Outsourcing – A Global Challenge
MBA-700 International Economics

Abstract
The choice to outsource is a major strategic decision not made lightly by companies in today’s global marketplace. Though it brings probable results of cost reduction, loss of control in your product or the quality of service rendered makes this a decision that should not be taken lightly. Though a concept decades old, outsourcing is a topic that brings out fervor in individuals fighting for or against it. It’s a debate centered on moral, economical, and political aspects, with feelings that intensify during economic downturns because of the This paper will discuss theories of outsourcing, while comparing and contrasting the disadvantages and advantages (SWOT Analysis – see Appendix 1) of a concept that is growing in global business. The paper will conclude, most importantly, with discussions on three outsourcing alternatives and their potential to re-invent the status quo.

Introduction The advent of globalization has proven that outsourcing is not a hypothetical situation; it is a major strategic business decision growing in popularity that our American workforce must now face in the decline of our U.S. economy. Some believe that outsourcing has become a serious issue not only for our workforce, but also in our major corporations, and the political arena. Issues such as the security of our nation have become debate topics, with critics arguing that outsourcing has weakened national security. Other issues, such as decreased quality, loss of control, cultural barriers, and communication breakdowns all serve to dissuade the American public to a concept that is re-inventing American business. Increasing competition in the global market has forced companies to look for innovative ways to cut cost and generate value for the organization. The world has embraced the phenomenon of outsourcing and companies have adopted its principles to help them expand into other markets. (Bender, 1999). Strategic management of outsourcing is perhaps the most powerful tool in management, and outsourcing of innovation is its frontier (Quinn, 2000). Outsourcing has become one of the most effective tools in the modern business arena. Companies recognize the need to use innovation and technology to their advantage to bring to the consumer a quality product or service that is competitive in their chosen market. The concept of outsourcing allows businesses to concentrate resources on continual development of their core mission as well as implement proactive processes for growth.

