Term Paper on "Outsourcing Trends About"

Term Paper 7 pages (1913 words) Sources: 5 Style: MLA

[EXCERPT] . . . .

Outsourcing Trends

About outsourcing

The concept and practice of outsourcing are based on economist David Ricardo's theory of comparative advantages. This theory states that if a country or company, registers lower costs of producing a certain good you need, it is more effective for you to use that other company to produce those goods, instead of producing them yourself.

A direct result of such thinking led to the intense implementation of outsourcing practices. The process of outsourcing has been defined in several ways, a relevant definition being given by Tech Encyclopedia, which states that outsourcing implies "contracting with organizations outside your country for work that could otherwise be done by employees within your company."

The procedure of outsourcing can be extremely useful to the cost saving process, but if incorrectly implemented, it can do more damage than good. As such, a company that desires to outsource, has to follow the next five steps: "bid process, due diligence, contract negotiation, transition and ongoing operation."

The outsourcing process has raised numerous debates amongst supporters and disclaimers, each placing more emphasis on the advantages or disadvantages of outsourcing. Among the advantages that make supporters promote outsourcing are: reduction of costs, "improvement of company's focus, access to world class capacity, non-critical business functions, shared risks, improvement of production and abstraction of delays, minimalist human risk and additional profits."

2. Outsourcing trends

Regardless of the opinions forwarded by economists, the outsourcing process continues to expand and develop in accordance with international business features. For instance, fierce competition led to the growth of the outsourcing marketplace and its maturation. A wide array of outsourcing possibilities has generated a more severe selection process, and higher expectations from the clients. For example, if in the recent past outsourcers were interested in reducing costs, today, they desire to increase productivity and also the quality of the purchased services. Other outsourcing trends include consolidation, globalization, person-to-person offshoring, green sourcing, virtual worlds and Outsourcing 2.0.

2.1 Increase of outsourcing procedures

The general and most obvious trend in outsourcing is that of its increase, proof of this trend standing the large number of companies that are currently engaging in outsourcing procedures, and also the great number of companies that desire to engage in such actions. "Recent market surveys indicate that almost 80% of companies expect to increase their investment in outsourcing."

2.2 Maturation of outsourcing marketplace

Furthermore, according to the same source, the process of outsourcing is undergoing a firm maturation upon the international marketplace. Currently, both parties, client and vendor, are extremely focused on developing a long-term relationship, to their common benefit. Prabhakara goes as far as to state that clients and vendors are developing a "lasting symbiotic relationship."

The maturation of the outsourcing marketplace within the international business environment is best revealed by the nature of the relationships that occur between client and vendor. As such, these relationships are no longer solely based on cost reduction, once the number one argument in favor of outsourcing. Today, when engaging in an outsourcing process, the vendor will closely analyze the available clients based on numerous criteria relevant to his/her business. The clients go through a tough selection process that, aside from costs, focuses on the capabilities and training of the workers, the client's experience with similar operations or additional services that the client can offer, such as transportation, storage or assistance.

In other words, a current outsourcing trend is that of selecting the foreign partners based on several criteria, not just low costs. Here are some of the selection criteria: "commitment to outsourcing; flexible and proven methodology; pathway and access to talent; industry knowledge and superiority (or intellectual capital); international scope and presence, organizational and financial staying power; referral base; strategic alliances; strong commitment and budget for research and development; quality of the contract; willingness to negotiate; insurance and litigation history."

From these new features of outsourcing, result seven major trends:

increased focus on the quality of the services provided in the detriment of cost savings;

increased competition on the outsourcing marketplace;

an average three-year duration of the outsourcing contract;

emphasis on confidentiality when selecting a vendor;

multiple outsourcing contracts;

necessity for a forth party, an intermediary between the outsourcer and his vendors;

continuous increase in it outsourcing.

2.3 Increase cost reduction, productivity and quality

Even if achieving cost reduction is no longer the sole advantage for outsourcing, most companies still consider it to be a highly motivating factor. In addition, when searching for an efficient outsourcing contract, the international client is looking to maximize the productivity and the quality of the services purchased abroad.

