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Globalisation has influenced many changes in outsourcing and relocation. Almost every aspect of world is affected by globalization. Globalization is the phenomena which help to increase the interaction between firms and individuals all around the world. Globalization helps to reduce obstacles in trade and investment and it increase the relationship between organisation, governments and individuals all around the world. It helps to improve in information and communication technology and also in transport facilities. Due to new global interaction it helps in make drastic changes in societies. According to Spich, R " Globalisation is a conceptualization of the international political economy which suggests and believes essentially that all economic activity ,whether local, regional or national must be conducted within a perspective and attitude that constantly is global and worldwide in its scope". Globalization helps business to target customers in all regions of market and for societies it gives access to products around the globe. Globalization helps government to attract foreign direct investment (FDI) and also government to invest in research and development, infrastructure and education. It helps the consumers to enjoy the internet, travel worldwide and also helps in globalization of markets and production.
According to Lonsdale. C et al (1998) defines outsourcing as ``the process of transferring an existing business activity, including the relevant assets, to a third party". Outsourcing is one of the different numbers of options available to become competitive. For example Nike is the best example of outsourcing non core activities of the business. Nike is outsourcing its every production expect technical footwear parts. Business leaders thinks that outsourcing is the best method to achieve performance increase in a firm .outsourcing has become very important in developed nations like UK and US as firms usually outsource production and service activities to developing country as it will result in cheaper labour and suitable employment acts.
Relocation means changing the physical location of the firm. The reason for change may be change in government rules, less tax in different location and also increasing cost at present situation. Relocation helps a firm in outsourcing productivity gains.
In this we are going to discuss the benefits, risks and different types of outsourcing and in relocation we are discussing benefits, risks and impacts and various others factors relating to outsourcing and relocation.
Overview of outsourcing and Relocation:
Outsourcing covers a very huge area which includes outsourcing of services as well as manufacturing. Firms usually outsource due to benefits like it will help in cost reduction, to concentrate resources on main activities, advantages from a supplier's new creations and investment, to convert fixed cost into variable cost easily and to increase time to market. Vertical integration is commonly used word in similar to outsourcing and vertical integration means that it is concerned with whether the activity should be performed internally or should be produced externally from outside suppliers. In manufacturing point of view outsourcings is concerned with make or buy decision. Successful outsourcing helps a firm whether outsourcing will be suitable for the organisation and if it is appropriate we should analyse how outsourcing process helps in achieving goal of the firm.
The main aim of outsourcing is one is to act as a source of competitive advantage and another is to stabilize the competitive position of the firm. According to Saunders et al (1997) found that in several cases that main motives for outsourcing were strategic and technological and not cost reductions. It has been found that outsourcing provide number of benefits like it will help to adopt new technologies by responding to customer wants and also by managing the rate of change in product demand.
Relocation helps in promoting the competitiveness of the firm as it helps in increasing productivity gains. Relocation helps a firm to maintain competitiveness if it face obstacles in maintaining competitiveness. Relocation contributes to better allocation of resources triggered by industrial restricting and also in technology transfer. Relocation process is different in different countries.
Benefits of Outsourcing:
There are many benefits for outsourcing and it includes the following like it helps to concentrate on core business means it helps managers to concentrate on core business. Outsourcing helps to control capital cost means converting fixed cost into variable cost and by converting fixed costs into variable cost it allows to reduce expenses during first stage of business and it will be more attractive to investors as it is invested in revenue producing activity. Outsourcing helps to reduce labour cost means outsourcing helps in getting required labours when needed, since hiring staff for short period is expensive.
Outsourcing helps to start project quickly means it helps to start the project at right time otherwise it will require major capital investment and if doing internally it will take weeks to start new projects. Outsourcing helps to match the same level of expertise efficiency that big companies enjoy .Due to many risks in business outsourcing helps to avoid risk by better understanding the conditions of business in the area of expertise. Outsourcing helps the firm to reduce IT infrastructure expenditure and also save wage differentials. Outsourcing offers quickly react to supply and demand variation and also benefit from economies of scale. It helps to improve time to market means it helps to move the products quickly to market. Outsourcing helps to free up assets during immediate financial period. According to Rimmer, S (1991) in house outsourcing helps in saving on capital and operational costs. According to Greaver, M. F. 1999 outsourcing helps to meet changing business conditions, increasing demand for products, improve service and technology by creating more suitable workforces. For organisation it helps to meet changing needs and also in modifying resources quickly. It helps to take advantage through economies of scale. For sector like public and private sector it provides niche financial players to enter sector quickly, improve Return on investment. For nations it helps to improve Gross national products and also increase employment. For finance outsourcing it helps to improve efficiency in a firm, improve quality of service and also helps in improving the quality of finance related data.
