telecommunication, information technology. Off shoring organizations specialising themselves in developed sectors, like the software sector have the opportunity to achieve increasingly more qualities and cheaper workforce, which can also possess professional qualifications and infrastructure which leads to a rapid increase in their activities, and above all to business success in an extremely competitive market Kavcic (2009). For most of the companies, outsourcing represents a starting point for spreading their global network of ownership, their franchise, knowledge and technology in acquired organizations across the world.
The aspect of off shoring provides the means to improve theoretical understanding of recent firm-level business strategy decisions and their outcomes Doh (2005), and the sector where off shoring or out sourcing has been practiced vitally is The Software and The IT sector.
Importance of outsourcing in UK IT sector:
Most UK organizations outsource some of their activities (68%) and many believe that outsourcing has simply become an established way of working (39%).
Organizations are citing positive benefits in terms of quality, productivity and cost savings as a result of outsourcing. Two-third of those currently outsourcing say it has enabled them to concentrate on their core business activities (66%) and/or that it has saved the company time and money (68%).
Outsourcing is not set to increase dramatically over the next 2 years - 14% of those currently outsourcing plan to cease doing so in the next 2 years, although 20% of organizations not currently outsourcing are planning to do so over the same time period.
IT, HR, marketing and R&D outsourcing are set to expand over the next 2 years.
Sectors planning the largest increases in outsourcing are Telecommunications and Other Manufacturing, with public sector organizations planning a significant rise in IT and HR outsourcing over the same period.
Over two-thirds of companies in the UK (68%) currently outsource some of their business activities.
Today, service sector in United Kingdom (UK) contributes around 75 percent of its GDP. In particular, its banking, insurance, and business services dominate, requiring high-skilled management professionals. A bulk of production job, design job, and commercial job that is being carried out now has a considerable part of what we denote as human capital in it and a much lower use of natural resources and other stuffs than previously.
This tilt towards services is a significant change that needs a fresh look when it comes to running a business house here. After all, human experience and skill are not something that is constrained by the laws of diminishing returns. The more human capital is utilized, the more it refines. This sums up the future expectations from human resources department to seize the opportunity to grow exponentially by skillful management of such human capital.
The decline of trade unionism and growing importance of outsourcing services in UK and elsewhere is perhaps due to unique requirements posed by globalization and advances in interactive 2.0 web technologies.
Recruitment and training of employees is one of the key roles of human resource department. Over the years, management thinkers have supported decentralization over centralized business administration. Findings in 2004 Workplace Employment Relations Survey, UK, did observe that there was greater decentralization of personnel function.
The significance of SMEs in the UK economy is great. In the beginning of 2004, number of private sector firms less than 250 employees was 1.16 million and employed 8.66 people or 36 percent of all employees in the UK. The nature of workplace in terms of economic activity belonging to SMEs is quite different from larger firms.
It is found that for SMEs, personalized services and superior quality are more important for success than price, vis-à-vis large firms. It is feared that their reliance on single product or service and low customer base may place greater pressure at tough times than their bigger counterparts. For instance, when it comes to London Olympics 2012, SMEs lead the race of contracts with over two-thirds of the contractors applying for business belonging to SME category. It is expected to give such businesses a great learning experience. However, it is questionable how such new SMEs will adapt and survive once the event is over in the long run. According to economists, outsourcing is one recourse that will give them specialized services at a significant lower cost.
The strategy to move towards service sector and outsourcing jobs has changed UKs work environment. Without better quality of skilled professionals and reduced cost, UKs exposure to service and other knowledge-based sector in this competitive global environment could not have increased. In this transformation, there has been evidence to suggest that many workplace employment related practices such as work-life balance (WLB) and equal opportunities (EO) have changed for the better.
There is a broad consensus that when it comes to competing globally, UK's performance has been on track. The current weakness that we are seeing from 2008 is perhaps because of global recession and weak pound that may also need some adjustments with regard to personnel practices. However, outsourcing will be the way forward for its SMEs that will help them tap the best of advanced technologies and globalization as the economy recovers.
Harry Tata believes that for UK economy to flourish, outsourcing will play a big role going forward. Outsourcing will help UK avail high-end, knowledge-based services at a lower cost without any pressure on its demography. Outsourcing and remote services will perhaps be the best way to leverage on rich infrastructure that UK has build over years. For SMEs, it will guarantee excellent specialized support at a very competitive price.
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Types of Outsourcing:
One challenge every business enterprise faces nowadays is to find niches that generate the most income. Several companies are wary to venture on additional expenditures that do not promise considerable yield. This is the main reason why companies resort to outsourcing activities.Â OutsourcingÂ is divided into three types: technology services outsourcing,Â business process outsourcingÂ and knowledge process outsourcing.
Technology Services OutsourcingÂ
Due to the fast-changing world, business enterprises find it necessary to invest on sophisticated technologies and systems. Technological innovations are fueling the rapid evolution of business and economic models. Companies have to adapt to these changes in order to thrive in a competitive market. Some of these technologies include electronic commerce, network infrastructures,Â applications, telecommunications and website development. Investing on a whole new set of manpower to perform these tasks is apparently, an additional capital expenditure. In-house employees may perform such functions but not as good as getting a third-party firm that specializes on the field and are sure to be more cost-effective.
Business Process OutsourcingÂ
Business Process Outsourcing, more commonly known as BPO started back in 1995 during the advent of internet business. It involves operational functions such as customer relations management, equipments, accounting, human resources, logistics, procurement, security, documentations, insurance, health care, manufacturing, and media outsourcing. In BPO, specific tasks, especially those outside the core competency of a company, is outsourced to a third-party firm.
BPO can be further divided into two: front office tasks and back office tasks. Front office functions are customer-oriented such as marketing, customer service and technical support. Back office tasks are more on internal work (e.g. billing, payroll, purchasing).
