The introduction of Offshore outsourcing
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Published: Mon, 5 Dec 2016
For the last two decades international business has taken a new form due to increased global activity. The business world has witnessed a phenomenal integration of various businesses forming a global network which spread across political and geographical boundaries due to trade liberalization by many third world countries. Businesses are continuing to seek strategic assets in the overseas markets which enable them to gain advantage of various factors like location, ownership and internalization as identified by John H. Dunning. (Dunning, 1993)
Offshore outsourcing is a strategy followed by many businesses to access the raw materials, skills and resources in the host countries where they are cheaper.
Allocating a part of the company’s operations to another company with an intention to gain some cost benefit can be understood as outsourcing. Outsourcing can range from tendering administrative and back-end processes like HR and Payroll to that of core functions like management and marketing. In most cases companies resort to outsourcing because of lack of resources and also because procurement of such resources would cost much higher than contracting a specialist company to do that job. (Needle, 2010)
When a firm allocates its operations to an overseas company, the type of outsourcing is called Offshore Outsourcing. This seems to be a current global trend followed by popular MNCs.
For example, many silicon chip makers have outsourced their manufacturing process to low cost destinations like China and Taiwan. India continues to be the back-office for the Western companies by answering their customer enquiries from numerous call centres for the multinational companies like Accenture, Bank of America etc situated across cities like Mumbai, Chennai, Bangalore and Hyderabad. Similarly HR functions like recruitment and payroll are outsourced to Indian companies where abundant skilled workforce is available.
Impact of Offshore outsourcing on Western companies
Especially for businesses in western countries it is a common practice to outsource some of their processes to low cost and labour rich third world countries. There are a host of advantages for western companies gained through offshore outsourcing. A few of the advantages are as follows:
Cheaper cost of Production: The key factor that drives any business is profit. In saturated markets like US the only way companies can increase profit margins is by reducing the production cost. Hence western companies rely on low cost destinations by outsourcing their processes.
Example: Verizon, the leading internet service provider in US has outsourced its call centre service to India.
Difference in Time-Zone: Due to the time difference between the West and the East most of the companies find it logical to outsource their customer service function to countries in south Asia like India and Malaysia. As a result of the time difference companies are able to provide round the clock support to customers thus providing added value.
Likewise some other advantages for western companies would be availability of skilled workforce. Sometimes businesses might take a decision of establishing subsidiaries in host countries which would fetch them other advantages like Tax benefits and incentives offered by government as well as help them establish in new markets which earns profit.
Difference in Cultures
Western companies need to understand the culture of host country in order to fully leverage from offshore outsourcing. Due to the cultural divide between the west and the east the host companies face a friction in terms of ethical and legal practices which turns out to be the greatest disadvantage of offshore outsourcing for western companies. The parent company having less managerial control over the host companies is also a major drawback.
Nike is one of the most popular footwear companies from United States which outsourced their production line to several offshore locations in the world like Indonesia and Vietnam where the wages are comparatively very low and also the labour laws are very lenient. Nike was under allegations of mistreating their workers by showing gender differentiation even though Nike was not directly involved in the situation as it does not own the factories. However it affects the brand image and their business in further expanding globally. In May 1998 Nike announced a new code of conduct and it plans to select the partners to participate in the monitoring practices in Indonesia, China and Vietnam. It also announced it would lift the wages for the entry level factory workers in Indonesia by 22%. (Deresky, 2000)
Impact of Offshore outsourcing on emerging market companies
Third world countries have been emerging rapidly over the years to compete with the developed nations in terms of economy. Foreign Direct Investment always boosts the economy of the host country and also provides a variety of benefits such as employment creation and technology transfer. (Lewis, 1999)
Increase in GDP: Offshore outsourcing has contributed for a growth in the GDP of the emerging economies as a lot of inward flow of investments has boosted the national income and catalysed the business activity. More the profit earned by companies, more is the tax paid to the government.
Employment Opportunities: In emerging countries like India, millions of jobs were created to support the back-end administrative tasks for foreign companies which socially benefitted the company. The major job creation due to outsourcing was in the services sector and specifically in IT/BPO industry in India whereas in China, Vietnam and Thailand, most of the jobs are created in manufacturing sector.
According to the statistics published by UNCTAD, there is an increasing trend in the outward FDI of emerging countries. Most of these investments come from large companies registered in India and China which are voracious for foreign markets. Mainly emerging companies depend on other nations for knowledge and technology and hence they outsource the core functions like management to foreign specialist companies.
Offshore Outsourcing from emerging countries is mainly observed in the Middle-East, where large companies in the oil, shipping and construction industries outsource their processes to established companies in developed nations.
For example, the training needs for management of Emirates, a leading airliner from Dubai are outsourced to a foreign company.
Impact of Offshore outsourcing on the workforce of Western countries
The major advantage of outsourcing is gaining of competitive advantage apart from profitability gained through cheaper cost of production. For the parent countries which outsource to locations like India and China one of the major advantages is the size of population .The number of the technical graduates who pass out of universities is increasing day by day creating a vast talent pool who compete for jobs on the common platform. Hence entry level employees are more in number who get paid less while the demand for experienced staff remain the same in western countries who are paid heavily.
Due to offshore outsourcing, there are major job losses in western countries leaving a large work force unemployed. Often such work force is dissatisfied for reasons like lack of quality services by the host company.
The cultural differences should be handled properly when offshore outsourcing which is major challenge for the investing company’s .In the case of Taxis Bleus is a French taxi hiring company where customers can call and reserve a taxi. The call centre process was outsourced to a company in Rabat, Mexico. The French customers were unable to understand the language of call handlers and felt annoyed. Thus Taxi Bleus business dropped down and French taxi drivers lost jobs. (Jacques, 2006)
Impact of Offshore outsourcing on the workforce of emerging market countries
Due to foreign companies investing in the emerging markets and seeking for outsourcing support, the living standards of the people there have increased. The knowledge of the employees has also increased due to adaptation to new technologies and the training has imparted skills to the workforce making them globally demanding. Offshore outsourcing helped rapid increase in wage rates in India and China. Just in these two countries more than 300 million people have are relieved from abject poverty which is the first time in human history for such a change to take place in too short a time.
Due to scarcity of skilled work force in developed countries like UK both public sector and private sector like health care, IT and education have recruited people from many developing countries like South Africa, Ghana, Nigeria and India (johnson, 2001)
In the western countries due to lack of skilled labour and expensive wage rates, the UK government has insisted firms to skilled staff from India. Firms such as Atkins and Network Rail have recruited signal engineers from India who are a scarce resource. (G.smith, 2002)
It is evident that the recession in 2008 started in US has tremendous impact on the global economy .Thus western companies have direct impact on the outsourced companies in host countries. Many people became jobless, rigorous ramp down in the teams, reduction of salaries etc.
Though offshore outsourcing has many advantages every business process can’t be outsourced to foreign companies due to limitations such as cultural barriers. However businesses should better limit their processes based on their core competence and should outsource the rest of processes to leverage high cost benefits and specialist services that are available only in few countries.
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