Introduction
The word offshore outsourcing is defined as the transfer of a company’s functions to another country or turning of some company’s functions to an organization that is located outside the country. Most of the researchers consider Offshore Outsourcing Business Practises (OOBP) as activities that transfer organization operations from one country to another even though the activities may be done by the same organisation located in a foreign country (Manning et al., 2008).
In the recent past, offshore outsourcing has become popular as organizations try to cut their production and labour markets. According to Currie and Willcocks (1998), offshore outsourcing grew rapidly between the early 80’s and 90’s as it was viewed by most managers as a way of reducing costs, eliminating poor performance and accessing skilled manpower.
The global recession, need to reduce the production costs were also seen by most researchers as is the contributing factors towards increase in offshore outsourcing. At first, Most of the US based companies primarily outsourced less sensitive and trailing edge projects but as the vendors proved themselves worthy, more and more high value- low risk projects were outsourced.
India leads in the off-shoring business although other countries are also competing to take a share of the western world business. Many organisations are now turning to OOBP as the most formidable way of increasing a company’s profitability.
Despite its usefulness in cutting down cost, OOBP has several disadvantages such as low quality, inability of the company to monitor its production process, laziness and over reliance on a foreign company.
Various scholarly articles show that OOBP has both benefits and demerits. It is therefore imperative that a company evaluates the risks and values associated with OOBP and determines whether outsourcing is beneficial or detrimental in the long run.
In this paper, a comparative analysis of the merits and demerits of offshore outsourcing are discussed. The first part of the paper discusses outsourcing and offshore outsourcing in general while the second part presents a critical evaluations and discussion about the potential benefits, risks, and disadvantages of OOBP. The final part of the paper presents a conclusion based on the finding of the analysis.
Benefits of offshore outsourcing and outsourcing
Literature studies reveal that most of the companies outsource non core functions that will not put an organisation at high risk. Among the main services that are outsourced can be classified as onsite /offshore staffing, development of maintenance and support systems, design of systems and products, offering consultancy services and strategic planning (Weerakkody & Irani, 2010).
One of the major benefits of off-shoring is the ability of an organisation to get services at reduced prices. For a long time, the low labour cost prevalent in Asian countries has served as a major incentive promoting OOBP by many multinational European and American companies. Many firms outsource their activities so as to get the same products and services at a relatively cheaper price.
Many companies are now shifting their operations to China so as to get reduced production cost. Bray (2009) documents that, in addition to the low costs, many Informational Technology (IT) companies get value added services at a lower cost. Most of the company have realised that offshore outsourcing produces high quality IT solutions.
Off shoring is also associated with faster access to technical staff at a lower price. Outsourcing allows companies to harness the vast human resource skills and expertise at a relatively lower cost as compared to them hiring employees. This enables organisations to improve their business operations and products.
Another principle value addition for OOBP is the ability of an organisation to pool skilled labour in the foreign countries. Most of the multinational companies have developed subsidiaries in countries abroad to specialise in the development of tailor made software’s and other solutions requiring skilled labourers (Weerakkody & Irani, 2010).
According to studies done by Weerakkody & Irani (2010), several companies that were involved in OOBP were evaluated and found to be benefiting greatly. These companies were: company A which specializes offshore staffing, company B specializes in providing maintenance and support services, company C specializes in design and product development while company D offered consultancy services.
Of these companies, the chief executive of company’s A and B indicate that cost efficiency is a critical benefit for OOBP and it is important for the company to gain competitive advantages. The case study also showed that established firms face less challenges when outsourcing as compared to the middle level companies.
Improving the supply chain management is one of the key strategies towards achieving competitive advantage. A researcher have found out that OOBP increases flexibility, adaptability, reduces the lead times, shortens the planning cycles and enable organisations satisfy the market demands.
A survey on outsourcing in Taiwan industries reveals that the industry uses different strategies during outsourcing and offshore outsourcing (Tadelis, 2007). It was found that 45% outsource half of their production while 66% of the companies supplying the local market have an outsourcing rate of 50%.
The research also showed that companies that outsource have better supply management and the suppliers are able to perform to capacity. However, the study reveals that most companies that outsource focus more on the profits made at the expense of the supplier. This calls for better strategies to be developed so as to foster better relations between vendors and the home company (Wee, Peng & Wee, 2010).
According to Pellicelli and Meo-Colombo (2011), outsourcing has many benefits such as reducing production costs as well as streamlining the organizational structure. OOBP inculcates flexibility into the organizational structure making it efficient as managers can concentrate on more critical activities.