Here is how 240 companies in a Cutter Consortium survey viewed the future of outsourcing businesses regarding the three major factors:

Cost reduction: not successful - 3.8%; minimally successful (less than 10%): 16.2%; moderately successful (10 up to 30%) - 51.7%; significantly successful (31 up to 50%) - 20%; very significantly successful (more that 51%) - 5.8%. 2.5% answered they didn't know.

Increased productivity: not successful - 7.9%; minimally successful (less than 10%): 24.2%; moderately successful (10 up to 30%) - 44.6%; significantly successful (31 up to 50%) - 15%; very significantly successful (more that 51%) - 5.8%. 2.5% answered they didn't know.

Increased quality: not successful - 12.9%; minimally successful (less than 10%): 32.9%; moderately successful (10 up to 30%) - 30.8%; significantly successful (31 up to 50%) - 15%; very significantly successful (more that 51%) - 5.8%. 2.5% answered they didn't know.

In a nutshell, most outsourcing companies expect the next decade of outsourcing to bring them moderate cost reductions, moderate increase in productivity and minimal increase in the quality of the services.

2.4 Consolidation, globalization, person-to-person offshoring, green sourcing and virtual worlds

The consolidation of businesses, brought about by outsourcing, is generated by the fierce competition on the marketplace, and it is prone to materialize in numerous mergers between companies activating in similar areas.

The globalization trend of outsourcing means that in the near future, companies will outsource contracts to most countries of the globe, unlike nowadays when most contract are being sent to India. "According to a study by analyst IDC, cities in China will overtake their Indian counterparts as top destinations for offshore global delivery by 2011."

Person-to-person outsourcing implies that the contracts signed will no longer solely refer to large scale outsourcing, but they will also include smaller size companies and operations that require less personnel.

Green sourcing means that in the near future, outsourcers will take into consideration the environmental factor within a country, before deciding whether or not to sign contracts with companies in that country.

And finally, the virtual worlds trend implies that in couple of years time, companies will be able to organize their employees, based both nationwide as well as around the globe, into virtual groups that will be able to meet in virtual offices.

2.5 Outsourcing 2.0

As compared to Outsourcing 1.0, where the emphasis was placed on cost savings, "Outsourcing 2.0 is about core competencies." It aims to increase efficiency, level of customer satisfaction, level of employees' training, experience and capabilities. Furthermore, Outsourcing 2.0 shifts contracts from large companies to small and medium-size organizations. If Outsourcing 1.0 implied that only large companies were encouraged to outsource, Outsourcing 2.0 points out how "more middle-market and small companies are in fact turning to outsourcing."

In addition, Outsourcing 2.0 reveals the top three activities that are no longer performed within the original company, but are being outsourced to second parties: accounting, information technology consulting and marketing and sales.

3. Outsourcing issues and solutions

There are numerous shortcomings to the outsourcing process and specialized economists criticize the next trends. For instance, the increase of outsourcing procedures could lead to massive job losses in the outsourcer's country. For example, if United States companies continue to outsource it jobs to India and China, American developers will be faced with imminent unemployment. Two solutions could be proposed to solve the problem of unemployment: 1) a moderate and controlled increase in the number of outsourcing contracts or 2) the possibility that companies in the outsourcer country do outsource work for a third nation.

However, both alternatives present the parties with potential loss. In the first case, the company would have to limit its outsourcing contracts and work with more expensive internal workforce, a situation that generates increase of costs. The second situation presents potential loss for the workers, as they would probably have to accept lower wages from the foreign outsourcer.

The market maturation trend poses the issue of monopoly. Given the fierce competition on the international outsourcing marketplace, smaller companies would be eliminated by larger corporations or, in order to survive, would be forced to merge. Currently, there is no viable solution to the growing competition on the outsourcing marketplace.

Furthermore, also a consequence of the market maturation is the intensified selection process. As clients now look for more than reduced costs, they select vendors based on numerous criteria. This makes the selection process a time consuming and costly activity.

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