The Growing Outsourcing Trend in Today’s Business Market

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Introduction

What do Microsoft Corporation, Marks & Spencer and Mambo Graphics have in common? One thing that made them related with each other is that they were known in their own fields and achieved more than what they expected. This, they owe to the power of outsourcing. They did not rely on the skills and capabilities of their employees internally. They took time to explore new possibilities how to be more competitive with the market. They learned that outsourcing can be a very good tool in achieving one’s goal.

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Highly skilled operators, programmers, agents for a specific insurance company, or even call center agents are hired to provide a certain function that cannot be provided within the country or the state.

Lever (1997) defined outsourcing as a contracted services outside a company or even outside the country to do a specific job or function. “Outsourcing or contracting out work started in the manufacturing business in the early 1980s, primarily as a means of cutting back staff and saving on wages” (Ryans, 1996). They are commonly called the third-party providers or simply service providers.

There are many reasons why outsourcing or contracting out work is more preferred rather than developing in-house talents. First, it is seen as more cost-effective (Domberger, 1998)–for example, a contracted personnel from other countries require only smaller salary because of the certain standardized salary scheme within the country; second, to cut cost and refocus resources (Holt, Kennedy, Rehg & Ward, 2002). A large company with numerous personnel with no specific work is the same with a company with smaller personnel but with specified work. This was done through outsourcing of different functions from different sources. And third, lower investment in internal infrastructure (Reaser, 1996), it will be built instead to the outsourced country.

In India, the volume of work outsourced has increased to more than 50 percent since 2005 (Ahmed, 2006, BBC news). Skilled professionals of IT and call center jobs are growing in India. When outsourcing from other countries started, India has been one of the countries most favored for this aim.

While some commended outsourcing is the best option to be more competitive in the market, some are anxious with what will be the result of all these in the workforce especially in the US. Other than India, China, Japan and the UK are also now outsourcing some of their workforce.

As of October 2006, the Bureau of Labor Statistics reported that the US population continues to grow at 300,263,379. Although employment grew by 92,000 in October, the workforce is still apprehensive with might happen if companies continue to outsource personnel.

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The Hira brothers’s book cites a University of California Study that estimates 14 million U.S. white collar jobs – one in nine – are at risk. A 2004 report by Forrester research suggests that a total of 3.3 million US white collar jobs will move overseas by 2015, with 830,000 jobs leaving by the end of 2005.

Other than IT, outsourcing has extended to desk job employments and networking, and healthcare.

Although the data shows from the BLS that the unemployment rate has declined to 4.4With the presented data on the employment rate and unemployment rate of the America, it only suggests that too many outsourced jobs can affect the economy of the America. Based on the book written by the Hira’s brothers, outsourcing can lead to the loss of workforce and decrease in economic capabilities of the country.

Some of the factors affecting the high increase of the outsourced jobs are the low enrollees in science and engineering courses in America (Holt, Kennedy, Rehg & Ward, 2002). These specializations are not given attention by the government and the schools. That is why some of the companies rely on the outside service providers who can serve with a minimum cost which is very beneficial to the contracting company.

This paper is aimed at analyzing the overall impact of outsourcing to various industries, particularly to the corporations’ shareholder value. Specifically, this is intended for:

  1. reviewing the various factors why outsourcing has been becoming a trend
  2. classifying the various approaches and strategies to effective outsourcing
  3. analyzing the impact of outsourcing which is prominent in most developing countries

Outsourcing Defined

Outsourcing may involve either a short-term or a long-term contractual relationship for business services from an external provider. Nowadays, these forms of relationships are becoming very popular particularly in wide variety of business activities. Firms widely outsource in areas once strictly considered internal domains, such as human resources (Spee, 1995).

Outsourcing adds value in the changing corporate environment, especially when used in combination with reengineering (Marinaccio, 1994) or a shared-services model. The trend toward outsourcing select HR activities is growing. Outsourcing differs from other forms of contracting in several distinguishing ways. For these reasons, outsourcing is not a situation which firms enter lightly or want to renegotiate frequently (Quinn and Hilmer, 1994).

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There are four phases to an outsourcing relationship. The discovery phase consists of benchmarking internal service levels, identifying future requirements, and issuing a request for proposals. During this phase, there is a short listing of probable vendors. The discovery period can result in a better understanding of the firm’s current capabilities, and sometimes in a decision to reengineer rather than outsource.

