In basic terms, outsourcing is the process of contracting a given company or individual top carry out a particular function. However, it is important to note that the precise definition of outsourcing has not been agreed upon as at yet. However, outsourcing has been lauded in management accounting as a cost cutting measure and in that respect businesses wishing to operate effectively in today’s increasingly competitive marketplace have come to embrace outsourcing so as to remain afloat.
In this text, I identify the main issues in outsourcing and apply as well as reference the new learning that has occurred so far. I also build upon class activities that facilitated learning as well as understanding and present specific current applications and relevance to the workplace going forward.
Outsourcing: the main issues
Outsourcing is critical in today’s increasingly competitive marketplace as it allows businesses to concentrate on their core activities. This essentially means that the relevance of outsourcing cannot be overstated going forward. The recent global economic meltdown that has been seen to be the worst since the 1920s great depression has made businesses embrace ways as well as strategies that are meant to ensure that they remain profitable in these uncertain economic times. It is important to note that outsourcing has been applied by businesses for quite a long time especially since work specialization came into the scene. However, it is only recently that companies have begun to embrace the model of outsourcing to execute functions considered to be narrow including but not limited to data entry as well as billing, payroll processing and a wide range of other functions that could not be outsourced previously. It is hence not surprising that we have had a number of companies coming up to offer outsourcing services and in that regard, such companies tend to have better trained personnel, specialized facilities as well as tools so as to make their services more efficient and effective for their clients.
As at the moment, outsourcing assumes quite a number of forms. We have organizations which prefer bringing into the fray service providers who avail business processes that are considered distinct including but not in any way limited to the management of benefits. However, according to Greaver (1999) some companies go ahead to outsource entire operations. This includes but is again not in any way limited to BPO or what is better known as business process outsourcing and ITO or information technology outsourcing.
Bragg (2006) notes that when it comes to BPO; we have claims processing outsourcing, accounting outsourcing, HRM outsourcing, call centre outsourcing etc. The world over, outsourcing has come to be branded a multimillion dollar business and it has also become commonplace for businesses seeking outsourcing services to make deals that allow them to transfer the workforce they were previously using to the outsourcing company so as to avoid massive layoffs. To give some examples, the better known outsourcing companies today especially in the business process outsourcing as well as the information technology outsourcing marketplace include Capgemini, Accenture, ACS, HP, CSC, EDS as well as IBM.
According to Greaver (1999), a big number of startups have realized that one major way of ensuring that their launch time is fast is to utilize both service provider staff as well as internal staff in what is commonly known as outsourcing. In that regard, they go ahead to bring into the fray a wide range of outsourcing service providers who take care of virtually all or at least a majority of the new project’s tasks including but not in any way limited to sales and marketing, localization, software testing and coding as well as project design.
It is also important to note that outsourcing and its subsequent management may prove to be really challenging when we have a function or activity being accomplished in another country i.e. offshored. The difficulty here or challenges herein come about as a result of a constellation of factors including but not limited to cultural as well as language barriers and differences in time zones. To put these issues into perspective I briefly discuss the same below.
Current issues in outsourcing offshore
Bragg (2006) notes that it has become a common trend for companies to outsource offshore today. However, such a decision as noted above comes with its own challenges as well as consequences. The issues I discuss below highlight some of the concerns that are impacting on offshore outsourcing in one way or the other.
To begin with, we have the infrastructural issue. When it comes to infrastructure, not many offshore jurisdictions have network bandwidth appropriate for efficient communication. This essentially means that such jurisdictions are prone to intermittent electrical outrages. It is important to however note that not all outsourcing functions are affected by this.
Next, we have the issue of objectivity. Here, the pertinent issues include the level of commitment the offshore outsourcing partner has towards your work and the ability of the same partner to act in your best interests as far as the accomplishment of your projects is concerned. We then have the issues of culture that essentially means that the possibility of miscommunication between the client organization and the outsourcing partner is increased. This is essentially because business value systems, forms of address as well as conduct vary vastly all over the world.
When it comes to language barriers, the issue needs no introduction here as it is self explanatory. It is common knowledge that going offshore especially as far as outsourcing is concerned may bring along challenges of communication due to a mismatch of languages between the service provider’s country and the client organization’s country. The absence of facial expressions in the communication process may also end up making it worse off. Lastly, we have the issue of time zone clash. For instance, we have countries in different parts of the world having hour differences. For some countries such as India, the existing hour differences may be up to 10-hours. While some outsourcing companies might see this as a good thing and try to convince the client as such, the time differences may make it hard to consult between the two companies (both the outsourcing service provider and the client organization) when issues requiring urgent consultation come up.
Further, it cannot go unmentioned that currently, most particularly in the US; there is a backlash against the trend of offshore outsourcing because this is seen as taking jobs to other jurisdictions. It is important to note that such backlash may essentially bring about negative consequences for a firm outsourcing its services to other countries. At a time when most businesses are reeling from the effects of the global economic crunch, it may be prudent to avoid any negative publicity.
Outsourcing: a discussion of new learning
According to Greaver (1999), in the outsourcing process, we have a number of stages. These stages numbering to four include;
- Strategic thinking aimed at coming up with an organizational philosophy regarding the outsourcing role as well as what it is supposed to incorporate.
