Outsourcing

INTRODUCTION In the hard economic times the United States is facing, a growing trend being adopted by many companies is outsourcing. Outsourcing allows the company to hire outside help in order to complete some of the company’s productions and/or services for a lower cost. Also outsourcing may increase the productivity rate. As with any other business venture, there are advantages and risks associated with outsourcing. DEFINITION “The contracting or subcontracting of noncore activities to free up cash, personnel, time, and facilities for activities in which a company holds competitive advantage. Companies having strengths in other areas may contract out data processing, legal, manufacturing, marketing, payroll, accounting, or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost. Outsourcing is often an integral part of downsizing or reengineering. Also called contracting out” (Businessdictionary.com) ADVANTAGES OF OUTSOURCING According to author Dean Meyer of SourcingMag, there are four distinct advantages of outsourcing. They are as follows: (1) Outsourcing can save you money. (2) Outsourcing can help you share risk. (3) Outsourcing can help accommodate peak loads. (4) Outsourcing can help develop your internal staff. The first advantage is that outsourcing can save you money. Money will be saved because outsourcing will assist in unit costs going down while hopefully volumes will increase. “External service providers can achieve economies of scale unavailable to individual firms when they combine the volumes of multiple companies” (Meyer 2005). Certain conditions must be met in order for outsourcing to save the company money. The article mentions the following stipulations; (1) Economies of scale must exist. There must be some economic advantage to larger size or greater numbers before outsourcing can pay off. (2) The economies must be accessible across corporate boundaries. Savings only occur if outsourcers can combine the volumes of multiple clients. “For example, it’s easy for many companies to share the huge fixed costs of a telecommunications infrastructure owned by long-distance carriers. Laying one’s own fiber or leasing a private satellite channel is unlikely to be economic, so outsourcing is an obvious choice” (Meyer 2005). (3) The savings must be sufficient to outweigh the additional cost of paying other shareholders a profit. The second advantage is that outsourcing can help share risks. This is known as the portfolio effect. The portfolio effect can be explained by the well known phrase, “don’t put all your eggs in one basket.” “In investing it’s best to diversify your portfolio rather than put all your money in one stock. By spreading your risk, you reduce your total risk” (Meyer 2005). With outsourcing, one aspect of the company may be successful which can offset another’s aspects mistakes or failures. Meyer provides the following example of how outsourcing can help share risks in a manufacturing business, “if all your work is done in one plant, an outage or a labor dispute could put you out of business. If you spread your workload across a number of plants, a labor dispute in one country may not affect the operations of other plants. Thus, you reduce your risk.” The third advantage is outsourcing can help accommodate peak loads. In order to do this, companies should staff during valleys and outsource during peaks. The final advantage is outsourcing can help develop internal staff. Meyer identifies two strategies in order to accomplish this; (1) Contractors can be used to off-load less interesting commodity or end-of-life work, or to handle peak loads. This leaves staff free to pursue new, developmental opportunities. (2) Consultants and vendors can be used to bring in new ideas and to train internal staff. KEY TO OUTSOURCING SUCCESS The main key to success is choosing the right aspect of the company to be outsourced. According to the “Outsourcing and Offshoring” article, there are three key factors that influence what work should be outsourced. The three factors are; (1) The skill level of the outsourced staff – It is important to evaluate the staff’s experience so that nothing too complicated will be outsourced to inexperienced workers. (2) Research request view process – the amount of time it takes the information services staff to review each request to determine if the task is suitable for outsourcing should be considered. (3) Information suppliers’ contracts – The terms and conditions of the outsourcing contract is important. DISADVANTAGES OF OUTSOURCING Often times when companies outsource they do so in foreign countries which is known as offshore outsourcing. One disadvantage of outsourcing is the effect it has on the employees of the company. A loss of available positions and downsizing is likely to be a result of outsourcing. Also if the company outsources out of the country there are barriers the company will have to face, such as differences in language, customs, business ethics, business practices etc. Dealing with the barriers may not be worth the money the company is saving by outsourcing. “Consider the case of one fashion apparel company based in Los Angeles. Its 1,500 workers, paid at rates well above minimum wage…if it were to move its operations offshore, logistics costs might well swallow up any savings from lower wages” (Ritter & Sternfels 2004). EXAMPLE IN THE WORKPLACE There are many companies that are using outsourcing. One well known company participating in this concept is International Business Machines Corporation, better known as IBM. “International Business Machines Corp. agreed to take over most of the computer operations of auto-parts maker Visteon Corp. in an outsourcing deal that the companies say is likely to be valued at more than $2 billion over 10 years” (Hechinger 2003). Outsourcing has worked for the company because according to the article, it is the number one computer maker. CONCLUSION Outsourcing is a business strategy used to cut down the costs of production. Outsourcing involves more than one company. The initial company hires another company to run/operate a specific part of a business, or produce a certain product for the business. As with any other strategy there are advantages and disadvantages of outsourcing. The four main advantages of outsourcing are saving money, sharing or diversifying risks, accommodation of peak loads and developing internal staff. Some disadvantages are the loss of jobs, under qualified outsourced staff, and barriers with other countries such as language, customs, ethics and etc. Many well known companies use outsourcing. The example I provided is the company IBM who successfully used outsourcing and still remained on top. References: BusinessDictionary.com http://www.businessdictionary.com/definition/outsourcing.html Ginsburg, C. & Noorlander, W. (2008). Outsourcing and Offshoring. Online, 32(4). Retrieved from EBSCOHOST database. http://web.ebscohost.com/ehost/detail'sid=9c96b03f-72b3-42b895a4200cfb7220a1%40sessionmgr12&vid=1&hid=19&bdata=JkF1dGhUeXBlPWlwLGNwaWQmY3VzdGlkPXM4ODU2ODk3JnNpdGU9ZWhvc3Qt bGl2ZQ%3d%3d#db=aph&AN=32918621 Hechlinger, J. (2003, February 12). IBM gets $2 billion outsourcing job -- most computer operations of Visteon to be taken over as it diversifies from Ford. The Wall Street Journal (Eastern Edition), B3 Meyer, N. D. (2005). 4 Advantages to Outsourcing. Retrieved from: http://www.sourcingmag.com/content/c051011a.asp'action=print Ritter, R.C. & Sternfels, R.A. (2004). When Offshore Manufacturing Doesn’t Make Sense. McKinsey Quarterly, 4. Retrieved from: EBSCOHost Database. http://web.ebscohost.com/ehost/detail'sid=c138f864284d4387855ea17ee6932c72%40sessionmgr4&vid=1&hid=19&bdata=JkF1dGhUeXBlPWlwLGNwaWQmY3VzdGlkPXM4ODU2ODk3JnNpdGU9ZWhvc3Qt bGl2ZQ%3d%3d#db=bsh&AN=15253037