“A vendor is selected during the negotiation phase. On a general level, the decision rests largely on the operating philosophies of both parties and the vendor’s approach to service. An outsourcing contract involves high levels of integration and coordination. It intertwines vendor and client. Working closely, both parties identify areas for service improvement and plan transition and service delivery” (Quinn and Hilmer, 1994).

After which, the transition phase follows. The ease with which transition occurs is dependent upon the amount of planning and preparation done beforehand. During this time, employees are transitioned to the vendor or to other positions, and computer applications are migrated to the vendor’s systems. Most ofthen than not, the vendor simply takes over the client’s systems (Quinn and Hilmer, 1994).

The third and final phase in executing an outsourcing arrangement is the assessment phase. At this point the vendor is already providing the service expected from him. Careful contract monitoring ensures using predefined metrics and benchmarks. Eventually, the contract is either re-negotiated for further use or ended (Quinn and Hilmer, 1994).

Every company who will be planning and/or deciding to do outsourcing should expect a dramatic change of the system. There is a procedural change that will be happening within the organization itself. The dramatic changes in the organization can be in the form of changes in the nature of work, control, and organizational design. The outsourcing process is sated with uncertainty for employees and in this sense similar to changes like mergers, restructurings, and downsizing. At even the mention of outsourcing, employees suspect their employment is jeopardized, often correctly. Resulting productivity losses may exasperate already unacceptable performance levels and inspire additional outsourcing (Bettis, Bradley, and Hamel, 1992).

Firms that proceed and contract for outsourcing services comes across different organizational change with serious implications for the status quo.

“In true outsourcing relationships clients transfer day-to-day administrative responsibility and control for the outsourced activity to the vendor. Whole business activities are repurchased from the vendor without concern for productivity issues and component costs (which are now the responsibility of the vendor). Clients pay for a service, and pay a premium to avoid the difficulties of producing and delivering a particular service (Bettis, Bradley, and Hamel, 1992).”

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Unloading the burden of administration is a great attraction to outsourcing. However, for the client’s employees there is a sense of loss. Client employees lose such tangible signs of power and status as direct control over staff, budgets, and functions. For some, there is the real and acute loss of employment. On the positive side, some employees will receive greater control over resources and greater exposure to outside agents (Bettis, Bradley, and Hamel, 1992).

Outsourcing may also imply substituting vendor services for current internal capabilities. Outsourcing means replacement. It entails replacing business activities traditionally performed internally and eliminating the units that previously provided the services and either reassigning or releasing employees. Replacement distinguishes outsourcing from simple contracting precisely because the organizational implications are significant. The duplication is eliminated to realize the motivations that originally inspired outsourcing. Outsourcing is an inexact tool for organizational design, not simply a contract for acquiring goods and services (Bettis, Bradley, and Hamel, 1992).

Lastly, outsourcing represents a semi-irreversible organizational change. When employees are transferred or terminated their knowledge and skills, perhaps the result of decades of learning, leave with them. Unspoken understandings of the work and organizational particulars are difficult to rebuild if the outsourcing relationship fails. Moving the activity back into the firm as a result of a failed arrangement is a difficult process of shifting resources and rebuilding capabilities (Bettis, Bradley, and Hamel, 1992).

Outsourcing in Developing Countries: the Aftermath of Globalization

The need to globalize is what most of the industries across all nations are aiming for nowadays. With the idea to globalize comes the concept of outsourcing – may it be in the form of supplies or even the very human resources. Needless to say, outsourcing has always been interconnected with globalization.

Globalization is imposed focusing on the various facets of one’s country. This includes growth of trade, flow of capital thereby ensuring financial capability, stable migration flow, entry of Information Technology (IT) and web thus dissemination of technology (Keohane and Nye, 2000).

Trade plays a pivotal role in the economy this is why this is one of the focal point of globalization’s purpose. Trade shows the relationship of total factor productivity and growth. Globalization includes increase of trade as one of its goals for it is believed that trade can enlarge the markets for domestic producers, allow the market to reap scale economies, force such market o be competitive and offer incentives and opportunities to incorporate as well as develop new technologies (Krueger, 1997). More so, with proper facilitation of trade, enough export earnings will be achieved. Export earnings is believe to be capable of loosening foreign exchange constraints on the economy and thus making it possible to facilitate expansion of other sectors Ades and Glaeser (1999).

