Critically Evaluate Business Advantages To Outsourcing Commerce Essay

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SMEs are very much localized in the management of business acumen. Technology prospects are of a very manual environment and most of them being handled by a big group of staff within the organization with very little high tech support. Taking very low or no risk is the common culture for local SMEs management. Politically, they are looking more for stability.

'Outsourcing is identified as the acquisition of products or services from sources that are not within the organization.' (William M. & Faramarz Parsa, 1999)

With the unstable economy and fast pace technological advancement, outsourcing practices is seemingly penetrating into SMEs. For years, outsourcing seems to be the only appropriate solution to balance the lack of resources or manpower that a SME requires for daily operations. And for now it is also observed that SMEs in Singapore are increasingly evaluating the needs for and the advantages of outsourcing. 'This might be due to rising prices, which makes the business advantage of cost saving from outsourcing be less attractive.' (Prasad, 2006). This paper compares both business advantages & disadvantages of an SME critically and seeks to find a solution to the problem stated.

Literature Review

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Prasad K. (2006) suggests that companies have been outsourcing since the industrial revolution, and of which the functions are usually of low strategic value or can be treated as commodities. (Ripin and Sayles). There are both upsides and downsides for outsourcing:-

Outsourcing

Pros

Cons

Cost saving

Less hassle

Gain Access to world-class capabilities &resources

Focus on more important matters

Assist a fast-growth situation and handle overflow situations

Share risks

Lack of financial support

Lack of managerial control

Lack of quality control

Outsourcing company goes out of business

It may be more expensive

Data security, confidentiality &ethical issues

(Table 1)

Advantages

Cost saving: It is often viewed as the major benefit for outsourcing. One can easily find equivalent skilled labor forces in other countries, and especially those who work for less money and still able to deliver the same quality results.

Less hassle: It also helps to facilitate SMEs with resources & knowledge that they lack, example IT function to external vendors, whereby they won't have to employ and manage another headcount.

Gain Access to world-class capabilities & resources: It enables SMEs to be able to tap on higher end resources, be it training & development or IT.

Focus on more important matters: 'Companies can only truly perform well at a few areas.' (Ross and Westerman). Outsourcing non-core related activities allows a SME to focus more on its core competencies, giving it a competitive advantage.

Assist a fast-growth situation and handle overflow situations: As most SMEs aim to expand their businesses, and due to globalization, they tend to grow fast when the economy is good. At times, there may be over demand from the market, so outsourcing helps to meet deadlines (Yvonne et al, 1998) and ease things through these situations.

Share risk: Both SME and the outsource provider share the risk, given clauses being signed on contract.

Disadvantages

Some local SMEs may not be able to outsource certain functions of their business processes as they may not have the financial support like MNCs.

Lack of managerial control - It may be harder to manage external vendors as compared to own employees. 'Moreover, it is a major disadvantage when a SME wants to fire an incompetent outsource provider as both parties has already signed a long term contract' (Steven R. & Judith R., 1999, pp 546)

Lack of quality control: There is a major worldwide Recall from Toyota during early 2010 due to faulty gas pedal. A design failure & manufacturing fault by outsourcing provider. (Scott D., 2010). Another example is the recently launched iPhone 4. It has a design fault, causing signal reception problem for users worldwide. Apple has to bear the cost of sending out the extra 'metal piece' to consumers to attach onto their iPhone 4 as an antenna for better signals. They would also have to check whether their suppliers & manufacturers are able to keep up to supply the new "add-on". All this can be actually avoided if quality control has been in place.

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Outsourcing company goes out of business - If your outsourcing service provider goes bankrupt or closes down business, the company will have to take immediate action to change to a new one or take the process back in-house. Example of a held hostage situation in an outsourced manufacturing strategy experienced by SMEs.. There is an airport closure due to riots. Thailand in the year 2008 has uplifted all cargo as there were no flights taking place during the one week duration.  An example is the product such as flowers is in the perishable category.  All items in the airport ready for delivery to customer on Just in Time (JIT) basis have affected production schedule as supply was unable to meet demand in the production lines has caused line down issues in most of the production plants around the world.

It may be more expensive - Even though the main driver for outsourcing is cost reduction, sometimes it is cheaper to keep a process in-house. In the experience of the writer, marketing efforts such as designing can be kept in-house, it is cheaper and advisable to hire a designer than to outsource to design firms. As it is a culture to multi-task when working in Singapore, especially in a SME environment. A designer may be asked to perform other work duties such as administration or even sales.