Literature Review
Definition and Types of Outsourcing Outsourcing is made up of two words – “out” and “sourcing”; sourcing refers to “the act of transferring work, responsibilities, and decision rights to someone else” (Power et al, 2006). Organizations, to be successful must consider sourcing out work to others who can do it in a more efficient manner. Outsourcing is a management strategy by which an organization delegates major, non-core functions to specialized and efficient service providers (Elmuti, 2003), or as (Corbett, 1999) asserts, outsourcing is nothing less than the wholesale restructuring the corporation around our core competencies and outside relationships. Depending on control levels organizations choose to have over the outsourced product or service, outsourcing is internal or external. Internal outsourcing is the “reallocation of functions in business systems for saving control over its performance, whereas external outsourcing is the “delegation of performance of separate or mutually related functions to an external outsourcer” (Anikin & IL, 2009). For example, “divisions of of joint activities of external outsourcing include centers concept, cooperation, joint servicing, and participation in capital, whereas divisions of joint activities of internal outsourcing include long-term partnership, shot-term partnership, and single partnership” (Tayauova, 2012). Furthermore, outsourcing is divided into partial or full outsourcing types. Partial outsourcing is “the delegation of certain functions or business processes to an outsourcer, while a set of mutually related functions are performed by the company itself, and full outsourcing refers to “the delegation of separate function to the outsourcing company with entrusting full responsibility for function performance (Doyle & Tapper, 2001).
Outsourcing Theories In a reseach paper, Tayauova (2012) claims, “Outsourcing consists of different activities and each phenomenon can be described by several frameworks that are embedded in various theoretical approaches.” Many outsourcing studies have been impacted by three concepts: Resource-Based View, Core Competency Approach, and Transaction Cost Theory. The resource-based view in outsourcing is based on the concept that when an organization realizes a lack of resources and capabilities, they will seek out an external provider to fill the void. The most prominent use of the resource-based theory in outsourcing process is the preparation phase for defining the decision-making framework and in the vendor selection phase for selecting an appropriate vendor (Perunovic & Pederson, 2007). The vendor must have an awareness of the importance of their role, as tasked with providing capabilities and resources that neither diminish the product or service, nor lower a company’s competitive advantage. The core competency theory is a model where competencies critical to the functioning of the organization be kept in-house, but any other activities should be considered for outsourcing. According to Henry “a core competence can be thought of as a cluster of attributes that an organization possesses which in turn allows it to achieve competitive advantage” (Tayauova, 2012; Henry, 2008). With the focus on the core competency the organization is now free to look to outsourcers who can provide non-critical functions at the lowest cost. Williamson (1985) defines the transaction cost theory as, “a transaction that occurs when a good or service is transferred across a technologically separate interface. “ Additionally, transaction cost theory has been developed to facilitate an analysis of the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures (Coase, 2005). Using this theory to analyze outsourcing, a comparison of the cost of keeping a process in-house as to using an external entity would dictate the direction of the organizational process.
Potential Negatives in Outsourcing Outsourcing is a major strategic move in the global marketplace. It is a detailed concept where failure is an option. Agreements between the client and service provider can fail; not because expectations are unobtainable, but because planning processes were are implemented to mitigate problems that arise with a change in domestic business processes. “Problems with Outsourcing Implementations”, a report by Shawn McCray (2008), a partner in the organization Technology Partners International (TPI), outlines potential negatives in the outsourcing process. TPI conducted multiple interviews with providers and clients to identify key areas of weakness in outsourcing process. Based on interviews and analysis it was revealed that the most critical issue was that after the signing of an outsourcing contract, the clients and the service providers are not prepared to work together. “The problem occurs if new processes and decision rights have not been well designed or socialized” (McCray, 2008). Another significant issue was a resistance from personnel in the organization receiving the outsourcing. Research showed that recipients of the service were unprepared for the changes arising from outsourcing, and due to internal subtleties, failed to meet department expectations. Expectations not met potentially lead staff to an “I told you so” mentality, which can bring out personal views regarding the organizations decision to outsource in the first place. TPI saw, in its analysis, culture clashes between clients and service providers at both the corporate and regional level. Cultural norms in terms of organizational structure, style, or decision-making were all frequent areas of issue. The company receiving the outsourcing, in a desire to achieve quick, tangible benefits, implements changes in process, behavior, and potentially, staffing. “Sometimes both organizations can take extreme, inflexible positions that serve to create tension or distrust” (McCray, 2008). It is hypothesized that outsourcing creates a level of uncertainty for the existing workforce. The uncertainty lowers staff morale, and potentially causes individuals to look for employment opportunities elsewhere. “An unmotivated staff decreases efficiency in service delivery and possibly operational risk” (McCray, 2008). It is asserted that even the organization that implements a culture of change and process to achieve outsourcing success, has a strong propensity to revert to old cultural norms within the organization. This regression develops because the organization believes the benefits of outsourcing will continue to occur; therefore, unnecessary costs are eliminated. “The irony of these decisions is that the clients are cutting back on the very things that have made outsourcing successful in the past and are needed to make it successful in the future” (McCray, 2008). The findings in McCray’s article indicate that change, if unmanaged can cause major problems for the client that has chosen to implement outsourcing in their