College Papers

Outsourcing many countries of the world. One of

 

 

 

 

 

 

Outsourcing

The advantages vs disadvantages

 

 

 

ISBP

 

 

 

 

 

 

Vadim Bucur

 

Introduction to outsourcing

 

    In recent years, the world economic
situation has undergone significant changes. The main reasons for those phenomena
was the introducing the globalization. This is a process where the
interconnectedness of neighboring countries increases. Globalization is propagated
by the increase in the cross-frontier flows of goods, currency, services, persons,
habits and information (1999). It is thought that the introduction of
globalization in the world helps in assuring more prominent economic, political
and cultural ties between many countries of the world. One of the significant achievements
of globalization is the expansion of international trade; this obviously caused
an increase in international flows of capital, workforce and technologies. Generality
in institutional, legal, political and cultural practice amongst nearby
countries has also become possible due to globalization.

   With global commerce, states can disseminate
their products and services to a wider market. In addition to development of
economy, the ties between the countries can also be a useful opportunity for emerging
countries. Ideally, international trade should contribute to the achievement of
world progress through the economic strengthening and strengthening of world
relations. Due to the appearance of international trade, some transformations
in business, as well as in technologies, a new important phenomenon has
occurred, that is, outsourcing. Several companies are outsourcing their
internal procedures in an attempt to establish a stronger business center for
primary competence. The main factor for this solution is basically focused on company’s
restructuring and cost reduction. There are several states that have been capable
of gathering greater potential because of the use of outsourcing.

Whereas
these countries have obtained considerable success on the business outsourcing,
different countries are participating as well in the current trend, notably in
the emerging countries. Outsourcing is developing in most industries since the first
part of 1980s (1995). The main motive is to maintain employees every all sector
of business. Although lower wages cannot be the main motivation for
outsourcing, sometimes this is the result. As the monitoring of pension plans
becoming more complicated, the company’s employees are looking for outsourcing
to solve this problem.

Outsourcing
is basically one of the lines of services that globalization and the advent of
ICT have advanced further in the business world. The theory of transaction
costs Williamson (1975) can be a theoretical ground for outsourcing. He puts
together economics with management to establish the most adequate kind of behaviour
a firm should follow on the marketplace. This generally improves the
procurement discipline, which uses analysis of the factors that define the inner
and outer frontiers of the firm.

Due
to some transitions in business and in technologies’ area, outsourcing is no more
an optional strategy for emerging nations, but a must. Several enterprises are
trying to outsource their various internal operations in an attempt to concentrate
on basic competences. The main motivating factor for this decision is mainly
focused on organizational restructuring and cost reduction. As mentioned
earlier, outsourcing also culminates in certain gains for both the customer and
the external vendor. Having decided to continue outsourcing, the next question would
possibly be where exactly to outsource.

Although
these countries have already made their mark on the outsourcing business, other
countries are also opening their doors to the current trend. One of them is
China who is engaging in severe business competition due to its outstanding
speed of development. For example, in software outsourcing, China intends to
expand its businesses in South Korea, Southeast Asia, Japan, America and Europe.

Why
companies are inclined to outsource is a common dispute. In a survey (2010)
conducted by the World Trade magazine, 180 companies that participated,
announced various reasons for their decision about outsourcing. Among the
common answers are the expansion of opportunities, increased flexibility in
production, improved product quality, improved focus on primary competence,
reduced investment in fixed assets and the achievement of a global presence in
production. However, the researchers have observed that the most frequent ground
that companies use outsourcing is to cut off from expenditures. In fact, 40% of
respondents said that cost reduction is their main cause for outsourcing.

 

 

 

Role of outsourcing

 

Outsourcing
is mainly seen as a mode of predefined external support by other company for delivering
of products and /or services which were previously offered at home. We have two
varieties of outsourcing services, technologies and business processes. Each of
them can be inert partial for subsequent areas. The first variety is outsourcing
of technological services. This includes software (applications), telecommunications
and the development and deployment of Web sites, e-commerce (e-commerce), infrastructure
(networks). The second variety is outsourcing of business processes.

External
suppliers can be both specialists in the field of information technology, as
well as leasing companies, consulting firms, CPA firms and full-service
providers.

The
enterprises are more dependent on IT for business management, they conduct consistent
market investigation in order to find new clients. Due to that fact, numerous
firms have transferred IT assets and personnel to external suppliers or third
parties.

