Outsourcing is a practice adopted by organizations for transferring some of its non-core activities to other organizations for freeing up money, time and facilities. The organization can outsource any of its department to other organization through the means of outsourcing, which are marketing, sales, human resource management, accounting, payroll, manufacturing and database. The study has analyzed the concept of outsourcing with regards to its benefits and limitation. The limitation of this process can be found in lack of managerial control over the business process and threats of security of confidential data. The study has also described the trends of outsourcing that shows that Latin America and Europe are the most common destination outsourcing. The study is highly focused on demonstrating five real example of organizations that have adopted outsourcing process and these five organization are Tesco, General Electric, American Express, Versace and Microsoft.
Outsourcing is a process of transferring some of the non-core activities of the organization to some other parties for reducing time, cost and facilities (Holweg and Pil 2012). It also helps the organization in concentrating on some vital activities in which they can excel themselves. The study will analyze the concept of outsourcing in terms of its benefits as well as limitations. The trends of outsourcing will also be discussed in this study. Apart from that, the study will demonstrate five examples of organizations that have used the concept of outsourcing.
Concept of Outsourcing
Outsourcing is a concept of contracting as well as subcontracting some of the non-core activities of the organization for freeing up cash, employees, facilities and time that hold for the competitive advantage of the organization. Companies who have some specific strength on some particular area and want to concentrate in that area can contract out some of the area like legal, marketing, manufacturing, data processing, accounting and pay roll. Outsourcing can be defined as a process of transferring some parts of the business to outside suppliers to complete it rather than completing it by internally. Through outsourcing process, the organizations can concentrate on the work that they can do best and in this, the organizations can reduce the unit cost of the organization. According to Silvius et al. (2013), outsourcing can also be an integral part of outsourcing where the organizations try to redesign and reinventing some of their process. Outsourcing sometimes may also involve transferring of assets and employees to other firms but it is not about transferring all part of the business. On the other hand, Giustiniano and Clarioni (2013) opined that outsourcing of organization might also include foreign as well as domestic contracting of some parts of business. Outsourcing is sometimes called offshoring of business where organization shifts some parts assets of the business to other region and countries. Outsourcing leads to cost saving in the form of lower international labor rate that has instigated the organization to adopt this strategy. Outsourcing has first developed in USA and now it is widely used by almost all the organizations in all the countries (Lacity and Willcocks 2013).
The common case when organizations adopt outsourcing strategy is lack of skills and resources within the organizations for completing a particular job properly. In this situation, the organizations outsource those jobs to other organization that have enough resources and skills for completing the job. According to Snie?ka and Drak?ait?— (2015), organization may obtain products like machines as well as service like pay roll through outsourcing process. On the other hand, Martinez?€ђNoya et al. (2013) opined that the decision of outsourcing some parts of business is stemmed out from the intension of lowering the labor cost and allocating the important resources of the organization properly in an efficient manner. Outsourcing allows the organization in redirecting it concentration to its own capabilities and handling over other activities in which they are not competent enough (Delen and Kleijn 2015). In order to make outsourcing process to be effective, the organizations need high level of managerial control and standardization. Outsourcing is one of the most popular trends in business as it reduces the cost and time of the organizations.
Trends of Outsourcing
Outsourcing is the topmost trends of the management of the different organizations. Outsourcing organizations are emerging at a greater rate with an expectation of providing high quality service. According to the survey of industry analyst, the outsourcing industries are facing short-term cost pressure and thus, there will be service pressure in providing high quality service (Lacity and Willcocks 2014). Buyers of the organization are tended to seek more standardized solution from the outsourcing organizations. Hence, the outsourcing organizations nowadays are trying to differentiate their products for meeting the changing needs of the customers. According to Gorla and Somers (2014), common and shared services are always being the threat to the outsourcing process of organizations. However, these trends have been changing day by day. On the contrary, Massini and Miozzo (2012) pointed out that sharing IT service and critical business process ultimately make cost cut of the organization. The industry analyst has identified that Europe and Latin America is the most common outsourcing destination. On the other hand, most of the developing countries are also popular for outsourcing of business.
Benefits of Outsourcing
Reduced labor cost
One of the most important reasons for adopting outsourcing process is reducing labor cost of the organization. Organizations like to outsource their business to some developing countries, as the labor cost of these countries is low as compared to the labor cost of developed countries (Liu and Aron 2014). Cheap labor cost would improve the bottom line of the organization.
Organizations may like to outsource their business for reducing operational cost and increasing productivity. In developing countries, there are low levels of regulatory framework in term of overtime pay, safety and health issues (Rai et al. 2012). In this way, the organization can reduce their operational cost by increasing productivity.
Concentration towards core competency
One organization may not be expert in all of their function and thus, they can be able to perform all the functions effectively. Organizations can outsource some low level activities to the other organizations that can perform those activities effectively. In this way, organizations can focus on their core activities and excel their business. Concentrating on core activities assists the organization in increasing the productivity and doing the work effectively for increasing the quality of the business process (Lacity and Willcocks 2012).
Through the process of outsourcing, the organizations can reduce the overhead cost of the business. This is because the outsourcing organizations use their own resource, personnel and equipment for performing the task effectively Sturgeon et al. (2012). Therefore, the organizations reduce the cost in terms of not engaging these resources in the business process.
Organizations can get flexibility in their business process when there is a need to adopt change. In outsourcing process, the organizations need have to invest huge amount of money in such a project, which is going to be obsolete in future. In this way, the organizations can save themselves from huge loss.
