A Brief Introduction to Outsourcing Management Essay Example

as accessing external expertise and quality improvement. It frees up resources for companies to focus on their core activities and strategic goals (Juras, 2007).

The deal worth ?400m between Barclays and consultancy group Accenture is an instance of strategic outsourcing. Barclays aimed not only to lower costs but also to achieve its strategy goals of enhancing the agility, efficiency, and capability of its information technology operations (Cave, 2004). Several companies have either outsourced or are contemplating outsourcing as a means to reduce expenses, enhance performance, or both. ING, a Dutch financial services firm, is one example of a company that decided to outsource to minimize operating expenses of roughly €460m per annum and meet efficiency improvement and higher operational effectiveness goals for its retail banking operations (The Daily Telegraph, 2006). Orange, the UK's largest mobile operator, is planning to outsource as part of an initiative by its French parent Telecom to cut costs and improve customer service quality during high-demand periods. The initiative involves the outsourcing of 1,500 jobs from the UK to Indian call centers (White, 2005).

The most common functions and activities being outsourced by large international companies in Europe and the US were identified by Kakadbase and Kakadbase (2002). These findings are illustrated in Figure 1, with the source being Kakabadse and Kakakbadse (2002). Additionally, the most cited motives for outsourcing among companies in Europe and the US were also identified by Kakadbase and Kakadbase (2002), and Figure 2 illustrates this finding. The main motive for outsourcing among these companies was found to be cost discipline/control, as shown in Figure 2. According to a study on more than 100 western companies' outsourcing practices, conducted

by PriceWaterHouseCoopers in 1999 (cited by Kakabadse and Kakabadse 2002), the primary rationale for outsourcing was to save on overheads through short-term cost savings. In the IS/IT industry, companies outsource mainly for financial reasons as stated by Karyda et al (2006), with a primary aim of improving their rate of return on investments (ROI), reducing costs, and achieving economies of scale that may not be possible internally.

Outsourcing providers achieve cost reduction by specializing and achieving economies of scale through servicing a large number of clients. They can often achieve lower unit costs compared to any single company. Additionally, outsourcing providers have the ability to invest in new technologies and innovative practices. Globalization and new technology have allowed outsourcing providers to move business processes to areas with substantially lower labor costs, such as China where unskilled labor costs only 60 cents for manufacturing jobs. In call centers and the services industry, wage rates for graduate Philippine and Indian people range from $1.0 to $2.00, compared to $10 to $18 for similar positions in the United States. In the IT industry, labor costs can be reduced by up to 65% by sending work to India. (Alexander and Young, 1996 cited by Bryce and Useem, 1998; Finn, 2007; Wonnacot, 2002 cited by Clott, 2004; Kirkpatrick, 2003 cited by Clott, 2004; Khirallah, 2002 cited by Clott, 2004).The utilization of outsourcing by entities such as BP (British Petroleum) has resulted in decreased operating costs due to the accessibility of economies of scale and reduced labor expenses. In fact, BP contracted Exhul to manage administrative and business operations related to their HR function.

The deal negotiated by Belcourt (2006) resulted in an

annual operating cost reduction of $15 million and avoided a capital cost of $30 million for technology expenses. British Telecom (BT), a UK-based company, transferred its HR function to outsourcing provider Accenture in a five-year deal, saving ? 30m, having previously incurred over ? 50m annually for running an in-house HR function. Both British Petroleum and BT have experienced real cost reduction as a result of outsourcing, which demonstrates significant cost savings. Companies that face fierce competition, shareholder pressure to boost company value and customer pressure to lower costs have had to seize the opportunity to reduce costs through outsourcing to remain competitive, such as American company Wayne Youngers, Youngers & Sons who outsourced in order to stay competitive with Chinese competitors who were selling the same product for significantly less.