Advantages of outsourcing

Most
companies have transferred some management functions that allow them not to be
competent at the internal level. In principle, the main business task for using
outsourcing is to increase the added value of goods of the industry for their goal
marketplace. This practice is called “smart” outsourcing. This
implies a thorough and effective selection of business practices based on
strategic decisions of management.

Irwin
(1995) argues that outsourcing can have many advantages which imply cheaper
performance of activities by an outside specialist. The advantages that can be
achieved in outsourcing are that the activity can be performed better or
cheaper by an outside specialist. Moreover, the achievement of a competitive
advantage is not decisive in this activity. The risk that firms will be exposed
to changing technology can be reduced. In addition, the procedures can be
shortened, the decision-making process is accelerated, and coordination expenditures
can be lowered.

In
general, the advantages of outsourcing for business and emerging countries are as
follows:

Access to the latest technologies.
Technologies could become obsolete quite fast. The software, for example, is upgraded
quite often. Company would not need anymore to requalify thei staff.

Saving and quality.
Because of strong competition in the market scene, most executives have no option
but to fire employees to get rid of certain costs. Even the most well-known
companies are finding ways to compete with new participants, while reducing the
company’s expenses. Outsourcing companies can save money, primarily through
external suppliers. Third-party vendors can apply world-class standards to
existing IT professionals of the firm, in which all of them must be
re-qualified for outsourcing. They could  also cut some expenses off using more
efficient mass leasing and procurement mechanisms for software licenses, as
they are often more informed negotiators. In addition, external suppliers face
certain contractual burdens; therefore, they are obliged to observe the
deadlines.

Flexibility.
Through the use of outsourcing functions, enterprises must adapt well to the
ever-changing business environment in order to respond quickly to changing
trends and demands. Thus, flexibility is important for business. External providers
can use a wide range of capabilities, while firm’s information system personnel
is bounded.

Work safety for permanent
employees. Thanks to outsourcing, companies can hire employees
for limited period. Consequently, they can refuse or add employees to the personnel
without compromising the company’s image as a employer-friendly entity. In
addition, employee outsourcing buffers regular employees from changing demand,
and also allows the firm to create more sustainable relationships with its
staff members than otherwise would be plausible.

Disadvantages of outsourcing

Although
outsourcing has a positive effect on business operations and a developing
country, this is not a general issue. Thus, the practice of outsourcing is not
implying an automatic success for the company. This leads to issues with regard
to reliability and effectiveness of outsourcing. Possible negative consequences
related to outsourcing:

Media advertising and the benefits
of outsourcing. Often, managers of most companies
report successes associated with outsourcing during their debut for a business
transaction. During this time, both the company and the selected supplier have
high expectations for outsourcing. However, in some cases only the projected savings
that will be received from outsourcing will go to the headlines. However, huge
fees caused by changes in contracts are not taken into account, since there are
only a number of companies that want to advertise their failures.

This is not just outsourcing.
IT is different from other resources; this is not like other resources that
some companies have successfully outsourced in the past. IT is not the same as
legal services, logistics, security advertising and buying other raw materials
companies.

Information technology is
developing rapidly. Because of the rapid evolution of IT,
the prediction for three years may already be invalid or applicable at that
time. Thus, the settlement of long-term contracts for outsourcing is
particularly risky.

Mercurial economy.
The equilibrium in prices occurs in each industry. Nevertheless, only a few can
make the basic economic shifts as effective as possible in the field of
information technology. For example, a mainframe worth $ 1 million in 1965
costs less than $ 30,000 today and is likely to cost 20-30% less next year.
This makes it difficult for decision-makers to estimate the cost of outsourcing
applications.

The cost of switching is high.
Reorganization is often a problem in outsourcing that occurs among suppliers,
when mergers and acquisitions become commonplace. In the future, probably, only
a few suppliers will survive; therefore, difficulties are likely to arise when
shopping for the right price.

Loss of control.
There are some critics who noted that the services provided by the internal
function often do not correspond to those provided by third parties, in terms
of the level of service and efficiency. This is due to the fact that employees
working on the side are not under the same management and leadership, as are
internal employees. In addition, there is a serious concern among third parties
regarding the confidentiality of data, regulations and strategic applications
for disaster recovery.

Bad for the morale of employees.
Refusal of work or transfer of available employees to an external supplier is
often the result of outsourcing. This transition can have a significant
negative impact on the morale of employees. Regular workers may fear for the
safety of their work, which affects their daily work.