Another major goal of globalization is to increase capital flow and strengthen financial capability. Capital flow is and could be serve as a major source of investment of a country and a channel for the transfer of technology as well as the spur to financial deepening. FDI is able to produce encouraging outcomes for the country even if spillovers are present because of competition and linkage effects. It also produces productivity and better wages among employees or workers (World Bank 1999). FDI can also expand the stock of skills, increase technology level, enhance access to international markets and combine countries to internationally produce networks. Meanwhile, financial capability ensures a one or two percentage points to the annual growth rate as a result of increased allocative efficiency (Levine 1997).

Stable migration is the third most important goal of globalization. This is because several researches and studies have proven that endogenous growth and economic geography is highlights the importance of migration and its relationship with trade and capital movements (Faini et al 1999). Moreover, there are some researches on migration which shows that even during the early period of globalization, capital movement implied a possibility to be substituted by migration and serving to narrow factor price differentials (Williamson 1998). Hence, migration is a proven beneficial factor to developing countries. First among the reasons is the fact that migrants can send back remittances which can reach up to $75 billion per annum. This amount can of course lessen or eliminate foreign exchange constraints on growth. Also, a big part of this amount can be given to the poorer families which helps reduce the skewness in household consumption. Lastly, migration serves as the basis of international networks among the globalizing countries. Such network can encourage continuous flow of prospective migrants’ worldwide access. Simply put, migration plays a very important part to the developing countries in a way that it enable workers to find better employment abroad, acts as a major source of remittances, skills, technology and capital and it is a means of becoming a part of international production networks (Faini et al 1999).

As for the technology, it can easily be reflected that on the above facets of globalization, technology is always included. May it be on the increase of trade and capital or on the stability of migration, the probability of influx of technology is always connected. This is because several researches have proven that as more advance the technology is of a certain country, the more opportunity for the trade, capital and/or migration comes in.

Generally speaking, these four facets of globalization summed to two important factors of the country, and that is the economy and the culture. Thus, globalization is aimed at protecting and enhancing the country’s economy and culture.

To enhance the country’s economic level is one of the foremost goals of globalization. In the twenty years since the initiatives for globalization has started, a notable increase in the economy can is very noticeable especially among developing countries. These movements are in the form of importation, exportation and trade flows.

Generally speaking, globalization has made it possible for the developing countries to be at an equal pace with the more developed countries, or the first world countries when it comes to technology, business investments and gross domestic income. Clearly, the globalization initiatives brought majority of the countries to enjoy advantages to both economy and culture. These are in the form of (Amoore, 2002):

Economy

  1. Raise in international trade at a rapid rate
  2. Increase in international flow of capital including (such as FDI)
  3. Creates more international agreements like the organizational accordance of WTO and OPEC
  4. Develops global financial systems
  5. Increase in the use of economic practice (where outsourcing plays a very crucial role)
  6. Promotes free trade thereby reducing tariffs, eliminates capital control

Culture

  1. Better international cultural exchange
  2. Widens multiculturalism and population access to cultural diversity
  3. More international travel and tourism
  4. Increase in immigration rates
  5. Increase in the use of technology (such as telecommunication)

The reform to globalize has brought positive impacts on the economies of the majority of the developing countries. Like for example in East Asia, most countries belonging to this region have experienced incomparable economic growth thereby pulling up most of the populace out of their poverty state.

However, there were also some countries who did not respond as envisioned thereby were not able to achieved the real purpose of globalization. One of the undeniable facts of globalization is that not all countries that put too much effort for the reformation have had the same result as most of the East Asian countries. Countries in the Sub Saharan Africa, some parts of the South Asia, Latin America and the Caribbean did not benefit anything from in the process of globalization and did not produce any significant contribution to the aspect of outsourcing, may it be in IT related concepts or not. This happened, despite their equal efforts of having structural adjustments. More so, there were a number of pinpointed reasons for such failure. One reason was the fact that oil, which is the most important source of income among some countries did not produce enough hence, the income of the concerned countries – the oil-producing ones – was terribly affected.