Limitation of Outsourcing
Lack of managerial control
When organizations sign a contract of outsourcing a single part or a function of an entire department, the managerial control of that company goes to that outsourcing company. Through outsourcing process, the organization can contract with another company for completing some part of them but the managerial control completely goes on them (Gobble 2013). Due to lack of managerial control, the outsourcing organizations can provide the service below the standard level of the organization.
Outsourcing organizations are only motivated by the profit. Outsourcing organizations make the contract at fixed price and they are paid as long as they meet the condition of the contract. In this case, if the organizations need changes in their business process, it is very much difficult convince the outsourcing organizations to do the work according to the changes and thus, quality of the business may be reduced (Liu and Aron 2014). On the other hand, the outsourcing may also charge extra pay for doing work as per the changes in the business process.
Five Examples of Outsourcing
Many organizations have used the outsourcing concept for increasing their quality of the business and decreasing the cost of the company. Some real examples have been discussed in this study for showing their success as well as failure due to adopting outsourcing process in their business.
Outsourcing of Tesco
A real example of outsourcing process can be seen in the business process of retail giant Tesco. They have made an outsourcing contract with the Xansa for transferring some of its business functions. Xansa supports Tesco in some critical system like distribution, products, payroll systems, stock replenishment and pricing across Ireland and UK (Moe et al. 2014). The organization is successful in this outsourcing process, as it has saved the cost of the company by 25%. Even, the organization can highly concentrate on sales department through increasing sales, as this process reduces the time of the organization.
Justification of success
Xansa facilitates Tesco in application management that is according to the in depth understanding and commitment of the business process. As Xansa assists in stock replenishment, Tesco can balance their stocks as per the weather change and thus, reduce the waste of goods. The outsourcing company also provides product and pricing strategy and thus, market analysis cost of Tesco is reduced (Johnson, Wilding and Robson 2014). Facilitation in software development assists the organization in reducing cost of core IT operation. It also allows Tesco in focusing on improving customer service and investment retail offerings.
Outsourcing of General Electrics
One of the real examples of outsourcing can be seen in General electric in their offshoring of IT professionals in 40 other countries. In order to expand their business, GE has outsourced the recruitment of IT professional to third parties. 1100 technology workers have been hired by the third parties who were employed for the role of IT professionals in the branches of this organization (Teo and Bhattacherjee 2014). It has been found that non-GE employees were doing 50% of IT work of General Electric. GE had mainly offshored their business to India and China. However, the outsourcing of IT professional was that much successful.
Justification for failure
Outsourcing of IT professionals to other countries like India and China seemed to be failure for the organization. The intension behind outsourcing of IT professional was to reduce the cost of the company in regards to low labor cost but as the time passed by it has been found that the labor cost in India and China was increasing (Gorla and Somers 2014). Therefore, the intension of the organization was not fulfilled. On the other hand, the quality of IT professional employed by third party outsourcing company was very poor and thus, it was minimizing the quality of the business. Therefore, the General Electric has pulled back some of their operation form these organizations to their home country US for reducing unnecessary cost and increasing quality of the work by getting it done by own GE employees (Ali and Green 2012).
Outsourcing of American Express
Another example of outsourcing process can be found in American Express in Australia. This organization has offshored its call centers to many various region and even in other countries (Fu-quan, Di and Shi-xin 2013). The intension behind this outsourcing was that the customers want more detail about their service that needed local expertise and knowledge.
Justification of Success
This outsourcing process was successful as customers of this organization are getting more customized service according to their needs. Customers are realizing the benefits of making contract with the organization, as local knowledge is providing to them (Atallah and Blanton 2013). Local knowledge helps the customers in understanding the service more closely and thus, scrutinize the service.
Outsourcing of Versace
One of the another outsourcing process can be found in case of Versace Organization. It has made contract of outsourcing with Luxottica Organization, which is a popular sunglass manufacturing company. Versace has outsourced the manufacturing department of sunglass to Luxottica (Lacity and Willcocks 2013). The intension behind this outsourcing was to get high quality sunglass made by this branded sunglass manufacturing organization.
Justification of Success
This outsourcing process is successful as Versace is getting expertise knowledge behind making sunglass. As Versace is primarily focused in jewelry and textile, they have no expertise in sunglass making process. Thus, the outsourcing contract of this organization with Luxottica has led them to access expertise knowledge in sunglass manufacturing and increasing the brand image of the organization (Marshall et al. 2015).
Outsourcing of Microsoft
Microsoft has made a deal with Infosys Technology Ltd for managing the key parts of internal IT operation in all over the world. In this agreement, Infosys has given the responsibility to manage IT help desk and ‘desk side service operation’. Infosys is also responsible for servicing the database, devices and applications of Microsoft in almost 100 countries (Massini and Miozzo 2012). This agreement also led layoffs and transfer of employees to outsourcer.
Justification of success
This outsourcing process is successful as it has created ‘unified service management operation’ of Microsoft. This outsourcing has also assisted the organization in adopting ‘ISO 20000 IT service management standards’ (Gobble 2013). Microsoft has also become able to reduce the cost of IT service through improvement of support operation and service management.
While concluding the study, it can be said that outsourcing is an important process that organization can adopt for transferring some of its activities to third parties. Outsourcing helps the organization in reducing time, cost and facility that they can uses in some other core activities. The trends of the outsourcing organization show that buyers are expecting standardized products and service from the outsourcing organizations and therefore, pricing is being stabilized. The success of outsourcing process can be found in the example of Tesco, American express and Microsoft by the means of reducing cost of the company and proving quality products and service. On the other hand, failure of outsourcing can be found in the example of General Electric due to hidden cost.
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