In-Sourcing
Although whenever operations and jobs are delegated from production within an enterprise to a stand-alone entity that is internal to the company but specializes in that give operation may imply the concept of In-Sourcing, the transfer of jobs through the process of hiring local subcontractors within the country in which the contracting company is based is usually the referred In-Sourcing when the concepts of In-Sourcing and Offshoring are being reviewed together. The major rationale as to why businesses insource is that they like maintaining control of some critical production and competencies or either (Kletzer, 2005, p. 301).
There are several benefits of business In-Sourcing. When applied in the process of production, it is a strategy for reducing business costs such as taxes by the government and the costs of labor, cost of transportation among other expenses. It has been established that the acquisition of American labor is most of the time cheaper than acquiring labor from a European country. Therefore, In-Sourcing for this factor of production for a company based in America is better than going for a European country (Richard, 2007, p. 413).
Out Sourcing
On the other hand, companies may prefer to outsource depending on the business environment. This concept of Out Sourcing is used to refer to the movement or the dislocation of the business processes such as production or distribution or the marketing of a given company in a given country to another company in the same country (Kayabashi, 2007, p. 517). However, when the process of dislocation is destined to another company located in another country, the concept of Offshoring applies. This paper shall discuss the Offshoring of IT business processes from the US to India where there are low costs of operations.
A brief review of IT off-shoring history can be traced back to the 1970s where factories were transferred from developed to developing countries. A major structural change occurred in the developed nations when the factories closed down, thus bringing the post-industrial service community. NAFTA was effected in1994 while the recent introduction of the Internet has led to the Offshoring of programming, X-ray analysis, call centers, income tax preparation among others (Hira &Anil, 2006, p. 73).
India has been the hub for Offshoring IT services and products. Most world-renowned companies like the IBM, HP, AMD, Oracle, Cisco, Intel, and Cisco have already started Offshoring their services to India. First, the number of English-speaking people in India is a major incentive for these companies. However, other key issues behind this trend are the few competitors in India, readily available manpower at cheap costs, very cheap land resources for company establishment, and the fact that there are very loose policies regarding environmental protection in India (Lazonic, 2006, p.246).
Strategic Implications
A quick analysis of In-Sourcing as compared to off-shoring reveals that there is continued loss of industries as a result of Offshoring while Inshoring leads to the establishment of more companies within a country since business processes are shared among companies. Second, the life cycle of a product is shortened with Offshoring and prolonged with In-Sourcing. Off-shoring creates a means of accessing the talent pool in developing countries while providing access to cheaper products for consumers in the origin country. In-Sourcing is less likely to produce cheaper products and thus, it is not a means of attaining customer expectations (Mann, 2006, p. 209).
Offshoring has opened avenues for free trade between the two countries involved while Inshoring is regulated by strict policies on cross-border transactions. There has been a loss of employment as companies close down in the origin countries and people have been receiving low wages as the number of those seeking jobs increase while the chances are limited.
Most Offshoring companies have set strategies on how they shall remain competent and in the leading edge in a business environment of steep competition. Offshoring has contributed to the success of their strategies since the process ensures the production of low-cost products that meet the needs of consumers in terms of low consumer prices. Most companies have realized double-digit growth rates. The impact of Offshoring can also be traced to the way employees in India have accessed readily available jobs in the offshored companies although the wage rates are low coupled with very low workers’ rights policies and laws.
The suppliers of industrial raw materials such as silicon which is widely used in electronics in these companies have got a ready market for their products while the consumers are accessible to low-priced electronic products for use in communication. The investors seem to benefit the most through the low costs of production, very cheap land, huge economies of scale based on the population explosion in most Indian cities (MGI, 2003, p. 43).
Mission-critical services/processes
Mission-critical service is a terminology used to refer to services that are core and central and the company cannot achieve its goals without hose services. In Offshoring to India, most US IT-providing companies have considered the technical information and know-how in the industry to be critical to these missions because they are not available in India. The companies have to go with their own experts to India to establish companies. In order to succeed, the companies also have to train local people on the production processes so that they may benefit from the cheap labor otherwise they will have to hire their expensive US workers to do the expert work.
Off-Shoring Decision
Before a company decides to off-shore, there are a number of considerations it should make. First, it should be well informed about the current policies in the destination country about foreign investment. Whether the business is viable in the new location should also be considered. Other factors to consider include the amount of capital required, the amount of intellectual property it should export to the new location, how strict the destination country policies are on environment protection among other considerations (Lewis, 2005, p. 160). It is not advisable to retain all mission-critical services in the origin country because accessing them will necessitate more expenses in terms of communication and transport.
However, the decision should be based on the US policies on the exportation of intellectual property. It is also important to consider the company’s patent systems because if they are weak, the company should minimize Offshoring because there is a danger of intellectual property theft. It is important to note that the whole process of off-shoring is not a simple and flexible undertaking and it is not easy for Out Sourcing company to pull out. This is because the process is governed by regulations and laws coupled with numerous signing of agreements which partners should abide by (PMI, 2001, p. 307).