It was found out that outsourcing has been developing rapidly with companies outsourcing activities that were considered as inseparable from the main business as well as those requiring core competencies such as marketing, product development and specialized manufacturing be outsourced.
Outsourcing results to quality improvement, increased leverage and flexibility in resource utilization and the possibility of company entering into new markets more easily. The writers argue that the risks and disadvantages of outsourcing can be curtailed by following distinct steps and planning a proper implementation strategy (Pellicelli & Meo-Colombo, 2011).
Studies carried out by Pouder, Cantrell & Daly (2011), have shown that firms that adopted OOBP reported an increased shareholder value. Most of these firms were able to gain core competencies at a reduced cost. These core competences enable organisations to gain competitive advantage which in turn increases the company profitability in the long run.
Increase in profitability promotes the company image and this increases the share value of the firm in the long run. Thus OOBP enables companies to attain a competitive edge through the adoption of strategies that enable the firm to cut costs, adopt core competencies and gain new skills (Pouder, Cantrell & Daly, 2011).
Disadvantages
One of the major disadvantages associated with OOBP is the risks and uncertainties involved. Risk can be defined as the possibility of loses that result from unforeseen circumstances. Large firms are able to reduce outsourcing risks and sustain growth by establishing long lasting business relations and also because of their great experience in the industry.
Researchers have show that risks and uncertainties in the OOBP can be reduced by establishing relationships and in-depth contacts. There is the need to constantly upgrade the agreements to reduce conflicts and risks.
In the business milieu, it has been established that the main factors influencing OOBP are service costs, value of products, risk level, the client, the disruption to the client business, vendor expertise, product complexity, the client –vendor relationship, effective communication, culture and quality of products.
For OOBP to be successful, the client and vendor must develop strategies to circumvent these problems. Therefore, most of the risks and disadvantages of OOBP can be solved through adoption of appropriate strategies.
One of the key disadvantages for outsourcing is the issue of employee displacement. When a company outsourcers most of its function, there is a tendency that the workers in the different sections that has been outsourced will have to be shifted to other areas. According to research done by Tambe & Hitt (2010), it was found out that the rate of offshore outsourcing is higher than 40%.
The researchers found out IT workers were displaced at a rate of 8%. The main reasons for offshore outsourcing were cost and need to access better technology. The researchers point out that the displacement is greatest among US based workers. However, this should not be viewed as a hindrance because the displaced workers can be taken to other areas that require personal delivery and cannot be outsourced.
Though outsourcing has a negative impact on the employees, appropriate policy development is necessary so as to guide the displaced workers on new paths as well as retain them (Tambe & Hitt, 2010). Though this is a big disadvantage, the benefits of outsourcing far outweigh this disadvantage.
Though OOBP has many beneficial advantages, there are many associated risks and challenges such as increased costs, disputes, loss of organisational competences and loss of quality. For firms to participate in offshore outsourcing with minimal risks, the degree of experience between the vendor and the client is important.
Experienced firms find it easy to identify and mitigate risks resulting from OOBP. Other issues increasing the risk in off-shoring business are: availability of suppliers, uncertainty, lack of proper measurement methods and, loss of knowledge as employees are displaced.
Another great disadvantage is the loss control by the organisation. The company loses control of all the outsourced functions and thus if the vendor fails, the company would suffer losses.
Language and cultural barriers are other risks that are associated with offshore outsourcing. Communication problem may result to production of defective products. This can be circumvented by training the vendors on the cultural and communications strategies used by the parent company.
Another barrier is the different time zones which must be taken into consideration when ordering for products. The time taken to transport products physically must be factored in the ordering process so as to reduce the risks.
Another impact that is associated with offshore outsourcing is the loss in innovations of the parent company. In-house talents are lost. When companies outsource, their ability to develop innovative services and products is lost as the employee don’t act on challenging issues. These skills are transferred to the vendor who may develop innovative products and use them for his own benefit.
In the long run, the company outsourcing may loose its competitive advantage. However, in terms of cost, the company gains some potential benefits in terms of cost advantage. The major risks of outsourcing can be curtailed by adopting strategic decision making process. This entails carrying out proper vendor selection and management as well as factoring in the technological consideration during OOBP.
