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Now outsourcing is one the most recent management strategies to emerge in response to demands for more efficient ways to address organisational competitiveness. In an age where management carefully weighs the cost and benefits of every discretionary investment, finding evidence of the results of outsourcing is critical. In particular, research considering the context surrounding an outsourcing decision's results is likely to be essential and useful to corporate outsourcing management. Outsourcing is defined as " procuring of services or products from an outside supplier or manufacturer in order to cut costs"( Brooks, 2004, p.4). This paper will discuss the benefits and problems associated with the outsourcing function. Specifically, the paper will discuss real case examples of firms that have used outsourcing function to provide shareholders increased wealth and reduction of costs in the firm's activities. More so, the paper will also discuss the potential risks associated with the outsourcing function and how these risks can be mitigated.
The age of economic isolationism has long since passed. Approximately 60% of the revenue American information technology (IT) companies originates overseas. Also, in various industries ,ranging from banking to customer products to job placement services, leading firms report that their overseas revenues exceed their domestics sales. In 2003, Delta Airlines outsourced 1000 jobs to India, but the US$25miliion in savings allowed the company to add 1200 reservation and sales positions within the United States ( Drezner,2004). Large software companies, Microsoft and Oracle ,have simultaneously increased their domestic payrolls. In 2003, approximately US$120billion was spent on IT in the United States. While approximately 1.4% was moved offshore, 98.6% of the work remained in the US. In total, about 400,000 U.S position in IT has gone overseas. Meanwhile, total US employment rose from 129million in 1993 to 138million in2003 mainly in the service sector which turned out that, on balance, the international movement of services is quite positive to the American economy. This is so because American corporations are not the only companies that engage in off shoring. In 2003, for example, the US imported US$86.7billion in private business services, which included a lot of relatively low-skilled call centre and data entry work done in lower-cost developing countries. However, in the same year, the US exported US$133.5 billion private business services that generated a substantial array of relatively high skilled jobs in engineering, management consulting, banking and legal services.
In 2002, BT outsourced some of its HR functions that resulted to many benefits. Accenture HR services committed to saving BT five percent per year over the duration of the initial contract. A UK contract for HR services, covering 87000 employees and 180,000 pensioners, has resulted in $18million in savings with a total projected saving of $30million by end of the contract in Q3 of that year. So successful has the original partnership been that in the following year the two companies signed a new contract to extend the relationships to another 10,000 BT employees in 37 additional countries. While cost savings for this project are estimated to exceed those already achieved, the benefits of outsourcing have been more far-reaching than just direct costs savings. By outsourcing, BT has rationalized its training catalogue by 50percent, reduced training waiting lists by 26percent and saved $2.2million in time and money lost due to sickness. It has also increased employee satisfaction rating across training and counselling with 93percent of employees reporting that counselling made them better equipped to manage challenges.
The most significant reasons for outsourcing are to enable organisations to focus on core activities; to reduce costs; providing short term financial benefits and balance sheet improvements. Explanations for these expected benefits were largely based on economies of scale and scope. Focusing on fewer, manageable core activities, organisations could lessen the costs and complexity of their own operations. Outsourcing allows organisations to remove functional " silos"- separate departments and business units - and barriers between them. This provides better customer focus, flexing and changing offerings and processes to meet changing markets. This is particularly beneficial to larger, more mature organisations whose strong, hierarchical structures make them less agile. For such organisations, re-engineering business processes to improve flow across functions is difficult. Outsourcing enables " opting out" from complex internal organisational change. The objectivity of outsources relieves organisations of the constraints of cultures ,established attitudes and taboos , providing fresh ideas and activity for new opportunities.
Outsourcing changes the structure of sectors, providing opportunities for focused, niche players to enter. For example, the growth of specialist biotech and niche players may be attributed to the creation and seizing of opportunities that have impacted on the sector structure. The specialist outsourcee companies enables other players in the sector to focus on their core, improving the products and services they offer. Players within Sectors where outsourcing becomes the norm benefit from improved financial performance through cost reduction and reduced asset investment yielding higher return on investment, attracting more investment to the sector to develop customer markets.
The plank given most of the time for the outsourcing function is cost savings. By off shoring non-core activities to an external party, a company engaging in business outsourcing (BPO) may increase profitability and create value ,respectively for companies shareholders and customers. Cost savings may be gained because the outsourcing vendor operates in an offshore locale that has a lower pay scale than a domestic firm. Support service outsourcing enables companies to leverage vendor competencies in highly specific areas that include the increased corporate flexibility, effective technology, proven and tested methodologies and best practices without building and maintaining a complex and expensive infrastructure , allowing funds to be invested in more viable profitable activities. More so ,service outsourcing enables companies to eliminate the distraction of managing a peripheral function and, thus, develop long term core competencies that provide competitive edge on other market players.
Some organisations do not achieve the expected benefits from outsourcing. The most significant risks lie in the need to develop the new management competencies, capabilities and decision-making processes. These include decisions on which activities should remain within the organisation and which outsourced, whether all or part of the activity should be outsourced, and how to manage relationships rather than internal functions and processes. Mistakes in identifying core and non-core activities can lead organisations to outsource their competitive advantages.
Another outsourcing support function risk is the one that interrupt the flow of product or service between the organisation and its customers. For example, delegating control of the distribution process by an online retailer can result in customers not receiving goods promptly ; outsourcing call centre responsibilities can result in customers being dissatisfied with the product or service and, thus, returning the product, not repurchasing a service, or expressing complaints to others that could endanger company goodwill.
Closely related to the above outsourcing risk, is the risk that affects the relationships between the company and its employees. For example, outsourcing the human resources function can affect employee hiring quality; outsourcing payroll and benefits processing can result in information breaches that generates identity theft issues and resultant legal issues; or outsourcing software design can generate a decline in organisational processes.
Organisations often manage outsourcing risks using one of two methods. First, managers may choose an adhoc method to risk management. In this approach, experienced managers may use logic and reasoning, rather than an integrated methodology, in determining how to diminish outsourcing . Unfortunately, the adhoc approach does not provide the most efficacious approach by which to evaluate the risk related to an outsourced support service. A second method to managing outsourcing risk is to use an enterprise -wide risk management (ERM) approach such as the one developed by the Committee of Sponsoring Organisations of the Treadway Commission, or COSO (2004). In the COSO ERM model, risk management for each outsourcing activity is viewed as part of an integrated whole rather than as a separate consideration for each organisational or individual business unit function.
In this article, we attempted to identify some of the benefits of the outsourcing functions to organisations that include reduced cost; providing short term financial benefits and balance sheet improvements. Other benefits discussed include better customer focus and the elimination of distraction of managing a peripheral function. Examples of organisations that used the outsourcing support services to reduce cost and enhance shareholders wealth maximisation were also discussed. Outsourcing support services may certainly help companies become more efficient, have access to new skills and resources, and focus on core business- but only as long as the benefits accruing from the intangible assets are achieved and contribute to the company's goals, objectives and competitive advantage. The sole way to avoid support service outsourcing risk entirely is to perform all service tasks in-house.