business practices. These problems, combined or standing alone, create significant declines in the beginning of the outsourcing process and further down the road in the scheme of change management. In the 2012 report, “Advantages and disadvantages of outsourcing: analysis of outsourcing practices in Kazakhstan banks” (Tayauova, 2012), studied the advantages and disadvantages in outsourcing experienced by Kazakhstani banking industry. Tayauova listed loss of managerial control as the major disadvantage of outsourcing. She theorized that managing external resources is difficult, especially resources that are, potentially, thousands of miles away. Technology has given organizations the ability to monitor results and production 24 hours a day, but not being in direct contact with the organization tasked with your outsourcing needs results in different styles of process management that might not be in line with your domestic organizational policy. Another area of concern was security and confidentiality. Outsourcing contracts typically have verbiage regarding these issues, but due to the location of the client compared to the service provider, execution and auditing of the contract put the client at a disadvantage. Hidden costs can also be of disadvantage for organizations looking to outsourcing for increased efficiency. Tayauova explains, “An organization will sign a contract with the outsourcing company that will cover the details of the service that they will be providing. Anything not covered in the contract will be the basis for client organization to pay additional charges”. Loss of quality is another conceivable disadvantage after choosing to outsource. Organizations outsource because of the potential to provide a better product or service produced by the outsourcer than from internal production. As was discussed in the previous report, outsourcing can lower employee morale. Tayauova hypothesizes that outsourcing, in an employee’s mind, parallels the same thoughts as a termination. Once the outsourcing has occurred within the organization, it is the responsibility of the organization’s leaders to oversee the reallocation of employees. This change in structure can put an organization at a disadvantage if processes are not implemented that foster a commitment to the current workforce. The analysis also showed several advantages to the outsourcing of banking practices. Companies that handed over non-core activities to third-party vendors were able to concentrate on activities vital to increasing its competitive position. Cost savings occurred with outsourcing, along with new lines of access to personnel that might not otherwise be available to the organization. Additionally, with service providers, the level of operational experience is expected to be higher because of the greater concentration of staff on tasks as compared to internal operations (Allen, Gabbard, & May, 2003). The results of Tayauova’s research showed outsourcing attributed to Kazakhstani banks focusing more on core activities and cost savings, but did suffer from a loss of quality possibly due to a loss of managerial control (See Appendix 2). The article, “What is the right outsourcing strategy for your process” (McIvor, 2008) references several advantages to outsourcing. “With increasing globalization, outsourcing has become an important business approach, and a competitive advantage may be gained as products or services are produced more effectively and efficiently by outside suppliers.” Daily market changes signify a need to respond, and the difficulty of predicting the direction of such changes means that organizations must focus on their core competencies and capabilities. The global market is evolving and businesses, in order to compete, have been successful in finding efficiencies overseas. Outsourcing allows firms to focus on their own core competences by relocating limited resources to strengthen their core product or service (Lee & Daekwan, 2010) and strategically use vendors to perform service activities that traditionally have been internal functions. Resources, or the lack of, can create limitations in organizational performance. Many organizations are incapable of obtaining and applying quality resources to all areas of competition. Outsourcing allows these organizations to gain a competitive advantage, as they now have the ability to choose areas to concentrate their resources. By outsourcing to specialist organizations not generated by core competences, companies can see improvement in their organizational performance (Kotabe, Murray, & Javalagi, 1998). Gilley and Rasheed (2000), believe, “The acquisition of non-strategic services allows the organization to center on what it does really well, that is, on the services that have high strategic. This allows the organization to focus on concepts that not directly related to mission, but are still factors that can increase performance and flexibility. Secondly, increasing the outsourcing of non-strategic services can improve both the quality and the service. Finally, the outsourcing of services of low strategic value enables the company to reduce costs and improve its competitive position.” As stated before, the outsourcing of American jobs to foreign countries has become one of the more controversial issues dividing people in the United States today. Whether you believe businesses engage in it solely for saving money to increase profit margins or view it as a step to becoming competitive in the global marketplace, the practice of outsourcing is becoming more commonplace. While it is understood that the passion behind one’s belief will hinder the ability for everyone to agree, it gives the opportunity for forward thinking that might result in alternative outsourcing processes.
A report by Rachel Converse “Outsourcing: Unemployment in America” (Converse et.al, 2008) discussed three approaches in hopes of mitigating increasing unemployment due to outsourcing. Limiting outsourcing to 10% is the first approach in regulating how many jobs a company can outsource abroad. The government would provide tax incentives to organizations willing to keep jobs domestic. “They are still permitted to outsource, but the more jobs they supply for American workers, the less they pay in taxes for that year”, stated Aimee Winemiller. No other limits would be set as to the number of jobs outsourced, whether the company has 5 or 5,000 workers, just the 10% rule would apply. “Realistically, a company might expect to save about 20% through outsourcing.” (Birnbaum, 2004). Winemiller argues, “If companies can save money by outsourcing while they are receiving the same product why would they want to insource?” Proponents believe that plan will not only keep jobs in the U.S., but will increase domestic jobs and re-investment back into the country. Politically, many feel that outsourcing was at its peak during the Bush administration, and we are now responsible to assure the continued economic development of smaller, developing countries. The 10% limit allows us to outsource and maintain an awareness of how the process affects us domestically. Furthermore, many businesses in our diminishing economy choose to outsource due to an inability to pay employees at rates commensurate with responsibility. Outsourcing allows the businesses to decrease costs, with no decrease in quality, allowing for lower pricing to the consumer. The second approach, the Even Exchange Clause, is the exchanging of a job from one country to another. Opponents of outsourcing believe that one of the major problems with is the cultural barriers that exist between the two countries. Converse argues, “Through an even exchange a job may be outsourced overseas in return for a job of equal standing in the U.S. This program will help resolve issues of cultural barriers and improve foreign relations because as we provide a job for another country they give a job back to America.”
