Outsourcing is not a one-day process and takes time to be completed. Outsourcing is a procedure that takes stages before fully implementation. It is beneficial if it will lower costs of production of goods and services and delivering them to customers as noted by John, Halvey and Melby (2005). Even though it causes loss of jobs to locals, offshore companies provide the same or better services at lowered costs. This is important since it might lower the product prices. In choosing a company to outsource with, the firm should be aware of the firm’s reputation and systems to ensure easy back sourcing once the contract is over. The best outsourcing depends on good relationships with vendors besides the contract. A good reputation shown to the vendors makes them take responsibility and market the products beyond the terms of the contract. Any management of a company aspiring to make it big in the market should consider outsourcing.
Walmart is an international corporation that has established itself in the global market. With over 8500 stores in 15 countries according to Fisherman (2005), the corporation is the world’s largest firm today. After the launching of the largest private satellite communication in 1987, the firm has upgraded its information systems to be among the best in the world (Westermen 2000). Most IT-related operations in Walmart have been in its headquarters in Bentonville, USA, but in recent years, the firm has been outsourcing the same for efficiency. This is an illustration of good information system management is because of its supporting decision makers. China has been the biggest beneficiary of outsourcing processes in Walmart mainly because it contributes 80% of the total supplies for Walmart. In 2009, Walmart changed from its in-house information technology trend, to sign a business process outsourcing contract worth $ 300- 500 million in India (Eltschinger 2007). Walmart has not felt the full impact of outsourcing. This report addresses issues relating to outsourcing and gives recommendations for the same.
Issues in outsourcing
Wal-Mart recorded profits worth 13.4 billion in the fiscal year that ended in 2008. The main reason for outsourcing in 2008 was globalizing its information technology sourcing initiatives and not lowering costs as would be the priority for most companies. Even though outsourcing in India will lower costs as observed in other companies like Tesco, which save up to $ 60 million annually, the company will incur extra expenses in streamlining the new systems to be in line with the one in use today. The outsourcing will see non-core processes of procurement, finance, merchandising and payroll done in India for the first time in its retail history as observed by McNurlin, Sprague and Bui (2009).
The process will face challenges one of them being increased expenditure. The company’s management reported its intention to expand staffing in line with IT application, maintenance and development to help in the remote sourcing model in India. This is in line with proper operation management that will ensure quality service and security of the firm. The company is in a paradox following yet another announcement that it will not cut down its staffing in the US. According to Mishra (2009), over 500,000 employees had been slashed and their back-office work was given to vendors through outsourcing. Outsourcing in India lowered costs of operation by half compared to the United States. The non-core processes done by vendors will replace some staff in the U.S, therefore, making a loss of jobs for some employees inevitable.
The company has set up a group aimed at identifying potential IT partners, rather than collaborating with one huge IT firm. The group, Remote Service Management, will be part of Wal-Mart’s in-house IT arm, Information System Division (ISD). Mishra (2010) observes that having multiple partners will be expensive for the company. Having already incurred over $ 200 million in contracts signed with Wipro and Collabera, the firm will part with over $ 1 billion if it engages in partnership with other vendors in India. This is not only expensive but it raises security issues. The involvement in many contracts with different companies will compromise the firms’ information systems because they will be handling some special information including financial and payroll. Even though the organization form will remain intact, the IT architecture will have trouble because different companies use different information systems.
Disintegrating the non-core process into so many parts will cause difficulties in back sourcing for systems used are very different. The multi-partnering also raises issues of quality of services. According to Ghimire (2006), “selecting an offshore partner must consider past performance, references and compatibility with the company.” Most Asian tigers are implicit in communication unlike companies in the U.S, which are explicit. This difference in cultures can be a major drawback in the success of outsourcing. This is the major reason behind knowing a company’s history.
Outsourcing is a good tool for cutting costs and improving services in Walmart. It helps in globalizing the company that increases its income revenues. However, the choice of vendors should consider the costs incurred security to the firm and compatibility with the firm’s system both during the partnership and after (O’Brien 2003). The firm should contract with one or two partners since this is the first IT outsourcing process in its history. This will be cheaper and a better pilot model upon which core processes can be outsourced in the future. It will also enhance data security for the firm will be in a position to monitor all data closely between the vendor and the firm. Such a mechanism is easy to back source once the contract is over.
The impact of outsourcing on management of risk
Walmart has been in partnership with offshore countries for its businesses. Carmel and Tjia observe that (2006) China has been in outsourcing partnership for years controlling over 80% outsourcing done in Walmart. This has come with its own risks for most companies based in Asia have accessed the firm’s information systems in the processes of fulfilling the contracts. This has caused unique enterprise systems and improvement in information systems development.
In 2006, Walmart launched a website through which producers and vendors are able to access the company’s inventory data. In doing this the suppliers were able to know what was available and at what price as well as who supplied. McNurlin, Sprague and Bui (2009) observe that the website, web2.0, exposed the firm’s information systems, some of which were sensitive. The security system of the company was upgraded to protect it from hacking and other malpractices that could lead to data loss. In achieving this, the company automated its performance metrics used to capture and record processes on its website. The company also purchased programs aimed at monitoring the information accessed by vendors and controls the processes they have on the website.
