Off-shore outsourcing is a practice used by many businesses today whereby they employ external businesses abroad to perform functions that are usually carried out in the home country where the product is developed and produced (Dessler, 2008). Many factors drive managers to offshore business functions. A company that sells an upscale line of gourmet snack foods is considering outsourcing off-shore work of its call centre responsible for handling customer order and payment issues. However, before a final decision is made an analysis of the pros and cons of off-shore outsourcing has to be done. This paper will three (3) advantages and three (3) disadvantages of off-shore outsourcing in this situation and provide one (1) example of a company that is successfully off-shoring work and a company who has embarked on such a venture but had to terminate its efforts.
The first positive aspect of off-shore outsourcing is relatively lower labour cost than in home country. The cost of labour in developing countries such as India and China is significantly higher than the United States where labour standards require higher minimum wages and benefits for workers. This lower labour cost results in substantial reduction in the wage bill of the company, thus enhancing its financial strength (Weidenbaum, 2004). The cost reductions generated can be utilized to create new market opportunities for the business, such as the purchase new and more efficient equipment as well as to train and develop the competencies of staff. As a result some staff might get new and better jobs because of the improved financial position of the company (Weidenbaum, 2004). For instance, the employees that were employed in the call centre might be trained to operate new equipment purchased as a result of increased production and product upgrades or extensions by the company.
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Secondly, off-shore outsourcing allows the business to focus on its core business instead of its supporting processes. The business will be able to focus more on selling upscale gourmet foods instead of focusing on supporting processes such as customer orders and payments issues (Weidenbaum, 2004). In periods where the business is experiencing increased consumer demand for its product supporting processes will also have to be increased. As a result the business will have to expend limited financial and human resources on supporting activities which could otherwise be used to improve its core competency. Thus, off-shore outsourcing of is supporting processes would allow management to focus more on maintaining high quality and improving its core business competency.
Thirdly, off-shore outsourcing allows the company to offer faster and more skilful service to customers. The vendors who these supporting processes are outsourced to are specialized in this field (Weidenbaum, 2004). Because it is their core business they have specialized equipment with the latest technology which usually is not available to the company since most of its resources are channelled towards its core business. Additionally, the outsourcing business will be responsible for training staff and the costs associated with such. Again, since this business is its core competency more resources will be spent on training effective work force (Weidenbaum, 2004). Thus, the combination of better equipment and technology and better trained staff would result in more efficient and effective service offered to customers.
Although the advantages of off-shore outsourcing are very attractive to the business there are disadvantages that must be weighed against them before a final decision is made to outsource. The first disadvantage is the unreliability of service providers. The quality of service offered to the company's clients may be inadequate and sup par in relation to home country standards that may be due to language and cultural barriers. Overseas managers may not understand the culture, traditions and high standards of quality and customer service expectations of the home country. According to Weidenbaum (2004), the overseas supplier may gain a bigger client whom they view as more important and lucrative thus neglecting the work of the business. Additionally, the overseas supplier may suffer from rapid rates of turnover of skilled employees as a result of their employees leaving to pursue better job opportunities in larger and more sought after firms. Weidenbaum, (2004) further cites that off-shore operations in India such as call centres have an employee turnover rate of 15-20 percent annually.
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Secondly, the company may experience many unexpected costs and complications. These may arise from signing contracts across international borders without fully understanding the potential threats and implications to the company (Weidenbaum, 2004). Furthermore, the host country may not have the appropriate infrastructure in terms of road and transportation networks and reliable electricity. Thus, the company may have to expend additional funds to provide generators or transportation for employees to attend work (Weidenbaum, 2004). Moreover, the costs of real estate for these outsourcing activities could be very expensive since most of these call centres are located in urban areas where real estate costs are higher. The company may also incur further costs to refurbish or upgrade these facilities to accommodate their operations (Weidenbaum, 2004). In addition to the above mentioned a company may encounter public sector officials that are corrupt and legal systems which require payment of taxes to various institutions in order to function in the country (Weidenbaum, 2004).
