Class Assignment For Business Information Systems

Published Date: 02 Nov 2017

In the late 1980s, outsourcing was officially identified and recognized as a business strategy. Before this practice was officially identified, companies contracted out the tasks that they were not skillful enough to perform internally or not enough manpower to complete. The business strategy started to change in 1990s when companies began to outsource support services, However these also lead to objection of the practice by many people in the developed countries, as more highly paid professional roles (computer industries), started to offshore more regularly. In order for offshore outsourcing to be more cost efficient, the amount of money saved from the lower wage must exceed the increased costs of management and associate risk.

In 2001, when the American economy began to pick up from the recession and unemployment rate did not have any improvement, offshore outsourcing was quoted as a contributing factor to a jobless recovery. In the recent years, economists have concluded offshore outsourcing has a positive influence on the American economy and not that it resulted high unemployment rate.

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Introduction

Outsourcing refers to have a contract with another company or person to perform a particular function. This would means that it is an act of one company in a contract with another company to provide services that might else be performed by internal employees. Normally the tasks which are being outsourced could be able to perform by the company itself; however in most situations there are financial advantages that would be beneficial from outsourcing. Companies that provide the service of outsourcing are able to do the task for considerably lesser amount of money.

For over a decade, business process outsourcing (BPO) contracts have been progressively granted to firms in countries which are developing, the reason being this is that the educated employees in these less developed countries are willing to work for a much lower wage compared to the same level of employees in those developed countries. Companies would have business process outsourcing contract with another company to deliver services like accounting, human resources, data processing and security. Nowadays, most company outsources to another company in some way. Usually, the function which is being outsourced is considered non-core to the company business. There are several reasons that a company will outsource different type of jobs, but the most noticeable advantages are costs cutting and also they do not have to provide benefits to employees and have fewer concerns over headcount expenses issues. For more cost effectiveness, it might be much cheaper to outsource to companies located in companies overseas which is also known as offshore outsourcing.

Outsourcing allows company to focus on their core business while having the other non core business to be taken care of by other expertise in that specialized field. These specialized outsourcing companies usually has topnotch skills and access to new and advanced technologies which the company might spent a significant sum of money if they were be able to afford to invest in the technologies.

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Advantages and Disadvantages of Outsourcing

Outsourcing has both its pros and cons. There are several reasons that a company will choose to outsource its non-core business functions to a service provider company. Let us first take a look at the advantages of outsourcing first.

Advantages of Outsourcing

Outsourcing can be cost efficient which also means cost savings. The expenses of an internal employee will always be higher than the cost of an external service provider. This is an initial reason why most companies will choose to opt for outsourcing non-core business functions. The quality services of the service provider company will be more expertise and professional in the service they provided in comparison with internal employees, as this is their main core business for the service provider, they will seek to excel at the service they provide and will always upkeep their reputation.

As a service provider will be bound by a term or agreement in a contractual obligation, the liability of the service provider will be much higher than an internal employee, this would mean that it would be safer to have a business with them as they would have more responsibility in their work. Staffing issues like head count or staff benefits can be avoided by outsourcing the non-core businesses to service providers. Service provider is in a better position to counter any risk involved if the company non-core functions were outsource to them, as there are expertise available at the service provider’s end.

The non-core functions might require more manpower in times of peak seasons and it would be difficult to an internal employee to get assistance in order to meet the deadline, if the company has choose to outsource the non-core functions out, the expertise and manpower of the service provider will be able to meet the demands and the deadline of the work. Outsourcing can be leverage to enhance operating efficiency and migration to a better and more efficient ways of business processes so that it can be facilitated. Outsourcing can enables changes in the business culture and processes. Internal employees can be more focus on strategic planning and other new areas of development and core processes. There is more access to expertise knowledge on current and new technologies areas can be gain.

There are many advantages by outsourcing a non-core functions out to a service provider, however there are also disadvantages as well.

Disadvantages of Outsourcing

There might have linguistic barriers if the non-core functions are being outsource to an offshore service provider whom have no language in common. For example, if a call centre function is being outsourced to an offshore provider, customers might find it difficult to understand what they are trying to communicate across as the linguistic features like word use, phrases and accent are very different.