Less flexibility.
The specification of services is in the contract provided by the outsourcing
provider. In this stipulation, the outsourcing provider uses an appropriate
technology platform. Because of this contract, the company may lose some degree
of flexibility, especially when moving to a new computer platform.

Be a hostage.
There were professionals who argued that outsourcing allows the user to become
attached to the supplier, becoming his “hostage.” Outsourcing can
lead to the loss of technical staff of the company, and to be blocked by
patented equipment and software from an external vendor. Although initially a
company may have an advantage in a long-term contract during negotiations, in
the long run, the external supplier has the greatest advantage when outsourcing
already works.

Expenses.
Some managers suggest that outsourcing providers are inherently more competent
due to economies of scale. (The theory of economies of scale suggests that
large companies can achieve lower average costs than small companies, due to
mass production and the effectiveness of specialization of labor.) Within the
outsourcing arena, however, this model may not always be applicable. For
example, small companies may have lower costs than large companies, using older
technologies, offering lower-than-market wages and supporting tight controls
and procedures. When suppliers submit applications indicating savings, CPA
should always consider whether they can achieve similar results themselves. If
the vendor is not significantly more capable, the company may be able to cut
its IT costs by consolidating data centers and optimizing resources.

Subcontractors.
Companies often find out that their outsourcing project does not work for the
company, but for someone else. There are some third-party vendors, especially
those who are looking for hard to find technical skills that will subcontract
some of their computer systems to small and unknown companies. These actions
are carried out without the knowledge of their customers. The problems
associated with the acquisition of viruses from subcontractors, high costs,
poor communication and poor quality of service can arise from subcontracts.

In
general, the impact of outsourcing around the world is divided into two, either
outsourcing is success or failure. Although these effects are based on various
factors in the outsourcing parties involved, China, the Philippines and India
are one of the major Asian countries that have been involved in outsourcing.
Several countries, both from the east and from the west, foresee less developed
countries with a rich potential for outsourcing.

 

Future perspectives of outsourcing

 

By 2020, megatrends
will make the following changes to contracts for outsourcing:


Polarization with respect to flexibility and stability

 • Intelligent contracts measured in real time


Use of networks

The
accelerating and increasingly complex business environment requires changes in
contracts – on the one hand, short-term contracts that increase organizational
flexibility, and on the other hand, long-term contracts or agreements that
provide stability, but with greater flexibility.

Contract
management and measurement of results will increasingly be carried out in real
time by service providers and client organizations that share technology to
improve monitoring and subsequent adjustment of service delivery to better meet
the needs of end users.

In
the light of growing global reach and interdependence, organizations are
increasingly required to provide operational variability in markets. Local
characteristics are likely to become more pronounced in contracts for the
period until 2020. The challenge for service providers with globalization is to
provide a global offering for enterprises. The key is to adapt global values
??to local cultures to optimize performance and productivity.

The
reorientation of organizations around networks is also becoming more evident
and will have a greater impact on contracts in 2020. Access to networks becomes
a priority in comparison with knowledge, as organizations will no longer have
the ability to solve all problems independently. Organizations should be able
to discover the depth of existing knowledge and interact with their respective
trusted partners. New ways of working, including approaches that are
characterized by open innovations, cooperation, value networks and crowd sourcing,
become dominant as business models around the world – and most likely they will
be included as parameters in contracts. Users, manufacturers, service providers
and employees will have to think about work processes and spaces that can
accommodate this in a new way.

In
the period until 2020 and beyond, outsourcing services will develop in many
areas, some of which will be:


Specialized services


Services related to the capture, analysis and use of data


Services related to value and experience


Health and well-being services.

With
the constantly growing technological complexity, specialization and greater
demand for specialized services arise. For example, researchers from Oxford say
that 45% of American occupations are subject to automation in the next 20 years.
Thus, the outsourcing area will expand into new services to include new
activities and processes, creating new market opportunities for service
providers.

For
example, in FM and CRE, this can be implemented in the field of sustainability.
A growing network society also means that there will be a growing demand for an
alliance and deal architects – those professionals who are experts in promoting
interactions and relationships within and between networks.

In
addition, when information and data are the main economic assets in several
industries, new working opportunities will emerge for industry players who have
good opportunities for gathering context-specific data and / or processing
them. Huge data sets with built-in storage, analytics and applications will
increase the efficiency, quality and personalization of products and services,
turning industries such as FM and real estate.

