The Strategy Behind An Offshore Outsourcing Business Essay

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Sub-contracting, the act of employing a different organization or company with specific skills to carry out a restricted range of tasks on  behalf of another Company or other organisation, hereinafter called the Principal, is an established business practice whose roots lie in antiquity. In more recent years, the term has been supplanted to some extent by the phrase 'out sourcing', now, more commonly used as a single word 'outsourcing'.

From outsourcing, we have come to the point wherein outsourcing has move away from local sub contract groups and has moved onto the international stage, where the adjectival phrase  'off shore' has been corrupted into a verbal form, as in to 'offshore' something, meaning  to remove it from the cartilage of the Principal. This is epitomised by the UK telephone industry placing a substantial number of its call centres in India to reduce costs.( Monczka and Thomas, 1995). The term has a wide range of connotations, being from 'just another country', to the other side of the world, to putting the business in third world countries (Shamis et al., 2005) or to remote, low-cost locations (Robinson and Kalakota, 2004). This can also include the establishment of a subsidiary organisation in a different geographical area, (Lowson, 2001). Offshore subcontracting, then, is the delegation of all or part of an organization's recurring internal business functions  to a third party  in a foreign country, who specializes in those functions. This may be as basic as simply appointing a local agent as a vendor for the organisation's product.

The strategy behind an offshore outsourcing is based on creating value through low cost, and this frees  capital which might be used for other critical areas (Tayles and Drury, 2001). The success of this business model has encouraged many new companies to follow it, allowing company managers to focus their efforts on core skills. This can bring sustained cost savings. An airline which practiced this successfully for example, is Delta, which contracted with firms in India and the Philippines to handle part of its reservations (Stack and Downing, 2005). Other companies which have adopted this business pattern include Hewlett-Packard, Dell, and GE, all of whom have outsourced to India.

2. Western Companies Scenario

 While the focus has been primarily on manufacturing outsourcing (McCarthy and Anagnostou, 2004; Ulrich and Ellison, 2005), the above examples show  off-shoring of service work from developed countries to emerging countries, and this is gaining a great deal of attention because of ongoing trade liberalization, skilled labour, non-unionisation, low wages and the availability of skilled IT and non IT professionals in English speaking countries. As Metters and Verma, (2008) suggest, these factors continue to make such locations attractive for both manufacturing and  service industries. The situation is now sufficiently well established that it is now possible to draw distinct categories of business. For example there is the subcontracting of people based contact services.

These include substantial IT services, which are clearly expensive in the 'developed world' while not so in the remainder. Countries such as Brasil, Russia, India and China, the so-called BRIC nations, have been found to be well endowed with these  skills, and able to offer them for a much lower cost.

Some emerging markets offer foreign businesses significant financial incentives to relocate R&D, technical services, and other core and non-core business functions within their borders. (Mehlman, 2003).

Highly repetitive tasks such as data processing and payroll, claims processing, and customer-service call centre staffing have  been successfully outsourced to India, where there is  a huge low-cost labour pool available, and this is very appealing to businesses seeking workers to both perform highly skilled and highly repetitive tasks. Other countries which have similarly provided cheap labour Philippines, China, Indonesia, and Malaysia, though India dominates, usually because of the large pool of English speakers, since English remains the lingua franca in that sub-continent.

 

The rapid advance in IT has effectively produced a borderless world. Information is only a click of a button away, and this has generated what is possibly the fastest growing business sector in the world, the international offshore information technology enabled services (ITES) sector. Advances in IT infrastructure, the relaxation of export controls and tariffs by the Indian government, and significant technology and R&D investment especially in Bangalore, India, have enabled Indian service providers to deliver quality service to U.S. companies ofr example (Lewin and Peeters, 2006).

 

The realisation of the potential savings and the access to resources encouraged a large number of UK and  U.S. corporations to move their IT and IT-enabled business services, also known as Business Process Outsourcing (BPO). In areas such as finance and accounting, claim processing, data entry, help desk and customer services, airlines, banks, credit card companies, and insurance firms have chosen to use BPO. Multinationals  in banking , for example, Citicorp and  J.P. Morgan, in  IT  - IBM,  Dell,   - and in management consulting , have  moved their 'back-office' functions such as accounting and  data processing, to low-wage off-shore locations, especially the BRIC  emerging markets.

