Strategic outsourcing the key affair in all sectors

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Author : Chunis
Published on : June 23, 2013


  
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A legal professional with research interests.

Strategic outsourcing – the key affair in all sectors

Outsourcing with time has evolved into an elaborate industry of its own. The increasing growth of this industry due to cost effectiveness in recession hit world is undeniable.

The irreversible trend of outsourcing has been gaining momentum and has ever since been extending its roots from operational outsourcing such as - that of business operations a common trend in late 90s- to functional outsourcing such as - marketing, HR, procurement. Main consideration for outsourcing by organizations has always been the geographical location depending upon the type of competencies that are looked to be outsourced and the reasons for considering outsourcing.

Although the starting trend of this industry was primarily aiming for limited functionalities covering back end services/works such as technology, customer care, however, with changing trend and globalization, this industry has expanded beyond actual visionary expectations covering even sectors like law, finance, knowledge base – just to name a few.

Interestingly, the key factors that are contributing to such a large growth of this industry, apart from the basic reasons of economic feasibility and cost saving, are the appropriate schemes of restructuring, exploration of new avenues for strategic development of Corporate Houses and organizations.

Many more new avenues for outsourcing are in the opening and being explored as a part of planning and strategy by various organizations.

Trade, Developing Countries and Contribution:
The consequences of outsourcing have constantly been analyzed in the developed and developing nations. Time and again, it’s been mooted whether outsourcing is hampering or enhancing economic growth of nations especially on points of value addition to other sectors, employment hazards, and inverse affect on the actual work, employment statics of outsourcing countries, foreign trade development, trading standards, the extent of real benefits driven by the country outsourcing services and goods, economic and financial growth of the country outsourced with these services or goods and monetary inflow/outflow in these country.

It is observed that “Freer trade and cheaper communications have spurred globalization in recent decades, exposing once-insulated parts of the economy to foreign competition. We need to find the best opportunities in the global economy. In the new international division of labor, we can be the managers, consultants, and even facilitators of outsourcing.” (i).

There was a belief in the society - until Dependency theory surfaced in the late 1960s and early 1970s opposing - that the progress of developed nations and nations still in the process of developing would converge which now was not being permitted because of roadblocks in the course of capital and technology. These theorists pointed out that industrialized countries extend at the expense of developing countries that were prey to the international factors and institutions like multinational corporations, international development institutions. (Cardoso and Faletto, 1979;Frank, 1967). (ii).

Much apparent is the fact that with globalization, the direct outcome is seen to be outsourcing of services and goods. This has created and lead to symbiosis of different sectors and countries, open trade and inverse barter of best resources amongst nations via innumerable, accessible mediums, thus, causing various industries and organizations to become more cost effectively functional.

It has been observed that “in much of the world, the dependency and related Import Substitution Industrialization (ISI) model have been repudiated as research increasingly suggests that foreign direct investment (FDI) may be as or more important to a country's growth than domestic investment, since investment by MNCs brings improved technology and does contribute, eventually, to convergence (Taylor, 1999).” (ii)

Economics of Outsourcing in India
Despite all criticism of foreign competition and multiple other explanations against outsourcing at domestic and international level, India is harnessing and leveraging this industry to all its maximum potential.

“The National Association of Software and Services Companies (Nasscom) now forecasts that India's exports of software and services will be between $84 billion to $87 billion in the Indian fiscal year from April 2013 to March 2014. Exports are expected to reach $75.8 billion in the current fiscal year, a year-on-year growth rate of 10.2 per cent, Nasscom said. Analysts have forecast an improvement in India's outsourcing industry, which was hit for many quarters by shrinking budgets and a slowdown in decision making by customers in the U.S. and Europe. The offshore market for outsourced services is expected to grow by 12% to 15% this year, as more customers are expected to increase IT spending, according to research firm Offshore Insights”. (iii)

Because of volatility in markets globally and world economy being shaken, various organizations and Business/Corporate Houses have keenly been considering outsourcing for effective restructuring and restrategizing and having economic and financial benefits.