Choosing Off-Shoring Location
Choosing a suitable destination involves the consideration of the culture especially language, cost of labor, and business viability. It also involves comparing the cost difference since after all, the who Offshoring mission is after cutting down costs. Apart from costs, culture should be considered so that communication may not be a barrier to Offshoring efforts and also the number of competitors in the IT market. It is advisable to relocate business processes in greenfield locations rather than in areas that have Offshoring expertise and experience. Some of the potential destinations for Offshoring include Mexico, China, India, SE Asia, and countries in the eastern part of Europe (Shim & Siegel, 2000, p. 152).
Off-Shoring Models
A joint venture (JV) model of off-shoring is where a foreign company joins a local one by either taking equity in the local company or by setting up an independent company in which both the local and foreign companies pump in resources (Utkarsh & Vinod, 2007, p. 347) It is aimed at a win-win goal. The client company benefits by mitigating the internalization risks while the local firm benefits by being associated with the good reputation of the client company.
It may involve BOOT (built-own- operate-transfer) where at a later agreed time, the local company may sell its share to the client company (Blinder, 2006, p.124). The client company has the advantage of learning from the client partner. The subsidiary development center model is where the Out Sourcing company goes directly to business operations on its own locally. This is the case if a company can effectively avoid the risks of the internalization process and succeed in market operations. The challenges faces here are in the localization, the internalization of business as well as coordinating line and technical managers and the expatriate staff.
The captive model is where a firm creates its own captive site in the destination country and employs the local people as staff to the company. The company grows subsidiaries of its own to obtain, are advantage financial benefits while still controlling resources, intellectual property, and preserving the firms’ culture abroad. It benefits from taxes, cheap labor, and resources Hybrid model combines two or more of the models and avoids the risks of one while adopting the advantages of the other. Off-shoring for a service provider is a safe method of avoiding the risks of the joint venture and subsidiary models while capitalizing on off-shoring benefits (Sayed-Ahmed, 2006, p. 107).
A company outsources projects or programs to vendors in an offshore location. It is usually the most viable model and applies to tiny projects as well as huge multi-billion dollar projects. Global delivery on-site is where the client company takes a project on-site, deploys a small skilled team from locals to work with managers from the client firm that does the bulk of work. Multi-vendor Offshoring is where a client company seeks several vendors from which individual projects and their managers may select and source for work. Companies Offshoring for IT services in India is advised to adapt the subsidiary model (Cynthia, 2003, p.213).
Scaling Off-Shoring Processes
It is good to determine the scale of Offshoring and the king of IT services to offshore. Offshoring all companies will lead to unemployment in the origin country and intellectual property loss. Government taxes will be reduced. There should be policies on Offshoring to prevent negative impacts on the origin country. An increase in off-shoring will not necessarily result in off-shoring fatigue for as long as the aims and benefits of off-shoring are being realized (Wadhwa, 2006, p. 213).
Challenges & Risks in Off-Shoring
The success of off-shoring can be measured thorough evaluation of the performance of the newly started projects, the trend of the mission in terms of project expansions in the destination country, economic output in terms of profitability of the investments, and also the way the company’s shares are trading in the stock markets in the destination country. Offshoring costs are managed by obtaining the cheapest resources, labor and also through joining with local operators through joint ventures and partnerships. There are hidden costs associated with off-shoring missions (Gray & Larson, 2007, p. 89).
They include but are not limited to productivity loss, costs of communication with business at the origin countries in terms of international calls, business travel expenses to assess new project performance, quality impact when the company is determined to produce masses but not few products of good quality. Off-shoring risks can be managed by providing contingency funds, adopting the model that has limited risks, and partnering with local firms as an entry point to business. Risk assessment matrices should also be developed to establish the actual and perceived business risks in time so that they may be avoided and dealt with timely.
Metrics to measure the success of off-shoring
Periodically, projects and programs should be audited to measure their success and highlight major drawbacks while ensuring conformity to the initial business plan. The success of an Offshoring mission can also be gauged from the rate a business is expanding in the new location, interviewing clients in the new market to know whether they are satisfied with what the new business provides. The success of Offshoring can also be indicated by the absence of conflicts with the destination country laws or non-interference by political forces.
Continuity of Business plans, development, and implementation
It should be noted that Offshoring a business should involve very detailed planning, A venture only becomes a reality when the business plans are implemented through the development of the various necessary infrastructures like industries, purchase of transport trucks, employment of workers among others. The development and implementation should be in line with what was planned and as new matters arise, suitable adjustments should be made as long as they are positively contributing towards the mission for Offshoring IT services to the destination, which is India for our case (Vagadia, 2007, p.147).
Case studies
Some examples of IT Out Sourcing companies in India include the BPO industry which has been investing up to $ 18 billion per year after designing a very good plan for the development and implementation of the projects. Nagarro on the other hand has outsourced the development of software services. It is currently offering full product life cycle services. Among these services include architecture, it’s designing, the way it should be developed, issues of integration, how the services are implemented together with support services for the products.
Conclusion
India has been the hub for Offshoring IT products and services. Offshoring is bringing economic implications to the client country through the loss of jobs and industries. me mission-critical processes and services are being retained in the origin countries for fear of exporting intellectual property. Deciding to offshore should be based on well-informed criteria and also on real market research. Various models are possible, but IT companies are advised to adopt the subsidiary model. There should be reliable tools for gauging the success of an Offshoring mission such as auditing among others.
References
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