Thus, the failures of OOBP can be solved through proper managerial practises. Proper risk management can help avert the disadvantages associated with OOBP. To reduce the disadvantages of OOBP, managers need to have an in depth understanding of the mechanism, techniques and tools that are used in outsourcing (Herath & Kishore, 2009).
Another problem associated with OOBP is the conflict that results between the customer and the supplier. The company outsourcing is the customer while the vendor is the company willing to take up the outsourcing job. There arises a conflict of interests between the vendor and custom.
On one hand, the customer wants to procure the services of a vendor at the lowest cost while on the other hand, the vendor wants to maximise on his profits. For a complex project, the customer may not get quality product. Studies have shown that there exist hidden costs during the process of outsourcing. Some of these hidden costs include the cost required to hire a qualified vendor, training costs and the legal costs associated with contract formation.
Vendor cost increase as the company has to pay a lot of money during the initial search for qualified people. Training costs arise from the fact that outsourcing company need to train the employees of the vendor company so as to make them competent. Another hidden cost is the fact that contracts must be renewed from time to time and this adds up to the cost.
In the end, the cost of outsourcing may be more expensive as compared to cost of conducting the same Services at home. Companies willing to contract may realise that outsourcing increases the cost instead of cutting costs. There is need to carry out a proper cost benefit analysis.
Confidentiality and security is another problem that affects the outsourcing. When a company outsource its main functions, they have to give pertinent information about their operation and this may compromise the security of the organisation.
In some cases, the vendor may disclose this information to competitors and this may be used against the company. Vendors that deal with issues such as salaries, banking, human resource and finance must maintain high confidentiality. Any compromise may have severe consequence on the firm.
Lack of customer focus is another problem associated with OOBP. When companies outsource, the vendor has limited knowledge about the final consumer and he may not delivery adequate products and services that satisfy the customer. Proper management can reduce this problem. The home company should carefully analyse the consumer trends and pass this information to the vendor.
Inflexibility is also another problem associated with OOBP, for the company to change and adapt to changing technology and consumer trends, they must inform the vendor, train them and provide the necessary resources to effect the change. This brings out the issue of inflexibility in the parent company.
Loss of managerial control can also be attributed to OOBP. When companies outsource, the service provider is managed as a different entity and the company has no control over him. It is much easier to control employees as compared to another contracted firm.
Offshore outsourcing has also be found to have impact on the pricing of different products. Price volatility is a dominant feature in the international trade as prices keep on varying. It is impossible for vendors to keep up with the changing prices. Price changes may impact negatively on the parent company or on the vendors (Susan, 2009).
Conclusions
In this work, a critical evaluation of the benefits and problems of OOBP were evaluated. It was found out that many multinational firms and organisations are currently outsourcing their operations. Initially, companies only outsourced non core, less risk activities such as IT. However, with time, the companies started to outsource more activities.
Form the literature research carried out, it was found out the principle aim for OOBP was the need to reduce cost for most of their operations. Most of the organisations venture into OOBP so as to cut cost.
Other benefits that are associated with outsourcing are: streaming the organisation structure, increasing the shareholder value of the company, enabling the company gain competitive advantage and enabling the company gain core competencies.
Most of the companies are currently outsourcing most of their activities as they have found this to have beneficial impacts to the profitability of the organisation.
This evaluation has revealed that OOBP has both merits and demerits. Most of the disadvantages mainly stem from the fact that the process has many risks and uncertainties. The main impact of OOBP is the displacement of employees. As companies continue to outsource more and more workers are displaced and they may need to be retrained in other areas. Cultural, social and language barriers have also been found to impact negatively on the OOBP.
Security and confidentiality of information also affects the OOBP and companies find it hard to disclose payroll and financial data. The issue of hidden costs also affect most of the companies that outsource. The firms find themselves in the problem of having to retrain the vendor employees as well as the need to keep up with the changing prices and legal requirement.
Other risks involved in the OOBP include: loss of innovations, inability of the manager to control the vendor employees, problems with pricing among other risks. Generally, most of the problems of OOBP can be curtailed by proper strategic management.
In general, it can be seen that OOBP have more positive impact as compared to the disadvantages. Cost reduction is an imperative aspect of the OOBP and this plays a pivotal role in ensuring that the company becomes more profitable.
Furthermore, most of the disadvantages of offshore outsourcing are a direct result of risk and uncertainties in the market. These risks can be curtailed by adopting good strategic management of the vendors. I would therefore recommend that further research be carried out so as to develop strategies of mitigating the risks of OOBP.
References
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