The third disadvantage of off-shore outsourcing is the threat to the company of having its core technology or other confidential company information stolen by its vendors (Weidenbaum, 2004). Courtiers such as India and China do not have strict legislation and penalties with regards to intellectual property rights thus vendors there have no difficulty with swiping the technology and core competency of companies which they work for. This could be very detrimental to a firm since these business practices can be replicated and used to produce the product at a cheaper rate or sold to the business competitors. Either way it can put the company out of business.
There are many companies whose off-shore outsourcing endeavours have been either successful or unsuccessful. One company that has been successful at outsourcing is Dairy Farm International. Dairy Farm International is a pan Asian retailer that operates supermarkets, hypermarkets, health and beauty stores, convenience stores, home furnishing stores and restaurants. It is managed in Hong Kong and as of June 2012 operated 5,500 outlets; employed over 90,000 people and had total annual sales in 2011exceeding US$10 billion (Dairy Farm Group, 1998-2012). Hong Kong plays a major role in the company's operations and covers over 1,100 retail outlets and 15,000 employees. In the late 1990's the Hong Kong market became increasingly competitive thrusting the company into a restructuring efforts to strengthen their core competencies, operational costs reduction, capital expenditure avoidance in non core areas and increased revenues.
In order to deal with this problem, in 1999, the company embarked on a partnership with Capgemini which is a consulting, technology and outsourcing firm to outsource some of its services to centres in China and Australia as part of its overall restructuring strategy aimed at reducing general administrative costs. In 2003 the company further embarked on a process to outsource its business processes namely, finance & accounting, HR administration and procurement services (Capgemini, 2012).
The result of this effort was significant growth of the company through mergers and acquisitions, affiliations, franchises and joint ventures. The company has established a strong business profile through brands such as Starbucks Coffee, IKEA and Giant (Capgemini, 2012).
Outsourcing its finance and accounting, HR administration and procurement services has allowed dairy Farm International to focus on its core business strategy without having to incur the additional administrative costs associated with such growth. The financial savings incurred due to tremendous reductions in finance and accounting personnel supported growth in additional retail outlets (Capgemini, 2012).
The outsourcing success was mainly due to the company being flexible and being able to realign the vendor centre's operations to suit the company's needs. The development of a partnership built on trust and openness is also an essential element of their success. Additionally, quality of service was also cited as playing a major role in militating against the risks of outsourcing. "Consistent policies, common standards and rigorous attention to regulatory compliance" are cited as important factors which allow Dairy Farm to maintain the quality of service required by its transnational partners such as Starbucks and the overall success of the company (Capgemini, 2012).
One company that has experienced unsuccessful off-shore outsourcing endeavour is Dell. Dell is an American multinational company that specializes in the development, selling and support of computer technology (Thompson Reuters, n.d.). In order to cut costs and better serve its growing customer base in 2001 the company decided to outsource its customer service and technical support calls to India. The company set up its first call centre in Bangalore that same year and opened its second centre in Hyderabad one year later.
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The result of this off-shore outsourcing effort resulted in increased customer complaints for the company. According to (Corcoran, 2004), in 2002, following its outsourcing efforts, the Texas better Business Bureau reported that Dell's customer complaints tripled to 3,726. Moreover, the Texas attorney general office also logged 504 complaints against the company by its customers which doubled from the previous year 2002.
The main challenges experienced by Dell as a result of their off-shore outsourcing endeavour were due to cultural differences and conflicts. The language and cultural dimensions of the United States and India are very different and therefore Indian agents found it very difficult to adequately serve customers that they could not relate to or understand. M.D. Ramaswami, who was responsible for recruiting and training agents for the first call centre in Bangalore indicated that eight weeks training in American accent and culture and Dell products were provided however one of the major challenges were the language and cultural barriers (as cited by Corcoran, 2004). As a result of these problems the company was forced to partially move its outsourced jobs back to the United States (Corcoran, 2004). Dell has since worked on improving its customer service in various ways and improving the services offered by its offshore service centres.