When non-core functions are being outsourced to offshore sourcing, the unemployment rate of that country where processes are being outsourced from will be increased. This would means that more people will become unemployed as most of the jobs are being outsourced to other countries. An internal employee will always have a better knowledge and understanding of the company and how things or procedure works in the company than the service providers. In outsourcing processes, the staff turnover rate is high as the role is monotonous and companies would usually prefer to have the same staff to handle their account, as the quality of service will dropped if there is a change in the staff. There is a loss of control on the function which is being outsourced.

Though outsourcing has its disadvantages as well, but companies still practice outsourcing, as there are measures to be taken to overcome some of these downside listed above.

Linguistic barriers might cause communications to become difficult and might cause a risk to the business, but this can be resolve by promoting people to learn different foreign languages. For example, the cost centre in India or China can send their call centre agent for accent training before they are assigned being put on the job. Offshore outsourcing does result in the increase rate of unemployment in the country where processes are being outsourced.

However, outsourcing also results in higher profits for businesses which can be contribute back to the economy. The positive impact of the profits contributed back to the economy will nullify the negative aspect. Usually, an internal employee will have a better knowledge and understanding of the business than the service provider. But, if the business provides the same structured knowledge to the service provider, the service provider can also have the same kind of knowledge and understanding in the business like the internal employee does. Staff turnover is very common in every business, even the company itself also has to handle such issues. Hence, this is a common issue and cannot be used that it is not in favor of outsourcing.

The table above is extracted from the "black book of outsourcing" and it illustrates where the competitive market will be developing. For lower cost labor but with higher quality workforce, higher education and more advanced technology, employers can consider outsourcing their non-core functions to countries like India, Eastern Europe and China. Philippines, Hungary, Mexico and Chile are countries which are also low cost labor as well as lower quality workforce, lower education and less advanced technology. All these low cost labor countries are usually where companies would consider outsourcing their non-core functions to. Usually, these companies who outsourced these non-core functions out would be from countries with high cost labor and higher quality workforce, education and technology. Examples of the countries that usually outsourced their non-core functions out would be from United States, United Kingdom, Canada, Ireland, Israel, Singapore and Australia.

Real world applications of Outsourcing

Quintiles is a clinical research organization, which main core functions are to provide clinical trial for clients like Janssen and Sanofi Aventis. Janssen and Sanofi Aventis have outsourced their clinical drug testing functions to Quintiles. The clients have saved a significant sum of money on outsourcing the functions to Quintiles than having to set up a laboratory and getting the expensive equipments themselves. The clients may not be an expertise in such an area as well and they do not have the manpower and information on getting people to trial on the drugs. Quintiles have all the expertise, manpower and equipment required for the clinical trial to be successfully carried out. Before the drugs are launch in the market and approved by the government sector, it must be tested on different people with different nationality and of different ages. Quintiles have the capability and manpower to do that in other countries as they have their resources to know where to get the patients for the trial globally. By outsourcing these processes to Quintiles, Janssen and Sanofi Aventis can concentrate on their main core functions like drug development without having to worry about the tedious and backend processes for the drug outcome, at the same time they can cut cost too.

Future Trends for Outsourcing

Future trends for outsourcing for the next 5 years will not be much of significant changes. Let us have a glimpse and estimation of the next 5 years. Outsourcing will still continue to grow as companies are always looking out for ways to save costs. By outsourcing a function to an external service provider, the sum of money paid for the role decrease.

Any large and established enterprise will see slower growth, and will always be on the look out for more ways to save money in order to make up the difference. As technologies are getting more and more advanced, companies will always be looking out for outsourcing. However, outsourcing will shrink as well because as soon as a job is being outsourced, the service provider employee’s ability to create more new ideas will become limit. As the service provider’s employee will never suggest ways to make improvement on the business because by doing that they will eliminates themselves for that particular duty which they are being hired to do so.

The more a company outsource, the more compartmentalized and specialized it becomes and these will lead to more inflexibility and more unlikely to come up with new ways of working. A more heavily outsourced company will find it tougher to compete against a smaller one. Although a smaller company can be inefficiency, but this also can lead to new discoveries. For larger company, the direction of move to outsource or not will depends. If the economy stalls, companies will cut cost and outsourced more duties externally. At other moments when market expands, more duties will be done internally to accelerate growth and discover new opportunities. But companies should never outsource their core business as core roles should always be done by internal employees.