According to Collins (2007), outsourcing can lead to customers terminating contracts with companies due to the additional fees charged. Although outsourcing can result in cost reductions and improved operations, there are hidden costs and non-financial problems that may have negative impacts. Deloitte's survey of 25 world-class organizations revealed that one quarter of the companies brought business functions back in-house as they found it more cost-effective. Additionally, 44% of the surveyed companies reported no cost savings from outsourcing, while nearly half dealt with hidden costs as the most common problem when managing outsourcing projects (Tadelis, 2007, pp. 261).

Estimating the total cost of outsourcing often overlooks hidden expenses. These costs, as noted by Purdum (2007), include project selection and supervision, quality assurance, and customer dissatisfaction. Contract fees can also add up to 2% of the contract value, resulting in $20,000 for a $1 million contract (Lucas,

2004). Additional unforeseen costs may arise from legal fees, cost overruns or inadequate intellectual property protection. Outsourcing globally presents particular risks such as intellectual property violations in countries like China where practices such as copying, reverse engineering and product counterfeiting are common. In an example cited by Collins (2007), Hayward Pool Products discovered that a Chinese firm had copied their products and sold them under their own brand at a discount of 25%, causing the company to lose over $20 million in sales.

Outsourcing functions can lead to non-financial issues, such as customer dissatisfaction. According to a 2005 study by Gartner, frustration can cause 60% of organizations outsourcing customer-facing processes to lose customers to competitors (Pfeffer, 2006, p. 66). Poor customer service can also prompt UK pension policy holders to switch providers; in fact, 75% of them would do so (Pfeffer, 2006). Kelley and Jude (2005) point out that outsourcing often results in reduced quality because the provider and the company outsourcing have different interests. Tadelis (2007) notes a conflict between buyers seeking low prices and sellers seeking high profit margins in this relationship. Moreover, companies may become dependent on their vendors, making the outsourcing process even more complicated (Quelin ; Duhamel, 2003).

Transferring all responsibility to a vendor through outsourcing carries the risk of potential internal or external problems that could result in a failure to deliver on schedule and with the expected quality, as noted by Clott (2004). This also involves a transfer of knowledge and skills to the vendor, who may enter into competition with the company, such as what occurred when Schwinn outsourced its bicycle frame production to Taiwanese company Giant Manufacturing.

According to

Belcourt (2006), Giant's entry into the market caused damage to the business. Outsourcing can cause a company to lose critical skills and knowledge, as stated by Quelin & Duhamel (2003). When a company transfers all function responsibility to an external provider, it loses understanding of the service over time. Although the provider has all the knowledge to perform the activities related to the outsourced function, this knowledge will remain with the provider and cannot be transferred back to the organization. This can result in a particular problem if the company decides to bring back a previously outsourced function. Furthermore, as Alexander and Young (1996) cited by Bryce and Useem (1998) note, competitive advantage could also be affected as a result of transferring knowledge and skills to an outside provider. The vendor may even sell the acquired know-how and company secrets to a competitor, according to Belcourt (2006).

According to Karyda et al's study in 2006, transferring knowledge to outside providers poses risks, particularly in the IT/IS industry where data confidentiality is the top concern out of five risk factors. In a report by Biswas in 2005, a British newspaper reveals that purchasing personal details from Delhi IT workers was possible for a low price of ? 4.25, emphasizing the potential security threat to customers of outsourced organizations. Despite the risks, outsourcing remains a viable strategy for cost reduction for large and medium-sized international companies. With access to experience economies of scale and cheaper labor and overhead costs in regions like China, India, Western Europe, Latin America, outsourcing can offer substantial savings.

It is widely acknowledged in literature that outsourcing can offer various advantages, such as enhanced performance,

better focus on core activities, access to expert skills and knowledge and more. As a result, outsourcing is considered an attractive strategy for businesses to pursue. However, cost reduction is not always guaranteed when outsourcing due to unforeseen expenses or neglected costs that can add up and reduce overall savings. Moreover, companies that outsource to achieve lower costs may encounter non-financial issues that can negatively impact long-term stability, performance and service demand. This is especially true when relying on global vendors or offshoring, where cultural, legal and socio-cultural differences can contribute to an unfavorable outsourcing experience. Therefore, like with any major business decision, the decision to outsource should be carefully evaluated to identify hidden costs, risks and potential issues that may impact the decision. Companies must also be decisive in what activities or functions to outsource and who to entrust with them, in order to achieve significant cost savings.