Strategic outsourcing:
At earlier times, this industry was limited to outsourcing of non-core activities by an organization. All major basic activities i.e. “core” activities of the organizations were mainly performed and carried out in- house for reasons as to apprehension of quality, actual cost dynamics etc.

As observed, “At the firm level, there are two salient changes in strategy – first, the division of the firm's value chain into ever smaller pieces, and second, the willingness to outsource and offshore even activities close to the ‘core’ competencies of the firm”. (iv)

However, eventually, this trend is seen fading and enormous change has taken place in the aptitude of the organizations to strategize, develop and expand. There is keen interest in various industries, other sectors and organizations to explore and utilize outsourcing model to its crest.

Organizations are indulging into infusion of outsourcing techniques at every stage of the Business Model. Performance of activities whether core or non-core or more closer to core in any organization these days are undertaken/allotted after exploring fully the possibility of outsourcing, absolute planning and considering the cost dynamics.

As rightly pointed out, “For each sub-activity or operation the question then asked is where to perform it and whether to perform it within the firm, or outsource it.” (iv).

Organizations are aggressively considering strategies for entering new markets, reducing the costs of their activities and sub-activities, higher returns whether in terms of output (services/goods) or for financial gains.

Restructuring business models and outsourcing structures:
Developing a workable revenue and profit model with high economic returns is a major lookout for organizations in different markets inorder to restructure their business models and outsourcing structures.

The underlying intention and motivation behind any organization for considering Outsourcing or Offshoring processes, whether for activities related to services and/or goods, product, is same.

As correctly determined, “Outsourcing and offshoring simultaneously help the firm in three strategic needs: (1) ‘efficiency’ or cost reduction; (2) ‘exploration’ or access to knowledge and talented people; and (3) ‘exploitation’ or development of foreign markets (Dunning, 1993).” (iv)

The Outsourcing and offshoring, are considered as strategic moves. That being stated, what is important for any organization is to understand which option is reasonable for their organization -depending on the type of services, goods or product, the industry their organization caters to, strategic and business development plan.

New Developments/Restrategy techniques - Outsourcing and Offshoring Combo:

There is a great rise in the usage of “mix match” outsourcing techniques, prominently in IT industry, due to factors such as (a) increased requirement and preference in developed markets for location nearer to the operations for better monitoring of outputs and results, (b) locations that are politically and legally friendly and with more beneficial FDI Regulations and so on.

Blend of outsourcing and offshoring business models is seen to be recently aggressively tried and tested. This blend is a widely used as a strategic move that is effectively bringing down and curtailing large expenditure which usually comes with use of pure offshore or outsourcing models, even in sectors such as legal.

“LPO is no longer an “offshoring concept”. LPOs, such as NewGalexy, now operate fully serviced onshore delivery centres in the UK, offering clients the flexibility and comfort of choosing their own preferred form of delivery – whether onshore and/or offshore. This has now given LPOs further “reach” to service a larger market, and the ability to deliver niche services for focused sectors such as banking, financial services and insurance; engineering and construction; energy, oil and gas; and public authorities.” Mr. Sarvarth Misra, Director of NewGalexy, in his Article “What’s your LPO strategy for 2013? ” (v)

The constant innovative techniques and use of new delivery models in outsourcing industry for services and goods, products in different organizations and numerous industries demonstrates the development of outsourcing industry and has widened horizons for this industry in coming times.

Considerations:
Areas of prime consideration are:
· “Pre-outsourcing decision process and post-outsourcing management” (vi) inorder to manage any kind of outsourcing for a corporation are particularly important and helpful in fulfilling the aims of any organization. Constant reflection and reinvention in these areas is important for organization’s strategic development and growth in terms of deriving the most benefits from the outsourcing world.

Before taking any outsourcing decision, it is vital for any organization to evaluate the Expenditure & Revenue models, location, Labour consideration (domestic as well as international), preference of suppliers, markets, activities to be outsourced and other requirements. These “Pre-outsourcing decision” may require revamping as a BIG strategy step before and during outsourcing process in an organization.

