Outsourcing
...nd more companies planning to outsource low end as well as high end jobs to offshore destinations. The advantages linked with outsourcing huge proportions of service by developed countries is the promise that outsourcing will help companies focus more on it’s core competencies and cut costs. Hence some of the advantages of outsourcing of services are that it Reduces operational costs and capital expenditure. Allows a business to focus on core activities Streamlines a business’ operations Gives access to professional capabilities Increases productivity and cost savings Improves service quality Frees up human resources and cash flow Increases the control of business Makes the business more flexible to change (demand) Helps companies beat competition Firstly, by outsourcing to third world developing nations such as India, China, Philippines, Mexico, Ireland etc, companies can take advantage of the cheap labor and facilities available in those lands and in turn cut down on man power costs, reduce operational costs as well as capital expenditure. Secondly, with the ability of outsourcing services a business can focus on its core activities and strengths, giving it a competitive advantage over another company. Usually by outsourcing their back office operations, businesses can concentrate on their core competencies while their back office operations are being managed smoothly by a specialized third party company. This allows managers freedom to concentrate on developing and marketing new products. Thirdly, outsourcing streamlines a business’ operations by expanding the business into other countries and getting the company’s name out there by giving it exposure and company recognition in other countries. In addition, outsourcing gives access to Advantages of Outsourcing in Service Industry cont’d… professional capabilities as usually a company would outsource distinct segments of its company to different providers, each specializing in its own segment. For instance it is not uncommon for an organization to outsource help-desk services to one company and its hardware support to another. Outsourcing gives an organization the “chance to get access to skilled and trained man power at extremely lower rates that will lead to an increase in productivity and save on costs in a major way. There are many technologically developed offshore destinations that can give the companies access to high tech newly developed technologies at very affordable rates. This in turn can help them progress at a rapid pace. By employing skilled manpower in more numbers at lower costs companies can highly boost up their productivity in turn resulting into better customer satisfaction and increased profitability.” (www.bizbrim.com) Fourthly, when a company out sources it improves service quality because to whom the company outsource to is specialized in that field. Outsourcing frees up human resources as well as cash flow because it doesn’t need to hire additional employees and doesn’t need to spend as much money on a project as it would have to if it were to handle everything internally. Also, being able to outsource certain segments of a companies business allows for the company to increase the control of their business due to less core competencies to focus upon. Moreover, outsourcing enables a company to be flexible to change because it can do more when it comes to responding to fluctuating consumer demand. Another advantage of outsourcing in a fast paced economy is that it can help a company maintain lower rates with better service thereby helping them to beat competition. Hence these outsourcing advantages are an indication that the outsourcing market has a great future. Disadvantages of Outsourcing in Service Industry There are several arguments that are not in favor of outsourcing. These arguments are valid and should be taken into consideration when a company is thinking about outsourcing their services. The disadvantages of outsourcing are: Loss of control of the process Can lead to potential redundancies Other companies may also be using the service provider. Therefore in some cases, the best interests of the service provider may be diluted with other users. The loss of talent generated internally Employees may react badly to outsourcing and consequently their quality of work may suffer Alterations of well established job processes Geographical problems When looking to outsource many companies look at the bottom line and see that by outsourcing certain functions they will save on total costs. What the companies fail to see is the hidden negative costs of outsourcing. It is also important to look at the amount of control lost when deciding to outsource. When outsourcing loss of control is evident but if the company is not willing to let go of some control then it stands to have a lot of problems with outsourcing, which could be reason enough to decide not to outsource. Also, when outsourcing it is important to look at the possible loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus, and sharing cost savings. The loss of these functions in many cases may possibly outweigh the potential cost savings of outsourcing and can lead to many potential redundancies. Sometimes companies fail to realize that the companies providing their outsourcing functions are more than likely to be outsourcing to other companies as well. As the company to whom the service has been outsourced has complete control over processes of an organization; they may tend to leak it to the potential competitor who offers better rates. This kind of situation is more than inevitable. This can lead to a situation where Disadvantages of Outsourcing in Service Industry cont’d… organizations lose