Outsourcing - A Strategic Debate


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A strategic debate on the effects of outsourcing on US business

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Outsourcing - A Strategic Debate

  1. 1. OUTSOURCING [A Strategic Debate] The article is a debate on the impact of outsourcing from US point of view. PRITAM DEY pritam.dey@gmail.com 2008
  2. 2. Strategic Debate: Outsourcing Pritam Dey pritam.dey@gmail.com ABOUT THE AUTHOR Pritam Dey has an extensive background in IT and business consultant. He has designed and developed IT solutions for customers across domains and technology platforms. Having joined Tata Consultancy Services in 1999, Pritam has handled complex project assignments for Global Insurance and Financial Services firms. With specialization in Internet technologies and object-oriented design principles, Pritam has led cross-functional teams to execute IT projects for clients such as Tata Internet (India), Prudential Financial (USA), ING Bank (Netherlands) and A.P. Moller-Maersk Group (Denmark). Pritam has also played a significant role as a business consultant. To maximize his education during the MBA program, Pritam has led and mentored teams to provide data-driven business consulting and recommendation to deliver bottom- line results to his clients. He has executed a wide array of projects on business strategy, market research, business process analysis, competitive landscape study, new market entry and pricing strategies. He has consulted for Fortune 500 organizations such as 3M, UnitedHealth Group, Thomson-Reuters, and Northwest Airlines (now Delta). Post his MBA program, he has also consulted for a plethora of non-profit and startup organizations and has created marketing and business development opportunities for the respective organizations. Pritam is passionate about playing a major role in creating executable IT strategies and roadmap that increase the value of IT projects and that strive to reduce the gap between IT and business objectives. He spends a great amount of time following the latest technology trends and understanding how technology is going to drive business and consumer needs in future. He intends to use this knowledge to create effective IT solutions for his clients. Pritam holds a BE degree in Electrical Engineering from Maulana Azad National Institute of Technology at Bhopal (India) and an MBA from University of Minnesota at Minneapolis. -2-
  3. 3. Strategic Debate: Outsourcing Pritam Dey pritam.dey@gmail.com OUTSOURCING: A STRATEGIC DEBATE Introduction: Strategic outsourcing is defined as the practice of using outside firms to handle non- strategic functions normally performed within a company. The non-strategic functions typically outsourced include payroll, human resources, IT maintenance, facilities management, and logistics. A firm might consider employing strategic outsourcing in order to reduce costs, improve operational performance, gain access to foreign market, or hire skilled workers who are unable to come to the U.S. due to limits on immigration. Strategic outsourcing is considered a contentious issue because of the misplaced perception that outsourcing means offshoring – a practice of sending work out of the country. Since the effect of pain (of losing a job) resulting from outsourcing is experienced faster than the benefits of outsourcing are experienced, outsourcing tends to become synonymous with loss of jobs and unemployment. Benefits of Outsourcing: However, looking from a broader perspective, strategic outsourcing helps companies to focus more on core business and less on non-core business. It frees the executives from day-to-day process problems, and helps them to focus on strategic thinking, process reengineering and managing trading partner relationships. Outsourcing can result in significant cost-savings because companies can pay only for services that they need. One of the wonderful things about outsourcing is that companies can pay the contractors by the project rather than by the hour, so they get a good project estimate up front. Cost savings can also be realized in terms of unpaid benefits and other allowances that are usually given to employees. Companies also realize cost-savings by saving on manpower and training costs, by controlling operating costs, and by avoiding the cost of chasing technology. Through strategic outsourcing, companies today have the ability to develop competitive strategies that will leverage their financial positions in the ever competitive global -3-
  4. 4. Strategic Debate: Outsourcing Pritam Dey pritam.dey@gmail.com marketplace. Strategic outsourcing has provided many businesses with the opportunity to harvest the benefits of lower labor costs and to exploit the value of less than par foreign currencies. Outsourcing can enable a business to provide 24/7 coverage, especially for consumers who need 24/7 support. Productivity is increased because companies usually get work done from different countries running under different time zones. Contrary to popular perception, outsourcing has also benefited the United States. Companies in other nations also offshore their business services to U.S. The “insourcing” generated a substantial array of relatively high-skilled jobs in engineering, management consulting, banking, and legal services. Far more U.S. employees keep their jobs because outsourcing helps the companies stay competitive. Cost reductions from outsourcing can open up new market opportunities for U.S. companies and thus generate additional jobs here at home. Looking from a different perspective, outsourcing also tends to benefit developing countries such as India or China in terms of increased wages, job prestige, education, and quality of life. Limitations of Outsourcing: On the flip side, strategic outsourcing is not without its share of criticisms. One of the biggest criticisms about outsourcing is the loss of jobs. The pinch is mainly felt by the workers who got laid off because their work