Data security, confidentiality & ethical issues - HR processes such as payroll, confidential information such as salary will be known to the outsourcing provider. Although both parties can sign an undertaking, but no one can really guarantee if a staff of the outsourcing provider may not 'accidentally' leak information to a competitor.

Further Research:

A simple interview has been done with an ex-senior customer service executive from Univac (Elisa Wong S.Y., certified logistician, personal communication, 1 Aug 2010). Information has been recorded and represented in this essay.

A case study is further conducted by doing a comparison on two local SMEs from different industries, Univac Precision Engineering Pte Ltd (Precision Engineering Industry), Starhub (Service, Telecommunication Industry) & the writer's company, Rhythm 'N' Moves Studio (Service, Education & Training Industry).

SME profiles

Univac does plastic molding and has manufacturing plants in Singapore, Malaysia & China. (Near to 200 employees). Her strategic partners include companies such as Hewlett-Packard, Seagate & Tyco. Univac acts as an outsourced manufacturing plant for their clients. She is one SME that maintains a localized style of managing departments with a full supply chain such as Engineering, Finance, Purchasing and Manufacturing.

Rhythm 'N' Moves Studio is a new establishment, coming to 3 years. (6 employees & up to 15 contract workers/freelancers). A dance company that provides enrichment services, entertainment shows to corporate, government/private schools & in the studio (general public). His clientele includes Singapore Government Ministries, local TV station: Mediacorp & country clubs. It also serves as an outsource talent company for events company to look for performers.

Like most companies, the two SMEs outsource some of their business functions to external vendors.

Outsource overview table of both SMEs' departments

Department

Univac

Rhythm 'N' Moves

Administration

In-house

In-house

IT (Information Technology)

Outsourced (Running SAP)

In-house

Human Resource

Partial outsourced (Training)

In-house

Marketing &Sales

In-house

In-house

Manufacturing

Minor outsource of manufacturing to Thailand resulting in cost reduction due to lower manpower cost. But she is still having 2 plants, one at Singapore &the other at Malaysia.

High operating cost,

Labor intensive

Manufacturing of Dance apparel is outsourced to China suppliers &local tailors.

Logistic

Outsourced to DHL, FedEx

Outsourced to local logistic company, V3.

Customer Service

In-house

In-house

Finance

In-house

In-house

Operations

In-house

Outsourced

(Table 2)

From Table 2, it can be observed:

For supportive business functions (Administration, Finance, Customer Service & Operations): Both SMEs uses in-house resources to handle the processes. It is because SMEs requires their supportive functions to react quickly to any situations & be more tailored to their culture & methods of running the business, so as to better support in daily operations.

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IT (Information Technology): Univac uses SAP and outsource their IT functions. It helps to free up internal resources to do their core processes. This does not serve as an advantage for Rhythm 'N' Moves. As he does not have the need and the financial power to outsource this function for now, and it is advisable to do keep it in-house so that to save cost and have proper control.

Marketing & Sales: This is a function whereby SMEs in Manufacturing/Service industry will not outsource, especially in Asia, Singapore. Our local SMEs' methods of engaging business/sales are often through personal touch. Therefore, they will not risk having any opportunities to jeopardize the company image or to bring in sales.

Human Resource: Univac do partial outsourcing of their training and payroll to tap on world-class resources and also allow their HR department to be able to perform their daily tasks effectively. While for Rhythm 'N' Moves, trainings such as dance instructions and daily business training are conducted internally, which will save cost and tighten the company infrastructure.

Manufacturing: Univac do almost everything in house except for minor outsourcing to Thailand to cut cost. Rhythm 'N' Moves took the opportunity to fully outsource and tap on international resources to sell dance merchandise in store as he do not have to spend on huge capital to order large quantity.

Conclusion

Different SMEs have different strengths & weaknesses. 'Although theoretically, companies can choose to outsource their business function for any reason' (McGraw-Hill/Irwin, 2009), it is highly recommended that an SME should do an thorough evaluation first, and then outsource its business functions selectively. For example, partial Human Resource function can be outsourced, such as training, recruitment & top management payroll, while Compensation & Benefits should be handled internally, as it concerning the company's strategy to retain employees. One's apple might be poison for the other. Comparison between the two industries (Manufacturing & Service) shows that for different industries, it might be a disadvantage to one's business function, even though it is an advantage to the other. It requires good interpretations in the procedure within the management for effective outsourcing.