However, Sending work to overseas is not a one fit for all solution. For example it is difficult to move IT infrastructure and expertise to oversea. As Atul Vashistha, chairman and CEO of info-tech off shoring consultancy neoIT in San Ramon, Calif says: "quality of IT industry is much more difficult to measure, since IT play viral role in each and every business process, and it need more command and management". A quote from Tom Weakland, a partner at management consultancy Diamond Cluster also points to the disadvantage of offshoring workfoce; "theoretically, it looks extremely eye-catching, a Russian programmer charges 80% less than an American but when you compare it all over, total cost off shoring is comparatively less as compared to work done locally". Many ballet companies have learned the lesson in a harder way. A year back, neoIT's business came from consulting companies willing to go for offshore. Today, 20 to 30 % of business relates to fixing problems, says Vashistha. Many companies they don't revile out their problems which they are going through. "It's a dirty little secret," says Michael Mah, partner at software consultancy QSM Associates, based in Pittsfield, "There could be more crashed projects in the next 6 to 12 months." One of the major disadvantage of offshoring is that at times there is no one on the site to cater to customer needs. Therefore, before embarking on the ship to offshore outsourcing the western companies should take into consideration both the merits and demerits of offshore outsourcing. Long run considerations are of paramount importance than the short term profits.

3. Emerging markets companies scenario

The close association which the Philippines have with the US has generated a pool of English speakers there, and as a result, the Philippines are emerging as a close competitor with India for contact centres and administrative services. China, on the other hand, is establishing its position in  procurement, production and product development. Another area in which outsourcing  is developing as the accepted business model is knowledge-based services such as R & D, engineering, design, and technology. Major companies like Dell, Accenture, and IBM have thousands of employees in India, China, Russia, and the Philippines, and for Dell in particular, the Irish Republic,. The IT revolution, then, has generated networks of engineers and scientists who are transforming technology and know-how between distant locations.

 Before committing to growth of service in an emerging market economy, HR experts make sure that they work along with the organization workforce to achieve their goals inorder to increase the knowledge, talent and ability of the workforce in domestic and international markets. Stack and Downing (2005) show that  the Indian-based company, Evalueserve, refer to their service as "knowledge process outsourcing," thereby distancing themselves from transaction processing and underlining their involvement in more strategic business research for their clients (Nicholson et al., 2006).

The next section analyses the advantages and disadvantages of workforce from both the western companies and emerging markets perspective.

4. Workforce scenario:

Offshore outsourcing partners generate opportunities to intact with domestic companies managers. And this creates an opportunities to transfer cultivate knowledge. Nonaka (1994) suggested that organisation may require different tacit knowledge, that curving from the person level to organisational level for a global economical advantage. According to Luca and Hu (2008) workforce of emerging markets go through 3 stages of development. In the first stage, Countries characteristic lies at majority of young, trainable workers and low labour cost. Countries grow in this stage over time, countries like India and Vietnam give priority to the youths, in particular college graduates, in the workforce. The second stage of development deals with workers with more experience in order to add value to the organization. The skills that they develop overtime are troubleshooting, records processing, designing softwares and dealing with solutions. And by the time the emerging countries reach the thirds stage, their workforce has been upgraded to expert level. Countries by now develop world class experts, however, it takes a long time for an emerging economy workforce to reach this stage. For example India has a pocket of experts in IT and health sector, there is still a big gap. It is noteworthy here that, the above discussed three stage model has different nature when applied to various sectors (Luca and Hu, 2008).

According to Olga (2003) offshoring workforce has demerits as well, costs can add-up even if off shoring outsourcing is done correctly. Many companies have a tendency to send their expatriates team to setup their operational abroad and their earnings generally high. Then there's the cost of supplementary executive journey. In general offshore employees are also brought into US for several month for training in western culture and languages. Major effect on cost and inconvenience of supervising offshore outsourcing crews. In private software maker Elance said they outsourced some of its developments to India. Its a very difficult to local engineer team had to work past 10.PM every day to communicate with Indian team. Even today they find very difficult to work on night . says Fabio Rosati, Elance's president and CEO. Few companies also have to modify their in-house method to accommodate offshore outsourcing associate.

5. Conclusion

Both the western companies and emerging market companies need to consider the long term merits and demerits before embarking on the offshore outsourcing strategy, however, the implications of the forgoing are that this process will expand because of all the advantages adhering to the process of outsourcing internationally, and the world is becoming less and less bound by national boundaries and outsourcing is a source of competitive advantage. Outsourcing may also lead to access to new and lucrative markets such as emerging nations, which have  become very attractive destinations for offshore outsourcing for manufacturing  and for  service. The changing economic, political, cultural, business climate and the changes in infrastructure  in emerging markets offer enormous value creation opportunities for all businesses, especially those from advanced economies. Places like India, China, and Brazil having significantly increased the size of the global workforce from 1.5 billion to 2.9 billion (Freeman, 2005).These workers, some of whom  have been educated in the United Kingdom and other developed nations, have gained very considerable technology skills, and this coupled with an entrepreneurial flare is changing the face of business. They tend to be polyglots and polymaths and understand the western culture to which they have readily adapted, and businesses have not been slow to realise the value of this well of ability, at the same time as gaining a very real access to a market which exceeds two and half thousand million people.

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