Other operations outsourced by enterprises include multimedia, bookkeeping, consultancy, data entry, proof-reading and editing, as well as medical transcription. As internet technologies advance, so isÂ business process outsourcing.
Knowledge Process OutsourcingÂ
A more sophisticated level of outsourcing relative to BPO is knowledge process outsourcing (KPO). This involves advanced research, analytical, and technical skills which means that providers are expected to work independently. It is also important to note that in BPO, all processes are still laid out by the client whereas KPO specialists are given managerial control. Examples of KPO include: pharmaceutical research and development, intellectual property research, content writing, and database development services.
Among the three types, KPO is the older form of outsourcing and usually involves short-term and peripheral projects. BPO, however, is considered as the most popular among the three types especially if one is to consider that most companiesÂ outsource business processesÂ to offshore locations such as the Philippines.
Impacts of Outsourcing - Benifits and Problems:
Offshore Outsourcing and its impact on UK IT sector
The UK workplace goes global
A few years ago, UK workers worried about their employers offshoring their jobs to low-cost locations like India. The people affected by this were mainly call centre staff or administrative staff. Anyone in a value added role, which generally meant one that you couldnt train for in a matter of days or weeks, such as IT specialists, was safe from the threat of offshoring.
Well, not any more. Rising numbers of UK organizations are using offshore centres to cut their technology spending, and the figures are trending inexorably upwards. And in the latest development, offshore no longer means a 12 hour flight and 5 time zones away. Offshore staff could soon be coming to a desk near you.
Numbers quoted recently in the news media indicate that 85% of the 22,000 work permits granted in the last year were to Indian nationals employed in the IT sector. This represents a 10-fold increase over the last 10 years (2004 - 22,000 vs. 1827 in 1995) in the number of foreign IT professionals taking up work in the UK under skilled migrant visas.
Filling a skills gap?
The influx is largely explained by recruitment industry spokespersons as a response to the need for specialist IT skills in the UK. This implies that the estimated 30,000 unemployed IT workers of UK origin have simply failed to keep up with employers changing skills requirements. In other words it suggests that older workers in particular are not prepared to move with the times.
Other recruiters point to the large number of government and public sector projects which have pushed up demand for lower priced IT skills. According to pay monitoring firm PayScale, an experienced software programmer in India receives an average annual salary of 6,600 pounds compared to around 33,000 pounds in the UK.
In addition, representatives of Indian software development companies operating in the UK point to the logic of having a technician who has worked on the development of a system in India come over to the UK to oversee its deployment.
Cost is the decider
This trend, dubbed onshore offshoring, is borne out by the rapidly growing UK presence of major Indian outsourcers. Firms like Wipro and Infosys have growing British and Indian national workforces in the UK, and the recent 500m pounds purchase of Pearls closed book life and pensions business by Indias TCS in Peterborough has been seen as a landmark in onshore investment.
One Indian outsourcer currently has around 2,500 employees in the UK, of whom approximately 2,000 are Indian nationals on assignment from a few weeks to several years. They are paid Indian salaries, with travel, accommodation and living allowances.
Cost is rarely if ever quoted as a reason for bringing in Indian workers, although when challenged most interviewees admit that cost is an element in the decision. In this and similar cases, there may well be a skills gap driving the decision to bring people over from India, but the main impetus is economics. A person with specialist software (SAP) skills whose normal UK charge-out rate to clients would be around 650 pounds a day could be provided to the client for about 350 pounds all in.
What do UK organizations get out of this arrangement?
Organizations which are adopting this model gain a number of benefits:
Lower people costs
A solution to skills shortages
Flexible resource pool - the people can go home when theyre no longer needed
Knowledge of systems which have been built offshore
More direct control over "offshore" resources in the UK than if they were in offices in India
But what are the possible disadvantages for UK organizations? Aside from issues regarding cultural and business awareness, the disadvantages of hiring foreign workers on short terms contracts are potentially the same as with UK contractors:
You are developing the skills of someone elses employees, who can then take their knowledge elsewhere, including to your competitors
The business knowledge your short term resources have acquired is lost when they leave and you have to start all over again with someone new
Operational risk may increase because of lack of continuity of personnel, mistakes made by inexperienced staff and amount of management time absorbed by having to undo errors and redo work.
Reaction in the UK
Reaction to the work permit figures has been fairly muted, possibly because this so-called labour arbitrage has been going on for some years, starting with the run up to Y2k.
Perhaps also the lack of agitation reflects an acceptance that the phenomenon of the "onshore offshore" Indian IT worker is not going to go away, however much UK workers would like it to. Recent experience in the US, which has been ahead of the UK in charting the onshore offshore development, is not entirely encouraging to interventionists. An attempt by the US government drastically to limit the number of work permits available to foreigners resulted in a U-turn by the authorities when it became clear that US companies needed the foreign resources.
Perhaps the muted UK response is based on the acceptance that the UK itself has been offshoring its own expertise for decades. UK companies for years have exported highly skilled workers to other countries and circumvented work permit regulations by positioning them as "consultants" traveling for "business meetings" and short term "project work".
It seems that onshore offshoring is here to stay, as an integral part of the evolving global sourcing model. Customers and shareholders of UK organizations, not to mention public sector stakeholders want to keep costs down, and using lower-cost foreign labour is one way to do this. As long as UK organizations adopting the model stay within the law and do not expose themselves to unacceptable (mainly operational) risk further down the line, the hiring of willing foreign nationals to meet their IT needs will be a valid policy.
The global playing field is leveling outââ‚¬Â¦and its a very chilly place. And, of course, it could get chillier. Today: IT workers. Tomorrow: low cost Indian administrators working in the UK? Accountants? Civil servants? Scientists?