Risks in Outsourcing:
There are many risks in outsourcing and the main risks are the following like loss of core activities. According to Hamel et al (1994) the bad effects of ignoring core competencies are the following like it will cut down the growth of the firm, it will destroy the opportunities for innovative cross functional contact, it will slow down cumulative learning process and also firms will be easily attacked by new market participants. Other factor is leverage by suppliers and the factors leading to leverage of suppliers are high asset specificity, uncertainty, poor contracting and outsourcing in a limited supply market. The other risk associated with outsourcing is loosing strategic flexibility like if complicated networks of suppliers are used it become difficult to coordinate and as a result it makes supplier difficult to co-operate.
Supply interruptions also affect outsourcing and factors leading to supply interruptions are short term obstacles faced by suppliers like technical problems and supplier goes into liquation means that supplier will only stay in business if they are able to make cash. Risk of receiving low quality of supply means that if a firm is dependent fully on suppliers then the supplier will provide outsourcing with poor quality and the factors contributing to low quality of supply are supplier not able to cope up with technological development and also poor communication with suppliers.
According to Lonsdale, C et al (1999) argues that 5% of the company only achieved advantages from outsourcing. The reason for this is lack of decision making process, larger complexity in supply network and concentrating more on short -term saving. For organisation the main risk in outsourcing is that it fail to distinguish the core and non- core activities. In an organisation failure to manage outsourcing relationship will result in poor customer, reducing level of control and also it will reduce contacts with customers. In case of sector the outsourcing is more affected in public sector than private sector. The first risk in affecting public sector outsourcing will result in reducing government control and also in reducing employment. Second one is it will weaken some public sector stake holders like trade union and politicians. For nations the outsourcing will reduce the salaries of domestic people and also it will affect the international traditions and cultures. In a firm it will lead to confusion like which part should be outsourced and which parts should be remained and also whether to outsource fully or partially.
Impacts of Relocation
Relocation affects the aggregate level of employment where outsourcing will not affect it. Relocation will affect the country to which you outsource means like outsourcing to central and eastern European countries the manual workers will result in decrease in employment while this is not case while outsourcing to other countries. The relocation affect according to the characteristics of the firm that is exporting companies will benefit from productivity gains than non exporting companies. Relocation affects the types of outsourcing that is service or material and it also affected by the flexibility of labour markets. Relocation also causes employment losses and increased inequality.
In this section we will discuss outsourcing and relocation in detail. The outsourcing becoming so important because of globalization. Due to globalization and technology advancement the investment in outsourcing human resource and production have expanded and number of services are being outsourcing due to globalization. The firms usually not outsource that will offer competitive advantage, activities that involve higher levels of risks or asset specificity and activities that the firm is particularly confident about producing internally. If a company outsource fully it is called virtual manufacturer.
Business process outsourcing (BPO) is another form of outsourcing and it has become popular because of cost savings. According to Gartner Data Request " Business process outsourcing can be defined as the delegation of one or more IT intensive processes to an external provider, who in turn administrates and manages selected process based upon defined and measurable performance metrics." In this function firms non core activities which is not much relevant are transferred to outside provider. Not only IT services are outsourced but also call centres, help lines are also outsourced because they are concentrated only on a particular job and thus it help to achieve economies of scale and customer satisfaction. By doing this managers can concentrate on core part of the business.
Offshore is also another type of outsourcing which help to reduce cost in business. For example the countries like United Kingdom and America are concentrated on developing countries like India because of lower cost and Indian outsourcing companies are giving back office service to foreign companies. Off shoring cause job loss in home country and it has been criticized for transferring from advanced location to cheaper places. It is helpful to company`s and shareholders but it is harmful to employees as it will result in loss of job to employees. Outsourcing causes closing down of factories due to transfer to foreign products and it is beneficial to host country and also brings jobs and increasing income to consumers.