The
advent of economic experience, where primary economic value is in experience
and other intangible attributes, opens up new opportunities for innovation in
services and market opportunities. Activities and processes outsourced –
design, aesthetics, culture, storytelling, values ??and experience, become more
insignificant in nature. More attention will be paid to the design of services
and the user experience of existing proposals – a customer-centered approach
with emphasis on emotional travel as an aspect of providing value-added
services.

With
great attention to the health and well-being of employees, it is likely that
service providers will offer new organizational solutions in the field of
wellness. In general, service providers should be prepared to meet these new
requirements and emerging service areas or be willing to cooperate with those
who can provide solutions. For example, it will require new specialists in the
field, such as therapists, coaches, trainers and doctors, for example, as
personnel or FM functions.

By
2020, outsourcing is changing in three main ways:


Outsourcing is becoming more strategic and less focused on reducing
transportation costs.


Relations between firms and outsourcing providers will evolve from a
transactional relationship to a spectrum of relationships based on varying
degrees of interdependence.


Outsourcing seeping in more regions around the world.

Organizations
that use outsourcing, no longer use outsourcing to reduce costs – they have gathered
these benefits. Outsourcing in these advanced markets and industries has become
excessive. Prices cannot be shifted down without reaching negative results.

In
these markets, organizations are creating new outsourcing mechanisms that are
more compact, more flexible and interdependent, with a higher goal and risk
sharing between service providers and client organizations. In the future, outsourcing
will depend more on strategic intentions. Companies that are outsourced for
tactical reasons are going to review and focus on the strategic implications of
how processes are defined; do I need this process close to my organizational
core or not? What competitive advantage does it give? ”

Therefore,
the concept of outsourcing expands and becomes more complex and multifaceted.
The boundaries between what was once defined as outsourcing and cooperation
will continue to blur until they become virtually indistinguishable. “Over
the next 20 years, we will see an environment in which the issue of insourcing
and outsourcing will become obsolete. It will be a fluid environment in terms
of the business form and providing value to the customer, constantly changing.
One will mix these things to create value.” Many relationships will become
interdependent.

Therefore,
companies are beginning to understand that networks, partnerships and
cooperation provide much more value than working in closed systems. Attraction
of external opportunities through outsourcing or other mechanisms of
cooperation becomes a prerequisite for maintaining competitiveness and creating
a new value. Thus, outsourcing is approaching the main lines of business.

In conclusion,
the main trends transforming the process of outsourcing,
underlie the motivation for choosing outsourcing of various activities and
processes in the market. Outsourcing will increasingly be used to stimulate the
creation of value and innovation in organizations. Enterprises will use
outsourcing as a tool to consistently position themselves at the forefront of
their industries, turning to the best talents, resources and opportunities, and
sometimes using outsourcing to access new markets.

The
need for innovation, dexterity and progressive ideas will lead to a shift in
the creation of value in new areas. An emphasis will be placed on the
development of improved processes, with a focus on core competencies and market
differentiation. Outsourcing will serve as a mechanism for allocating risks and
costs associated with specific efforts. This entails the creation of strategic
mechanisms and the construction of value networks to increase organizational
flexibility and become market leaders, allowing enterprises to continuously and
smoothly use the best talents, opportunities and best resources.

In
mature outsourcing industries and markets, there are not many non-core activities
left outside outsourcing. Here, enterprises will push the outsourcing
boundaries to larger and more advanced business areas, such as creating ideas
and innovation. This will require overcoming structural constraints and pushing
internal limits without losing control over the strategic direction of the
company. Those suppliers who can successfully identify new value creation
mechanisms in the advanced business areas will take advantage of the benefits
until 2020. To this end, service providers will have to develop new system
perspectives, which are associated with complex relationships with a number of
partner organizations and serve, sometimes, as business architects.

Providers
must increase their innovative capabilities to move into areas such as creating
ideas and innovation. However, most service providers currently cannot provide
this service. The reason is twofold: “First, there is no economic
incentive for innovation, when service providers are contractually bound.
Secondly, the enterprises as a whole are not ready to pay for consultations on
innovations, except for very few branches “.

Service
providers will have to provide new ideas to achieve increased productivity.
This requires greater coordination and integration of outsourced service areas
in order to achieve inspiration and innovation.

The
types of problems that companies face today are becoming increasingly complex
and will require several high-level service providers to develop comprehensive
competitive solutions.

There
are several areas that still have a great potential for outsourcing in less
developed markets around the world. These include not only things like IT, back-office financial
administration and human resources, but also some
aspects of product development and FM.