With these, many criticizers were saying that only the rich and already industrialized countries benefited from globalization and only these countries show high regard to outsourcing. They are the only countries which gained from increased trade and rapid growth, while the already poor countries were seemingly pushed to become poorer. This resulted to an even farther gap between the rich countries and the poor ones. In fact, there are studies that revealed many developing countries have just been marginalized and were cut off from the mainstream of the global economy (Rodrik, 1997).

Conclusion

Indeed, outsourcing can offer a good advantage to some companies. Or it can be a disadvantage either. If the government will prioritize the labor workforce, companies would not hesitate to hire them. What a company wants for an employee is a skilled, equipped, and able to stand for his company. The government is on the light here. Include the schools who are giving their student and equipping their students how to be a better person once they graduate from their courses. Through this, they can compete with other workforce especially who are outsourced from other countries.

There should be specialized courses for each member of the population who are willing to be part of the workforce. In this way, companies in the America will give credit to the applicants. This will result to companies, industries, and/or manufacturing businesses to continue to boost the economy of the country. The government should not only be on look with the employees, with courses at school but also with the companies who are investing in the country. Choose the companies who will boost the economy and give credit to the employees.

It looks as if the outsourcing will continue to grow. Companies will continue to grow and so as labor workforce will continue to grow. Outsourcing will always be present but if every member of the household will give their part, cooperate with what the government has to offer with his people it will not be difficult to fight the issue on outsourcing. The unemployed will have jobs and the employed will be in their jobs in the next ten years or so.

Outsourcing is good because it ensures job workloads to be done in a seemingly lesser cost. Because a company has to hire for an agency and the like to provide the service they want without having to think about the benefits, social security services, medical benefits, etc. that are lawfully the responsibilities of such companies. But there are some who are also thinking that outsourcing is not favorable, because the attachment and the loyalty to a company will be lost. Agencies who offer outsourced jobs works for the money and money alone.

Employers are still in the advantageous side if they are to provide benefits directly than to outsource because having direct employees ensures loyalty from them and higher form of commitment in doing the jobs that will be tasked to them. Furthermore, outsourcing are usually in a contractual basis, hence there is a possibility that twice or thrice a year, there will be a replacement for that outsourced worker… this only means that the employer will be training every outsourced employee twice or thrice a year also – and that is truly time-consuming.

But then again, the corporation’s shareholder value will remain at a competitive end because of outsourcing. Outsourced personnel will always try to prove themselves with the company. They will always be on the look out for praises and incentives thereby making sure that they always put their best foot forward. This will of course result to higher productivity of the organization. Higher outputs will mean higher profit, thus a good feedback for the shareholders.

The only challenge for the shareholder’s point of view, or of the top management is choosing the best course of action related to outsourcing. Based on the experiences of the companies who have tried outsourcing, the first step to selecting the right outsourcing engagement is to focus on what business objectives the company is trying to achieve and then aligning the outsourcing engagement with the said objectives. That may appear to be obvious, but many outsourcing initiatives fail because that simple guideline was not followed. More so, the type of outsourcing engagement should directly relate to the reasons for outsourcing. The most pressing rationale for outsourcing, as stated by executives, is to cut costs and increase efficiencies. But the decision is often far more complex than that. The decision-making process per se may include an increased focus on strategic benefits such as the ability to access new skills, to focus on core competencies, or to manage processes more effectively. In fact, outsourcing can enable companies to access state-of-the-art technologies and technical skills that would be otherwise unavailable to them.

So managers considering an outsourcing move must allot enough time into identifying and prioritizing all of the objectives they seek. Indeed, ensuring the success of any outsourcing endeavor will always be dependent on the decisions made by the top management. While there are a hundreds of best possible practices about outsourcing, it is clear there is no one-size-fits-all outsourcing strategy. It should be noted that whatever outsourcing strategy a company must decide to use, it should always be based on the company’s current and unique business needs and how it aims to satisfy the target customers. As businesses develop greater capabilities, their outsourcing requirements change. Moreover, any company may pursue diverse outsourcing strategies for different functions, operations, or processes. Consequently, companies need to have a flexible and dynamic process for selecting outsourcing engagements rather than a rigid, static one. In coming to their decisions, companies must first review their business objectives for outsourcing and not fall prey to the apparent momentum of the outsourcing trend (Bettis et. al., 1992).

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