Outsourcing
Running a business requires many decisions to be made, one decision is whether a company should perform work internally or outsource job duties. Outsourcing is the technique used by companies to reduce cost by transferring portions of work to third party suppliers as opposed to performing the job internally. Outsourcing can be very beneficial in reducing cost, but there are also issues that surround outsourcing in general. In order to understand the benefits of outsourcing, one needs to fully comprehend the issues involved with outsourcing, the benefits that a company may experience from outsourcing, how to truly determine whether outsourcing a specific job is necessary or beneficial, and how outsourcing is relevant in today’s workplace. First, it is important to understand what outsourcing is.
According to Robert Handfield (2006), outsourcing, which became a formally indentified business strategy in 1989, can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources” (para. 5). Outsourcing, sometimes referred to as facilities management, is the strategy that involves an organization to contract out certain aspects of a business to both specialized and efficient service providers. Handfield (2006 points out that subcontracting and outsourcing, although similar in nature, are different because outsourcing “involves substantial restructuring of particular business activities including, often, the transfer of staff from a host company to a specialist, usually smaller company with required core competencies” (para. 8).
There are many reasons why a company may choose to outsource. Some of the reasons include reducing and controlling operating cost, improve host company focus, gain access to world-class capabilities, free internal resources for other purposes, insufficient resources available, share risk with outside companies or to control time consuming task. A organization may choose to outsource due to one of these reasons or a combination of them. One of the most compelling reasons to outsource is the ability to lower wages. Companies who are trying to control cost may decide to outsource employees., typically to other parts of the world, where wages are a lot lower compared to the minimum wages they are required to pay, especially in the United States. Although there are benefits for a company to outsource, there are a number of issues that surround outsourcing as well.
According to multiple interviews with outsourcing clients, Technology Partners International, Inc. (TPI), found that the number one problem with outsourcing is the fact that post-contract processes and decision rights were not understood. In other words, the clients and the service providers are not prepared to work together once the contract has been established (McCray, 2008). According to McCray (2008), once a contract has been signed, issues arise because "services simply aren't performed, implementation activities get stalled, client stakeholders and service provider staff are both frustrated, and the entire schedule for achieving expected business benefits is delayed (p. 3). TPI believes that the root of many of the issues of outsourcing lies in the lack of definition and understanding that is associated with outsourcing. This occurs when new processes and decisions are not communicated efficiently.
Another issue in regards to the understanding of the contract comes to the team members involved. These team members may be responsible for managing and implementing the activities involved in the initial outsourcing operation, yet they become emotionally charged and struggle with their own personal views of what should or should not be performed (McCray, 2008). Teams may suffer in outsourcing situations for other reasons as well. Team members may lack required skills and key talent may leave due to the uncertainty. According to TPI's Governance Benchmark database, 40 percent of clients did not provide any training for the team responsible for the initial outsourcing and only 20 percent felt as if they had sufficient ongoing training (McCray, 2008).
When it comes to the actual performance once a company has successfully established an outsourcing partnership, there may be other issues involved. Those issues may include the loss of managerial control, hidden cost, threat to security and confidentiality, decline in quality of products, the financial well-being of another company, and bad publicity and ill-will. According to James Bucki (2013), when outsourcing, one organization turns over a department or task to another organization and even though they have a contract, they are giving up management and control of that department or task. The two organizations may not have the same mission or goals that power the organizations.
Security and confidentiality is what tends to keep businesses running. Bringing in an outside company may compromise such information that will cause issue with the main organization. In most cases, the outsourcing company is driven more on the lines of a profit, but because contracts are set in price, it is hard for them to increase profit. In order to increase profit, the outsourced company would have to focus more on decreasing the expenses. In doing so, the quality of the products or services may decline. This too can cause issues to the organization who is receiving these goods and services. Finally, one of the biggest concerns about outsourcing is the bad publicity or ill-will that it brings on the organization. Outsourcing tends to get a negative response from individuals throughout society because it tends to impact the labor force. In today's economy, individuals struggle with employment, but when companies outsource whole departments or even single task, it creates and even bigger burden on individuals that are affected. Having a company that outsources a number of departments or tasks tends to get a negative response for the communities they are in or even from their consumers. This negative response has the ability to affect the success of the business as a whole. Outsourcing has both benefits and issues, so how does one determine that it is a beneficial solution?
