Today’s business environmental, organizational, and technological factors require businesses to operate efficiently and effectively in order to be competitive. Toward those goals, managers employ many strategies to improve productivity, including standardization, automation, and business process reengineering. Additionally, they restructure the business organizations to be lean and flat so that they can become flexible in responding quickly to changes in environment and customers’ needs.
Outsourcing is another valuable strategy managers use to achieve the above goals.
- In 2002, for instance, India had 90% of U.S. organizations’ information technology (IT) off-shore business.
- China looms as India’s biggest competitor, although some consider the two as noncomparable at this time. Other countries considered to be attractive as off-shore outsourcing sites include Malaysia, the Czech Republic, Singapore, the Philippines, Brazil, Canada, Chile, Poland, Hungary, Russia, and Vietnam.
In the age of the Internet and World Wide Web, a company’s location hardly matters. In the past, the educated and skilled labor from low-cost countries immigrated to the U.S. During the last decade, faster communications and improved information allow companies to easily send information oriented work to any location on the globe. Ultimately, countries with low-paid but well-educated workers will benefit greatly. However, the country of origin of the outsourcing also benefits.
Why Do Firms Outsource?
Companies outsource functions for reasons that are organizationally driven, improvement driven, financially driven, revenue driven, or cost driven. Outsourcing can be viewed as a component of corporate and industry international expansion and restructuring.
Five horizons of the global industry value chain
When to Outsource?
Factors that Support Outsourcing
Characteristics of today’s outsourcing environment are many and varied. The strategic change to outsourcing is highly evident in the software industry. Frequent changes to software especially often result in an organization turning to outsourcing as a solution. Reasons studied for this can be generalized to all outsourcing, and include:
- The turbulent market will need corporations to be customer focused
- There are pressures on corporations to continuously develop new product at reduced cost
- Extensive customization is enabled by IT through mass customization
- The market need can be fulfilled by flexible & adaptable organizational structure which is possible with IT-enabled processes
Previously identified factors include time compression, short product life cycles, strategic discontinuity, increase in knowledge intensity, and customer-focused approach. These changes are:
The Risks of Outsourcing
- Customer focus
- Shrinkage in product/systems life cycle
- Societal, political, and ethical factors
- Competition and real-time operations
- Changing workforce and job loss
- Technological innovations and obsolescence
- Organization structure and corporate culture
- Global economy
Despite the purported benefits of outsourcing and the wide range of success stories that have stimulated an unprecedented growth rate, there are potential risks as well. An outsourcing project might fail because of poor selection of the vendor, mismanagement of the outsourcing contract, inferior performance by the vendor, lack of acceptance by the end consumer, or other reasons
What to Do and Not Do?
Core Competencies and Critical Success Factors
Decisions as to what and whether to outsource should be tied to an identification and understanding of an organization’s core competencies and its critical success factors. Such an identification and understanding can be a lengthy process. However, it is the one true way to determine whether a project should be or should not be outsourced.
Outsourcing Trends and Future Projections
- If a task is a both a core competency and a critical success factor, it should not be considered for outsourcing. Such tasks are atthe heart of the company.
- Those tasks which are not core competencies are the most likely candidates for outsourcing.
- Tasks that are core competencies but not critical success factors should be reassessed.
- If an organization intends to bring an outsourced task back in-house a some future time, managers should be cautious. Once the expertise has been released to the outsourcer, it is difficult — if not impossible — to regain such expertise in-house.
- Outsourcing of information technology functions
- Outsourcing of pharmaceutical functions
- Outsourcing of customer care functions
- Outsourcing finance and accounting (F&A) functions
- Outsourcing of human resource (HR) functions
- Outsourcing of research and development (R&D) functions
Outsourcing of information technology functions is a huge marketplace. IT outsourcing began as a cost-reduction tool, but has evolved into a component of businesses’ overall corporate strategies. It has grown from simple applications to a much wider set of business functions: logistics, payroll, human resources, legal, and so forth. It has become pervasive and strategic.
Outsourcing of pharmaceutical functions traditionally has taken the form of outsourcing drug development and manufacturing to contract research organizations (CROs) and contract manufacturing organizations (CMOs).
Outsourcing of customer care functions by moving entire contact centers off-shore has become very popular. The functions performed by customer service centers are more important than their location. The discrepancy between labor, real estate and infrastructure costs on-shore vs. off-shore, makes this a logical function to outsource. Customer contact centers are a $650 billion industry (Cleveland, 2003).
Outsourcing of human resource (HR) functions, such as payroll, recruitment, hiring, training, benefits management, employee assistance programs, executive compensation, as well as health, safety, and regulatory compliance, is gaining momentum.
Outsourcing finance and accounting (F&A) functions have been prevalent since the beginning of business. Now, there is a growing trend for F&A functions to be outsourced off-shore, primarily to save labor costs.
Outsourcing of research and development (R&D) functions takes various forms. Drug companies contract with outside firms to explore new compounds for possible testing and launching. A different form of R&D outsourcing is used by companies such as Dell, Motorola, and Philips which buy complete design of digital devices from Asian developers, tweak them to their own specifications, and attach their own brand names. Another approach is that used by Boeing Co. which contracts with India’s HCL Technologies to co-develop software for everything from the navigation systems and landing gear to the cockpit controls for its upcoming 7E7 Dreamliner jet.