Bibliography: Barnes, P (2005) Outsourcing: A review of trends and some management issues, Management Services 49 (4) pp 42-44 BBC News (2005) How secure are India’s call centres? Available at: http://news.

References to articles on outsourcing:

- BBC. co. uk/1/hi/world/south_asia/4619859. tm (accessed on 1/02/08).

- Belcourt, M (2006) Outsourcing: The benefits and the risks, Human Resources Management Review 16 (2) pp 269-279

- Bryce, D ; Useem, M (1998) The impact of corporate outsourcing on company value, European Management Journal 16 (6) pp 635-643

- Clott C (2004) Perspectives on global outsourcing and the changing nature of work, Business and society review 109 (2) pp 153-170

- Collins, M (2007) Outsourcing: The good, the bad and the ugly, Industrial Management ; Plant Operation 68 (12) pp 38-38

- Financial Times (2004) Letters to the editors: Blind to the cost of outsourcing. Available at: http://search.

Sources consulted for this article include:

- ft.com/ftArticle?queryText=cost+overruns+outsourcing+;aje=false;id=040624001012;ct=0;nclick_check=1 (accessed: 12 February 2008)

- Finn B's "In with the out crowd" article in Personnel Today Magazine (2007), pp18-19

- J.B. Heywood's book, "The Outsourcing Dilemma" (London: Pearson Education, 2001).

Research on outsourcing results and future opportunities has been conducted by Jiang B & Qureshi A (2006) in Management Decision 44 (1) pp 49-51. In addition, Juras, P (2007) identified the total cost of outsourcing through a risk-based approach in Management Accounting Quarterly 9 (1) pp 43-50. Outsourcing trends in USA and Europe have been discussed by Kakabadse A & Kakadbase N (2002) in the European Management Journal 20 (2) pp 189-198. Furthermore, Karyda M et al (2006) provided a framework for outsourcing IS/IT security services in Information Management & Computer Security 14 (5) pp 402-415, while Kelley M and Jude M's exploration of how to make the outsourcing decision can be found in Business Communications Review 35(12), pp28-31. McCartney L's discussion of risks and benefits associated with offshore outsourcing can be found in CFO-IT Magazine, pp60-63. The potential savings from outsourcing but possible customer dissatisfaction was examined by Pfeffer J (2006) in Business 2.0,7(2),pp66; hidden costs of offshore sourcing were explored by Purdum T(2007). Quelin B & Duhamel F.(2003)'s research investigated the alignment between corporate strategy and motives and risks associated with outsourcing that aligns with it which is published in the European Management Journal21(5),pp647–661.Tadelis S.'s emphasis on creating value through outsourcing for innovative organizations can be found in California Management Review5(1),pp261–277.Finally,BT's ten-year ?306m payment for an outsourcing

deal was reported by The Daily Telegraph back in 2005.co.uk/finance/personalfinance/investing

The website http://www.telegraph.co.uk/finance/personalfinance/investing is accessible for individuals who wish to gain knowledge about investing.

Access was made to http://www.telegraph.com on 7th February 2008 to read The Daily Telegraph's article titled "Orange joins job caravan to India" which can be found at co.uk/money/main.jhtml?xml=/money/2005/02/03/cnbt03.ml.

Accessed on 07/02/08, the Daily Telegraph reported that Barclays outsourced IT jobs, according to an article located at co.uk/money/main.jhtml?xml=/money/2005/01/10/cnoran10.xml.

You can find the article on the website of The Telegraph at: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2004/06/24/cnbarc24.

An article from The Daily Telegraph (2006) accessed on 07/02/08 reports that ING had outsourced its office service jobs using xml. The article can be found at: http://www.telegraph.co.

Accessed on 07/02/08, the following link contains the xml file for uing04 on uk/money/main.jhtml:

uk/money/main.jhtml?xml=/money/2006/07/04/uing04.xml