Bad Experiences Of It Companies With Outsourcing

Published Date: 02 Nov 2017

Introduction:

Few years ago Outsourcing looked inevitable. Companies were Outsourcing specific task to cheaper and more resourceful countries. Just like product life cycle, any product experience period of high growth and high sales volume but eventually surrenders its worth to better product in the market, outsourcing has started to show crack holes. The question that many companies are asking now a days is does outsourcing still add value to supply chain process or not? It’s easier to make judgement about anything but to justify your claim is a difficult task.

Need for Outsourcing:

Let’s start our discussion by understanding why people started outsourcing and what impact it had on business. One source say "Outsourcing and offshoring began as cost-cutting measures, but companies that create real sustained value routinely use them for far more strategic ends to gain capabilities that they don't have in-house, or to strengthen capabilities they do have. We have found that 85% of those winners use capability-sourcing broadly and strategically for everything from developing world-class talent to bringing new products to market faster and enabling business model innovation. In other words, they've moved way beyond mere cost-cutting" (http://www.forbes.com/2010/06/15/outsourcing-capability-sourcing-leadership-managing-bain.html).

Bad Experiences of IT companies with Outsourcing:

There are a lot of things to sort out before offshore outsourcing or outsourcing within the country like location, service, price, government rules etc. Sometimes strategic decisions fail and comes back to haunt you in the future. It is understandable for any company to look for cheaper options but in case of IBM this strategy failed to bring fruition and actually Lenovo to whom IBM outsourced became the biggest beneficiary and thus suggesting that not all can handle outsourcing. Lenovo got the technological expertise from IBM and with their own cost effective model Lenovo started selling their own laptops with similar technology but at much cheaper rates and eventually eliminating IBM from the game. This is not the only instance when IT Companies has had bad experience; even giants like Microsoft experienced the wrong side of knife. Microsoft’s software are being pirated in China who have all the expertise in software development now sell the product for cheap and Microsoft cannot do anything about it this is because all the trademarks and patents that Microsoft have is not applicable in the eyes of the law created by Chinese government. There are still companies focusing on outsourcing and are still successful.

Winners and Losers of Outsourcing:

There are some clear winners of outsourcing countries like China, India and Philippines due to lower rates in the past got majority of the outsource work that helped economies grow faster. Call centres in India employed a lot of people but at the same time Europe and America were it difficult to create new jobs. This is one the major problems of outsourcing in my view. Unemployment rate is constantly rising in Europe. The jobs that could have been for the local citizens are now benefiting employees from other part of the world. "A good example of this has been tensions over relocating call-centres and software support from countries like the UK and the US to India. More than 230,000 jobs are lost each year in America as a result of outsourcing - but many economists believe that a similar number of new jobs are being created at the same time"( Patrick Dixon, The Future Of Outsourcing - Impact On Jobs). I do agree that employment is being created elsewhere but in the long run this will impact the GDP of the victim country.

Inflation in China and India:

Cambodia is the latest country to enter the field as cost in India is constantly rising thereby increasing the labour rate leaving Cambodia to snap up the businesses. The constant inflation is another reason why firms are rethinking their supply chain strategies. No longer will India and China be able to provide cheap labour but because now they already have expertise gained by performing tasks for foreign companies they have advantage of producing similar products and enter the field against the same companies from whom they use to get business.

Quality Issues:

The outsourcing company work for the profit and they would like to decrease their own expenses thus compromising on quality but still working within the specification so you can do anything about it. This is also true in case of call centres; this is compromising of service quality on company’s side. The dissatisfaction level is rising among consumer and is the reason why companies are taking some part of the work ‘in house’ although it is expensive option but it’s worth keeping customers happy.

Newer Trends:

This is not the only change we see today. Recently as mentioned in (clever boxing), companies are breaking up one large contract into smaller contracts. The concept behind it is that you outsource the bits of the work to companies that specializes in that department. This may sound more logical but along with some perks this technique also has some draw backs.

Down side of Smaller Contracts:

The product will be sold under your name and any faults in your product will give your company the bad name, this is the risk the company will have to bear. I am not criticizing and actually I am in no position to criticize any company who do choose outsourcing over producing in house or getting the work done by one big client or distributing work to different suppliers. But the fact remains when you sub-contract the part of the work to different companies or may be one then you will have to make sure that all the companies stay financially healthy. There are number of companies still outsourcing the work and are successful in attaining higher profits and gaining market share through competitive prices. But by drawing more than one contract the cost increases because company will have to deal with respective companies directly and will have to make sure that all the participants coordinate effectively. It is no guarantee that all of the participants will provide the same services any delay in manufacturing of one part may result in delaying of the whole process if this is the case than outcome can be ugly, Boeing faced the similar situation, "Eight years ago Boeing, America's biggest aeroplane-maker, decided to follow the example of car firms and hire contractors to do most of the grunt work on its new 787 Dreamliner. The result was a nightmare. Some of the parts did not fit together. Some of the dozens of sub-contractors failed to deliver their components on time, despite having sub-contracted their work to sub-sub-contractors. Boeing had to take over some of the sub-contractors to prevent them from collapsing. If the Dreamliner starts rolling off the production line towards the end of this year, as Boeing promises, it will be billions and three years behind schedule" (http://www.economist.com/node/21524822).

Bargaining Power:

When you have one supplier, in this case supplier is the company providing the outsourcing services, you have more room for negotiating the cost because you are giving the company major part of your work but now you are hiring specialist and giving them just the part of your work it now becomes difficult to get any type of concessions but at the same time you get better quality.

Exchange Rate Risks:

Outsourcing within the country does carry exchange rate risk. Currency rate effects the cost of production and you can try to hedge against lose but when the country grows and economy starts to expand the currency appreciates; no longer will you be able to make profits like before. "The global recession created a volatile market for currencies," says Ben Trowbridge, founder and CEO of outsourcing consultancy Alsbridge.

http://www.outsourcing-center.com/2011-11-is-there-too-much-currency-risk-in-your-offshore-outsourcing-deal-article

Conclusion:

It is still too early to say whether outsourcing will eventually fade off, maybe few tweaking in the process may help companies to come up with perfect solution. Companies are taking more cautious approach and are reluctant to sign long term contract instead short term contracts are preferred. This goes to show you that measures are being taken and only time will tell how the story folds.

Referencing:

Outsourcing Can Do Much More Than Just Cut Costs. Available at:

(http://www.forbes.com/2010/06/15/outsourcing-capability-sourcing-leadership-managing-bain.html) [Accessed: 3rd March, 2013]

Outsourcing is sometimes more hassle than it is worth. Available at:

(http://www.economist.com/node/21524822) [Accessed: 1st March, 2013]

Is there too much currency risk in your offshore outsourcing deal? Available at:

http://www.outsourcing-center.com/2011-11-is-there-too-much-currency-risk-in-your-offshore-outsourcing-deal-article-46153.html [Accessed: 1st March, 2013]