Outsourcing has long been a common business practice around the world. Outsourcing refers to contracting business functions outside the firm. Businesses, across industries, use outsourcing as a means to reduce costs, improve employee productivity, and to focus on core business functions. For example, manufacturers have long outsourced aspects of parts manufacturing to smaller firms, and in the public sector, institutions such as hospitals outsource laundry or meal services.
While the practice of outsourcing may not be new, information, communication and technology (ICT) has increased the demand for, and facilitated outsourcing. ICT specifically enables services to be provided outside the country, or “offshore,” often in lower cost destinations such as China, perceived publicly to have lower labour standards and exploitative human rights and labor practices. Businesses’ internal use of information and communications technology across the enterprise has further redesigned business processes, creating new outsourcing needs and patterns.
Use of ICT itself has lead to the need for technical support, which seldom can be provided in-house, given its complexity and the high degree of expertise required to install, use and maintain information technology systems. Falling telecommunications costs have facilitated increased international activities for firms; not only can firms trade in goods, but services can now be provided from anywhere in the world, if the telecommunications infrastructure is available. Advantages of outsourcing
The primary advantages outsourcing can bring are; Focus on core business activities – by outsourcing non-essential or repetitive tasks, staff can focus on the more core business functions to better support the business and its customers; Access to more resources – outsourcing to a third party whose core business is providing the agreed services at an agreed level can provide for better levels of service; Frees up resources – Resources are no longer tied up with mundane tasks and can be re-assigned to more business valuable tasks; Improved cash flow – In some instances where a service is outsourced for a fixed fee, the company can better plan and budget its cash flow; Shares the risk – having a provider contractually bound to provide a service shares the risk of ensuring that service is delivered. Disadvantages of outsourcing However, outsourcing can bring a number of risks and disadvantages to the business, particularly if the outsourced agreement has not been thought through fully. It is important to consider and address these issues before committing to outsource any service. Negative employee reaction – employees may not view outsourcing of some of their tasks, no matter how trivial or mundane, as a positive step. Many may feel their jobs are at risk or that this is the “thin edge of the wedge” for outsourcing other more important tasks.
Productivity may be impacted as a result or they may decide to leave the company; Role duplication – if not properly identified and demarked with the provider, some of the outsourced function may still be performed in-house and result in duplications of roles and tasks which in effect will not provide the expected efficiencies and advantages; The service provider may cease to trade – there is always the risk that the outsource provider may close down or cease to provide services in the area of the outsourced service; Deterioration in service – the selected outsource partner itself may not have the required core skills or resources available to provide the agreed level of service; Lack of flexibility – one of the main advantages a small to medium business has over larger competitors is the ability to be flexible and to change to suit the customers’ needs. If wrong processes are outsourced, this flexibility could be adversely impacted. The above risks can be mitigated by careful planning and thorough research in the initial phases of outsourcing the services. Conclusion. Proponents of offshore outsourcing argue that outsourcing is just good economics. Service outsourcing increases the competitiveness of companies and raises worker productivity.
The basic economic case suggests that moving outsourcing offshore lowers costs and boosts productivity. For the economy as a whole, the result is lower inflation and interest rates and higher economic activity. While certain jobs may migrate overseas, increased economic activity creates new, higher value higher paying jobs as skilled labour is now available to move to these positions, leading to a beneficial cycle of new job creation. Critics of off shoring allege that whatever savings consumers might gain from a decrease in re-imported goods is countered by long-term loss of income to domestic workers, who either lose their jobs due to outsourcing or lose potential income from investments not made in the country in question.
As international pressure for cheaper manufacturing intensifies, outsourcing is just a form of ‘labour arbitrage: a downward spiral of effective lowering of the average wage and living standard for workers in industrialized countries.
Information Technology Association of America and Global Insight, The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the U. S. Economy and the IT Industry, March 2004. Roberts, P. C. (2004) “The Hard Truth about Outsourcing” Business Week, March 22, 2004. Forrester Research, (2002)3. 3 Million US Jobs to Go Offshore, Research Brief November 2002. Kirkegaard, J. F. (2004) Outsourcing – Stains on the White Collar? ” IIE, 2004. 5 Ibid.