Due to the availability of highly skilled labor IT outsourcing is one of the most frequently outsourced jobs in the global market. Because of the technological risks involved with this type of outsourcing, it’s been suggested that Americans have the most to lose by the failure of the third party outsourcer. The Homeland Onshore Model (HOM) is a program created by the Synergy Group, a company in 1990 that specializes in Work/Life strategy development. The model was created to reduce outsourcing, particularly in the IT field. Rachel Denenberger explains, “The program implies that the process of outsourcing may be done, within our own country. This means that a company may hire an associate from another state at a competitive wage, similar to a wage paid for a worker overseas.”
For example, a company in Canada wanting to hire an individual in Virginia that has no desire to relocate. Using the HOM would allow him to stay in Virginia, but maintain his employment in Canada. Proponents of the Homeland Onshore Model believe this will be valuable asset to offshore outsourcing, with the belief that it decreases unemployment rates, and lowers security risks caused by the outsourcing of IT jobs. It is possible that these alternatives to the status quo of traditional outsourcing will open the lines of communication to address one of our country’s most quarrelsome sociopolitical issues. Converse proclaims, “A microcosm of geopolitical failure and success, our struggles and triumphs represent the fate of nations brought together out of the common need and desire for a better life. If this topic has taught us anything, it is that as difficult as it may be to overcome social and cultural barriers, it is ultimately best when people put aside their resources and work together towards a common goal, towards a common good.”
Conclusion
Outsourcing is quickly becoming one of the most widely used contemporary business strategies in the global business world. It is the concept that creates lines of conflict in the globalization debate. It has potential to provide companies that competitive edge needed to remain relevant in their market. I believe our society agrees that outsourcing has both advantages and disadvantages. Whether one side regards the concept as being beneficial or disruptive, we know one thing. Domestic corporations can no longer afford to recognize that the benefits of outsourcing outweigh the risks, and the best option for America is to take advantage of the situation. Without a doubt, certain things such as routine IT work, maintenance and the fabrication of products are accomplished overseas, with demand for more developing countries to enter the outsourcing market. Why is that? Because Americans love the low prices resulting from outsourcing. Outsourcing creates opportunity for domestic business to hire off non-core business competences, allowing for concentration in strategic business processes that spurn innovation, which is directly related to consumer demand. Developing countries, such as India have you, well-educated individuals ready to show off their brainpower at a cost that’s pennieson the dollar to that of their American counterparts. This will serve to boost American technology as older generation Americans prepare to retire and leave the business pool. That is especially possible with smarter U.S. policy. Companies from GE Medical Systems to Cummins to Microsoft to enterprise-software firm PeopleSoft that are hiring in India say they aren't laying off any U.S. engineers. Instead, by augmenting their U.S. R&D teams with the 260,000 engineers pumped out by Indian schools each year, they can afford to throw many more brains at a task and speed up product launches, develop more prototypes, and upgrade quality (Is there a way out from Job Outsourcing, 2013). Says expert Rajat Gupta, "Off shoring work will spur innovation, job creation, and dramatic increases in productivity that will be passed on to the consumer." The three outsourcing alternatives discussed above seem to show that as least some Americans are ready to seek out innovative ideas to mitigate the controversy that surrounds outsourcing, and the potential disadvantages that might occur to the U.S. job market. It is these ideas that will allow for America to stem the tide of discontent in a domestic workforce that are having difficulty not only accepting a changing climate in business, but also the speed in which it is occurring.

Appendix 1. SWOT Analysis of Outsourcing | Strengths | Weaknesses | Focus on core business processes | | | Employees may feel threatened their jobs will be in jeopardy | Cheaper labor | | | Loss of control | Cut in operation costs | | | Security issues | Lower training costs | | | Standard of quality control may need to be reformatted | Access to better technology | | | | Risks or concerns involving ethical performance | Contract secures liability and security of work | | | | | | | Opportunities | Threats | Access to specialized skills | | | | | Staff turnovers | Improved quality of service | | | | | Company knowledge and protection | Increase expertise availability | | | | Social responsibility | Ample opportunities for smaller business | | | Loss of talent |

2.Advantages of Outsourcing | HSBC | | BTA Bank | | Halyk Bank | Focus on core activities | Partially achieved | Mostly achieved | Moderately achieved | Cost savings | | Partially achieved | Mostly achieved | Fully achieved | Access to experience | Moderately achieved | Partially achieved | Not achieved | Performance improvement | Moderately achieved | Mostly achieved | Partially achieved | Flexibility | | Mostly achieved | Mostly achieved | Partially achieved |

This table shows the advantages Kazakhstani banks gained after making the decision to outsource non-core activities to third-party vendors (Tayauova, 2012).

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