Outsourcing has led the company to invest heavily in its information technology department. The department is useful in tracking improper conduct that might lead to loss of information or improper use of information. The company has also revised its policies to help it protect uncalled-for expenses due to negligence. To improve its risks management, the firm has policies that ensure partners disclose as much information as possible and pay huge transactions fees besides signing terms and conditions forms.. An example of such is the Risk Analysis Track introduced to track processes in market trends, foreign exchange and information procedures.
In 2005, the company improved its instruments for hedging and non-trading processes in the management of exposure to interest and foreign exchange. These instruments help in protecting market and credit risks. Simulation is used to model and value the growth of companies, which helps in sampling multimodal functions and applications to the market. In so doing, the capital invested in outsourcing undergoes optimization and the risks from losing it or from catastrophic incidences are eliminated as observed by Bouwman (2005).
Impact of outsourcing on business continuity
Outsourcing has had different impacts on different stakeholders in operations for Walmart. The company must ensure the presence of business continuity plans to ensure continuity in its operations. To the companies based in the United States, business has not been as usual. Outsourcing aims at lowering costs and most Asian companies offer the same or better services as those offered in the U.S at half the price. Most companies have lost their position in products and service providers to their Asian counterparts. Despite the presence of a program to support goods manufactured in the U.S, Walmart has gone ahead to purchase goods worth $ 20 billion from its 6000 supplies in China. This has caused some companies based in the United States to transfer their operations to China where production costs the company $ 0.25 an hour per employee compared to $13 in the U.S. (Eltschinger 2007).
Most companies in Asia incur low expenses in production, which make most Asian tigers reap from exports. In producing at lower costs and selling goods at cheaper prices, the companies have enabled Walmart to access products at cheaper prices thereby selling goods at low prices. This is the major competitive advantage Walmart has over competitors and has expanded its business operation not only in America but also around the Globe.
Relations with outsourcing companies
A SWOT analysis on good relationship outsourcing and comprehensive contracts indicates that good relation outsourcing has more strengths. A comprehensive contract has benefits in that both the vendor and the outsourcing firm are bound strictly by contract terms. The vendor has no other business rather fulfilling the terms. The weakness in this is that the vendor is not accountable for services beyond the ones on the terms and customer relations are not a priority. Even though gives the vendor future opportunities to serve the vendor, it threatens the number of customers if the vendor’s culture is not in line with the firm’s.
Relation based outsourcing is beneficial for both the client and the vendor. While the vendor is certain of futures contracts based on performance, the client (outsourcing company) is sure not to lose its customers base to rival companies. This is because the vendor will present the companies needs under all costs thereby acting as the company’s representative. The only threats to the firm are the costs, which are higher when compared to comprehensive contracts (Ghimire 2006).
Observations from Wal-mart’s success story, good relationships with outsourcing providers are fundamental to achieving organizational objectives and goals. Walmart treats its vendors and suppliers with utmost respect so that they reciprocate the same in situations where they present the firm. This has enabled the firm to have few legal battles with suppliers and ensure overall support by a majority of locals where it operates.
IBM and Wipro have had a long-term relationship with Walmart mostly because of the relation they have had. IBM, for instance, signed a contract in 1975 to supply IBM 370/135 computers Thirty years later, IBM still has contracts with Walmart, a recent one in 2006, that upgraded the firm’s IT system. IBM has benefited extensively from contracts with Walmart not because the contracts have the best of terms but because in maintaining the firm’s culture of cheaper services, IBM has produced the best systems at affordable prices. In return, Walmart has always rewarded IBM with contracts as observed by Cleland and Gareis (2006).
Outsourcing based on comprehensive contracts alone is not beneficial for the firm in the long run. Comprehensive contracts require the vendors to provide goods and services strictly based on the terms of the contract. The vendor company is not liable for activities out of the contract outline. Unlike in relation-based outsourcing, the vendor company relies on limits of benefits from the cooperation besides the contract as observed by Gottschalk and Solli-Saether (2006). The vendor company does not commit itself beyond the contract terms. It does not prioritize the client’s reputation or image neither. This is most cases result in improper service delivery, which has no emphasis on the client’s culture.
In terms of costs, relation-based outsourcing is cheap expensive for the contracting company. While comprehensive contract outsourcing is between vendors with the cheapest terms, relation-based contracts are expensive. Outsourcing with Hp and IBM cost Walmart $ 590 Million for IT services in 2005 while the same services would be accessed at the cost of $ 389 million in India (Malaga 2005). Though expensive, services from relation-based outsourcing can be relied on in the future for products made by IBM are HP to be used by Walmart are customized and easy to back source in future.
Walmart has portrayed some of the best outsourcing strategies in recent years. Expanding its outsourcing partners to India to include IT outsourcing will enable the company to expand its operations while at the same maintaining low costs. This has its extra costs which compared to the benefits will be worth the consideration. The company, however, can reduce these costs by reducing the number of outsourcing companies to about two in number.
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