Scope of outsourcing is that it can be divided into two parts like horizontal and vertical services. In horizontal services it includes finance, accounting and human resource management. In vertical services it includes service relating to specific industries like insurance, healthcare, securities, financial services and airlines.
Strategic sourcing is the main part of the business and govt enterprises. It helps to manage new techniques, deliver processes and services effectively to the internal organisation, business partners and clients. According to Gartner five key dimensions of strategic sourcing are achieving business goals, internal capability of the firm, external market capability of the firm, sourcing models and sourcing governance.
In case of outsourcing people there should be proper communication and leadership qualities to manage outsourcing successfully in people. To be successful in outsourcing people we have to play a lot of leadership roles like mentor, motivator, consensus builder etc. Managers should help the people to be creative and should support new ideas of people to be successful in outsourcing people globally. The people who has problems with outsourcing should be given regular and direct communication using various media`s like video conferencing, seminar, group meetings and mail orders. To become a match winner in outsourcing people we should analyse different group of people according to different criteria and should analyse which employees to terminate, retain or transfer. In order to reduce risk in outsourcing people the following strategy should be adopted like provide information regarding benefits of suppliers and conduct seminar for supplier representative to talk to people, conduct face to face contact between main employee and suppliers, providing information regarding relocation, guaranteed employment period and how to do a specific task.
Due to globalization the medium and small organisation are adopting relocation strategies to transfer their activities among territorial systems. Relocation strategies are of two types and they are selective and replicative strategy. Selective strategy means selected functions are relocated to destination country which are more able to manage in other country like India and this strategy are used by many firms as this will not damage territorial system. Replicative strategy completely relocating entire firm to destination country as this will damage territorial system. This strategy is not mostly adopted by the firm. To avoid damage caused by replicative strategy the governments are guiding firms to use selective strategy as this will allow to support innovation, improving human capital and also helps in improving socio- cognitive factors. In Replicative strategy it includes partial and active. In selective strategy it includes active involvement and passive involvement and again passive involvement is divided into outward processing trade and stable outsourcing and active involvement includes network building.
Selective relocation is the most reliable and knowledge based ones like research and development, markets etc. According to Case studies of the WEID Project (section 6) passive involvement are mostly among Footwear, sportswear etc. The active relocation strategy is more suitable where creativeness and technology are the major factors of competitiveness. According to Borroi, M et al 1998 the presence of socio cognitive factors like cognitive models, faith, and group identification process will stop from using replicative strategy. According to WEID Project (2005) inorder to understand industrial relocation it is necessary to analyse the overall statistics differentiating brown field and Greenfield. Relocation Process is different in different countries and also it differs according to district value chain in a country. For example before and after relocation occur between Italy and Romanian districts took place in a non co-ordinated way.
Relocation costs and failure of relocation made employees to consider relocation process. Domestic relocation has been used by many firms to attract new executives and also to select right person at right location. According to Lewis (1998) about 60% of relocation of foreign recruitment cause failure because of family problems like family members is not able to adjust to new location. In order to avoid relocation problems many firms are conducting counselling classes to family members and also providing cultural and language lessons to adapt to new location. Success of relocation lies if we solve the barriers like language difficulties, relocation costs, providing information regarding tax implication and also companies must provide training or assist in services to ensure success in relocation.
In this section i would like to say that to be successful in outsourcing the firm should have a virtual model otherwise it will be unprofitable and uncompetitive. If a firm decide to outsource it should have strong robust aim and supplier tools. In outsourcing we have to decide which component to produce internally and which product to be outsourced to outside supplier. There are many firms who tried to gain advantages of vertical integration to avoid problems in a firm by making strategic alliance with suppliers. Although vertical integration has benefits who alliance with suppliers there are also disadvantages like it limits strategic flexibility with alliance partners. We should analyse outsourcing effectively to become successful in outsourcing.
To reduce relocation failure managers should improve selection process and relocation compensation should be increased. Managers should try to improve the goal set for expatriate and should provide support when needed. Both relocation and different types of outsourcing should be analysed properly to be successful in relocation and outsourcing in the globalised world. We should carefully study regarding outsourcing and should decide which component to be produced in house and which should to outsourced to outside supplier and also we should analyse benefits and risk of make or buy decisions of outsourcing. Last but not least while doing international business we should analyse both cause and effects of outsourcing and relocation.