When deciding if outsourcing is a beneficial solution, there are five 'why' questions one must ask. First, why do you want to outsource your distribution operation? Many may answer this question with the response that it is costing the organization too much money. Second, it is important to ask why it is costing the company too much money. Is it costing the organization too much money because the organization lacks the knowledge or ability to carry out the job? The third question can come off of the response to the second question. That question would be why does the organization staff lack the knowledge to carry out the task and why does the organization lack the ability to carry out the task? Does the organization lack the resources for the level of individuals needed to perform the task or the resources to carry out the task? The fourth question would be why doesn't the organization invest in the right individuals and resources to carry out the task? Would it be beneficial in the long run to make this type of investment, or is it more important to focus precious time and resources into core production? Finally, it is important to ask why this department or task is not part of the core operation. Is this department or task something that is part of the core process, or is it more important that someone else focus on this task (Kugler, n.d.)? In asking these questions, not only is it helpful in determining if outsourcing will be beneficial, it is also helpful in determining an outsource partner. Regardless on the reasoning behind the decision to outsource, it is important to have a clear understanding on what the reasoning is.
In today's workplace, the number one growing trend is the distribution of organizations. Many organizations are shrinking due to the ability to outsource non-core functions (Aki Ouye, 2011). This is driven by lower labor cost, proximity to both internal and external customers, and the lack of access to skilled and talented individuals locally. This leads to another trend on why outsourcing has affected today's workplace. The coming shortage of skilled workers. According to Aki Ouye (2011), "The basic problem is that there will be fewer younger people to replace those of the Baby Boomer generation who will be retiring over coming years" (p. 4). Although Barry Bluestone, a political economist at Northeastern University, projects that many Baby Boomers may stay in the labor force longer to make up for losses during the Great Recession, it is still difficult to argue that that the number of younger individuals that would be replacing such retiring Baby Boomers does not compare (Aki Ouye, 2011). Bluestone projects that the youth labor force will steadily decline over the years, due to the decline in population (Aki Ouye, 2011).
When running a business, there are many decisions that must be made. The decision to outsource has become an important decision for many organizations. Should an organization keep all departments and task internally, or should the work be outsourced to another organization? In making these decisions, it is important to understand what outsourcing is, the benefits of outsourcing, the issues surrounding outsourcing, how to determine whether or not outsourcing would be beneficial to the organization, and how is outsourcing relevant to today's workplace. Once there is a clear understanding of what outsourcing is and the risk and rewards involved in outsourcing, it is important to find a partner that would benefit the organization overall. Outsourcing has it's issues, but it can also be the determining factor in the overall success of a business. References
Aki Ouye, J. (2011). Five trends that are dramatically changing work and the workplace. Knoll, Inc. Retrieved from http://www.knoll.com/research/downloads/WP_FiveTrends.pdf
Bucki, J. (2013). Top 6 outsourcing disadvantages: Outsourcing disadvantages: Reasons that outsourcing is bad for your company. Retrieved from http://operationstech.about.com/od/outsourcing/tp/OutSrcDisadv.htm
Handfield, R. (2006). A brief history of outsourcing. Poole College of Management: Raleigh, NC. Retrieved from http://scm.ncsu.edu/scm-articles/article/a-brief-history-of-outsourcing
Kugler, E. (n.d.). How to determine if outsourcing is for your operation. Retrieved from http://www.werc.org/assets/1/workflow_staging/Publications/656.PDF
McCray, S. (2008). The top 10 problems with outsourcing implementations. (And how to overcome them). TPI, Inc. Retrieved from http://www.tpi.net/pdf/papers/Top_10_Problems-with_Outsourcing.pdf