- Evaluation as well as selection designed to avail outsourcing projects believed to be largely appropriate as well as the probable location of the activities to be accomplished and those to accomplish the same, i.e. the appropriate service providers.
- Contract development aimed at ironing out the service level agreement as well as agreeing on other pricing and legal issues.
- The management, coordination or governance of outsourcing which levels out the continuing working relationship existing between the outsourcing service providers and the client or organization seeking outsourcing services.
It is important to note that the success of outsourcing is anchored on a number of things. One, we have the level of commitment the client company’s management has towards the outsourcing undertaking. If the outsourcing undertaking lacks the support of the executive level management, it may end up being an exercise in futility. It is hence important to note that one of the determining factors of the success of an outsourcing undertaking is the attitude of the top level management of the client organization towards the same.
Next, the success of the outsourcing undertaking is largely dependent on ample communication to those employees who will be squarely affected by the outsourcing undertaking. According to Bragg (2006), if the outsourcing is not communicated amply to the concerned employees, they may end up sabotaging the same and frustrating its takeoff. This may end up affecting the operation of the business in a number of ways. Therefore, the most logical way to ensure that the outsourcing project takes off and brings about the benefits it’s projected to bring to the organization is to ensure that such an undertaking gains acceptability across the board.
Next, the other main determinant of the success of the outsourcing undertaking is the client organization’s prowess as well as effectiveness as far as managing the service providers is concerned. If the client organization falls back as far as managing its service providers is concerned, we may have the outsourcing undertaking accomplishing opposite goals apart from the one it was intended to accomplish. For instance, failure to manage the service providers effectively may inform the escalation of costs hence impacting on the firm negatively. It is important to note that for the outsourcing undertaking to take off as well as proceed smoothly, the professionals in charge of outsourcing from both the side of the client organization as well as from the side of the outsourcing service provider need a number of skills including but not in any way limited to project management, communication as well as negotiation abilities. Further, they must possess the ability to comprehend the contract’s terms and conditions as well as the SLA terms or what are better known as service level agreements. It is also prudent to note that the client organization needs to be highly flexible to fully embrace as well as nature the specific needs of the outsourcing undertaking.
Outsourcing: arguments for and against
Organizations that seek to outsource some of their services do so for a number off reasons. One, there is the issue of saving costs. According to Bragg (2006), outsourcing ends up cutting the overall cost of service within the organization. The premise here is that a company does not have to maintain services that it should not. like for example, maintaining a cleaning department ends up using organizational resources as well as space whereas such a function can be outsourced to other players at reduced cost. Further, through outsourcing, companies can be able to access services that a preserve of big businesses at reduced prices. These services could include but are not in any way limited to application services as well as better modern IT services.
Next, outsourcing enables a company to concentrate on its core activities. For instance, a company in the hospitality industry may see it prudent to outsource some of its services like IT support so as to concentrate on its core business. There are also advantages of cost restructuring as far as outsourcing is concerned. The measure utilized when coming up with a comparison of variable and fixed costs is operating leverage. When it comes to outsourcing, the ratio’s balance is changed by facilitating a move to variable costs from fixed costs as well as enhancing the predictability f variable costs.
Next, those who support outsourcing argue that services provided externally may end up being of better quality than if they were provided internally. This argument is supported by the fact that when it comes to outsourcing contracts, they are essentially legally binding and as such, they come with legal sanctions as well as penalties for non performance. This is not usually the case when such services are provided internally. Further, services to functions outsourced to specialist companies with greater knowledge as well as experience may end up being completed more competently.
Next, outsourcing is increasingly being seen as a way to nature as well as embrace innovation. According to Greaver (1999), when an organization has limited in-house capacity to drive innovation, outsourcing may end up benefiting the company as specialized outsourcing service providers may be better placed to drive innovation.
However, it is important to note that there are those who are against the idea of outsourcing citing a number of reasons why outsourcing may end up acting in the bad interest of the outsourcing organization. It that regard, the issue usually revolves around security. According to Bragg (2006), the risk of exposing the company to forgery is very real as fraud becomes more apparent when outsourcing service providers come into the fray. To highlight this concern, we had a case where Citibank lost a total of $350, 000. The loss was orchestrated by the call centre staff whom the bank had outsourced after they stole customer accounts passwords and made money transfers to their own accounts.
In conclusion, it is important to note that outsourcing is here to stay. Based on the numerous benefits it brings to businesses, its relevance to the future operations of businesses cannot be overstated. This is more so as businesses recover from the one of the worst downturn in economic activity that hit the global markets. Hence as companies seek to enhance their productivity, reduce costs as well as enhance their competitiveness, the relevance of outsourcing is set to be well entrenched in business.
Bragg, S.M. (2006). Outsourcing: a guide to-- selecting the correct business unit—
negotiating the contract-- maintaining control of the process. John Wiley and Sons
Greaver, M.F. (1999). Strategic outsourcing: a structured approach to outsourcing decisions and initiatives. AMACOM Div American Mgmt Assn