has been outsourced. The emotional, financial and mental stress that a laid-off worker goes through is difficult to control. Opponents of outsourcing argue that about one-half of the outsourcing arrangements are terminated because of variety of reasons. Lack of managerial skills is one of the reasons why outsourcing fails. For example, while software-programming skills are plentiful in India, good managerial experience is very limited. The irony is compounded by the fact that after few years of programming, software professionals opt for managerial roles. What eventually happens is that since these people are not trained to be managers, their managerial productivity is limited. At the same time, they no longer do the work they are skilled at (programming). There are other costly complications that come along with outsourcing. Local highways and transportation network may be inadequate. Some American companies pay much more -4-
  5. 5. Strategic Debate: Outsourcing Pritam Dey pritam.dey@gmail.com for real estate for their offshoring activities than they would in the United States. That negative differential occurs mainly for two reasons. One is the cost of upgrading poor infrastructure overseas. The second reason is the fact that inexpensive overseas labor pools are usually found in large cities where the cost of infrastructure such as rent, wages, etc are much higher. Cultural issue is another factor why outsourcing fails. Overseas managers often do not understand the American business environment – customers, language, traditions, and high- quality control and expectations for prompt delivery of goods and services. Dell moved its call center support for corporate customers from India back to the United States in 2003. Its clients had complained about foreign speaking English in hard-to-follow accents and giving vague answers to technical questions. One of the biggest and most vociferous criticisms against outsourcing is the issue of security and intellectual rights. What is the guarantee that the confidential customer information that is sent to back-offices in India is not misused? In April 2005, Indian police arrested 16 employees of an Indian customer support outsourcing company in connection with the fraudulent transfer of more than $400,000 from Citibank customer accounts to bogus accounts in India. Those arrested had stolen personal identification numbers from Citibank customers. Some U.S. companies limit their outsourcing to routine engineering and maintenance tasks because they worry that their core technology may be swiped by vendors in Asia that do not respect intellectual property rights. Opponents of outsourcing advocate that outsourcing cannot solve all the problems. What cannot be outsourced are innovation and the invention of new business processes and technologies. As one executive aptly puts it, “Innovative business processes result from an understanding of the business that happens when people get into a room and talk to each other. That is very difficult to outsource.” Conclusion: From my point of view, outsourcing has benefited the companies that have resorted to outsourcing. Far more employees keep their jobs because outsourcing helps the company stay competitive. Some get new or better jobs because the firm enhances its financial strength. Cost reductions from outsourcing can open up new market opportunities for U.S. -5-
  6. 6. Strategic Debate: Outsourcing Pritam Dey pritam.dey@gmail.com companies and thus generate additional jobs at home. The companies can afford to buy new equipment and expand training programs. Hence, higher domestic labor costs can be offset by higher worker productivity. Over time, there is a positive feedback effect from outsourcing. As poor countries develop their economies, new markets are created for U.S. made products and services. Opponents of outsourcing complain that jobs are transferred to offshore. What they fail to observe is the positive effect it has on American economy. Software programmers who work at offshore use the computers and laptops made by U.S. companies. The rising higher standard of living creates demand for more products and services. Opponents of outsourcing need to consider the following: 1. In 2003, Delta Airlines outsourced 1,000 jobs to India, but the $25 million in savings allowed the company to add 1,200 reservation and sales positions in the United States. 2. In 2003, approximately $120 billion was spent on IT in the United States. Approximately 1.4 percent was moved offshore. However, the 98.6 percent of the work that stayed here was not deemed newsworthy. 3. In total, about 400,000 U.S. positions in information technology have gone offshore. Meanwhile, total U.S. employment rose from 129 million in 1993 to 138 million in 2003, mainly in services. It turns out that the international movement of services is very positive to the American economy. 4. In 2003, the United States imported $87 billion of business services. That included a lot of relatively low-skilled call center and data entry work done in lower-cost developing countries. Therefore, not all low-skilled jobs move offshore. The bottom line is clear: because of outsourcing, the United States creates far more new jobs (net of layoffs) than Europe and Japan combined. U.S. has the highest proportion (66 percent) of the population employed of all the industrialized countries. Due to the increased productivity resulting from outsourcing, total U.S. production of manufactured goods has risen about 40 percent over the past decade. -6-
  7. 7. Strategic Debate: Outsourcing Pritam Dey pritam.dey@gmail.com Sources: 1. Murray Weidenbaum, “Outsourcing and American Jobs,” June 24, 2004. 2. Eduardo Porter, New York Times, “Send Jobs to India? U.S. Companies Say It’s Not Always Best,” April 28, 2004. 3. Lance Koonce, DWT LLP, “Phising in Poisoned Waters: The Escalation of Identity and Information Theft,” May 2005. 4. Kerem B Limon, “Dell to Stop Using Indian Call Center for Corporate Customers,” November 24, 2003. -7-