its customers entirely to their competitors and lose control of the process. The loss of internally generated talent is another major argument against outsourcing. For example by outsourcing the purchasing side of the business the company that does so will lose its purchasing professionals who in the course of building their career have assembled corporate executive skills that would prove to be successful leaders because of their ability to balance corporate goals and requirements with goals that are pertinent to the success of the purchasing function. Another problem with outsourcing is that it tends to increase the amount of employee turnover, and the quality of its employee’s work decreases. The reason for these occurrences are that contract and union employees are less company oriented and they don’t care about the overall success of the company because of the outsourcing and the jobs being lost internally for that. Also outsourcing gives rise to lower motivation and thereby decline in services provided by the employees. Outsourcing of services can also lead to the alterations of well established job processes that can lead to unnecessary delays and conflicts. Lack of coordination between people having different cultural backgrounds and different time zones can also lead to time losses. Outsourcing can also lead to many problems that are associated with the geographical location of the offshore destination. Some of these problems can be language problems, accent problems, political instability, change in laws and regulations, labor laws, cultural issues and so on. Hence companies who are thinking of outsourcing services should consider the drawbacks and weigh it against the strengths to analyze if they are making the right move whilst taking the decision of outsourcing services to other countries. Countries and Companies Involved in Service Outsourcing There are many countries that are used for outsourcing in the service industry. Mainly the United States wishes to outsource to save cost issues within the labor force. Several of the offshore countries such as China or India are very efficient at cutting labor costs. The average annual salaries for technical services outsourced from these countries ranges from approximately $3,000-$12,000. (Forbes) However, countries like Canada that are near-shore require much higher labor costs ranging from approximately $25,000-$50,000. (Forbes) The most desirable candidates for service outsourcing would be those that reduce cost the most, which would be those countries that tend to be less developed and farther offshore. David Gardner states that, “outsourcing has created over 90,000 net new jobs in 2003, and is expected to create 317,000 net new jobs in 2008”. (Forbes) Creating that many new jobs will be good for those countries that do not have enough job openings, which will also save U.S. companies a lot of money by greatly reducing their labor costs. There are many large companies in the United States that use outsourcing in the service industry. The major U.S. customers for India for the use of outsourcing in the service industry are Citigroup, GE Capital and American Express; Experts see India becoming a hotbed for more critical analytical jobs. (Forbes) Companies that are involved in banking can use these countries for services through electronic data systems. Electronic Data Systems (EDS) is a professional services firm that offers services within the categories of IT outsourcing, business process outsourcing, solutions consulting, management consulting, and product lifecycle software. (Forbes) This system is very easy to use for companies involved in banking and other financial areas. Companies like Citigroup and General Electric were pioneers, having established specialized centers in other countries and sending ever more complex and critical Countries and Companies Involved in Service Outsourcing cont’d… functions outside the U.S. (Forbes) India is the leading recipient of the outsourcing of information technology functions like software development and maintenance, and also business process outsourcing. The latter includes back-office functions like accounting, human resources, call centers, and data analysis. (Forbes) Other major U.S. customers for outsourcing includes Proctor and Gamble, American International Group, Boeing, HSBC, Microsoft, Allmerica, Agilent, AOL Time Warner, General Motors, IBM, Intel, and Dell. (Forbes) Some of the other major service companies in America involved in service outsourcing are companies such as Travelocity, American Airlines, and Wells Fargo Bank which outsource business processes like customer relationship management, customer call centers, telemarketing, payroll maintenance and finance/accounting management. Moreover, companies outsource mainly because they have found that outsourcing is more cost effective for their business. There is obviously something being gained through outsourcing or you wouldn’t see companies of this magnitude. A majority, if not all of these companies is very large and well known. The main thing that is offered to these companies from other countries is financial services. Using these computer services from other countries they are able to lower costs and maximize efficiency, while always having accurate knowledge of their financial information. Thus, outsourcing of services is a large industry getting bigger every year, and is expected to rise in future years. Moreover, there will most likely be several more companies joining this list of U.S. customers of outsourcing. Data Findings Source: Data from Lisa DiCarlo http://www.forbes.com/2003/08/27/cx_ld_0827bestcountries.html Data Findings cont’d… Source: Data from Scarlet Pru...