Post outsourcing operations and management by the organization are to be actively monitored to gauge the realistic achievements of an organization through outsourcing. In case, there are any downturns, the effectiveness of the outsourcing process needs to be checked.

· Quality and delivery models in Process Outsourcing Company: The organizations as “pre- outsourcing” measures may consider confirming and verifying the quality and delivery methods of the process outsourcing companies that are shortlisted. As an alternative mean, the request for proposal can specify the conditions, requirements for quality assurance, data protections systems and processes and the latest delivery models as pre qualification criterion of Process Outsourcing Company for bidding, pitching for work related to services, goods, products from any organization.

· Outsourcing of sensitive information still a challenge: The extents of activities that can be outsourced have limitations. Still very sensitive information based activities in any organization are preferred to be done “in-house” and rightly so. The security and disclosure levels of the unit/organization considered for outsourcing work to are checked and then also, there are major known lapses faced by organizations.

· Intellectual Property Right issues: Intellectual property rights and related issues such as licenses, infringement have been a global concern for many product based company with back end service facilities or other outsourcing/offshoring units.

· Laws and economic policies: Different markets have different key driving factors. The viability and feasibility of these markets, laws and regulations as to trade, FDI, Labour etc, not forgetting the political scenario needs to be understood with futuristic approach before deciding on outsourcing.

· Employment and job stability from the employee’s perspective is still a concern in question and so is the dependency of developing countries on the money inflow and competition still questionable.

· Another area requiring constant attention is “Global corporate responsibility” (ii) and responsibility of the outsourcing organizations and units etc as global citizens.

· Effectiveness of the models: No matter one is running an outsourcing company or an organization considering outsourcing as an option- based on what so ever model ,or, process of Outsourcing, Offshoring or Outsourcing-Off shoring blend - it is essential to keep basic five principles of Management in mind: Money, Material, Manpower, Machinery, and above all Management.

It’s undeniable that outsourcing in whatever possible form has become an integral part of any effective business model and that of restructuring strategy in many organizations for not only the financial benefits but also for these Companies, organizations, Corporate Houses to serve the best in an immensely increasing competition worldwide.

As it is observed, I agree, “what is needed is a reconsideration of the nature of the firm that captures the more dynamic configurationally aspects of the firm.” (iv).

Needless to say, with obviously changing trends, it is unlikely that any sector and industry can be left untouched from outsourcing mania. It may well be said that constant consideration is required to be given to new, cost effective, revenue generative methods alongwith a well planned strategy for organizations as per business model and value chain; for countries as per domestic demand to cash on the best available by virtue of outsourcing in this world.

Bibliography:
(i) AUGUST 2, 2012 4:00 A.M. The Economics of Outsourcing , We need to understand and adapt to such developments. By W. Michael Cox & Richard Alm via http://www.nationalreview.com.
(ii) Offshore Outsourcing: Implications for International Business and Strategic Management Theory and Practice, Jonathan P. Doh, Journal of Management Studies, Volume 42, Issue 3, pages 695–704, May 2005, Article first published online: 14 APR 2005.

(iii) Indian trade group forecasts outsourcing services recovery -
India's outsourcing services business likely grow by 12% to 14% to $84 billion to $87 billion next year, By John Ribeiro February 12, 2013 via

(iv) Reconceptualizing the Firm in a World of Outsourcing and Offshoring: The Organizational and Geographical Relocation of High-Value Company Functions, Farok J. Contractor, Vikas Kumar, Sumit K. Kundu, Torben Pedersen, Journal of Management Studies, Special Issue: Offshoring and Outsourcing, Volume 47, Issue 8, pages 1417–1433, December 2010 (Article first published online: 28 APR 2010).

(v) What’s your LPO strategy for 2013 ?, Misra Sarvarth - 21 January 13, Journal of the Law Society of Scotland via http://www.journalonline.co.uk
(vi) Ying Fan, (2000) "Strategic outsourcing: evidence from British companies", Marketing Intelligence & Planning, Vol. 18 Iss: 4, pp.213 – 219.
(vii) Special report: Outsourcing and offshoring - Here, there and everywhere -Jan 17th 2013, 16:25 by Economist.com.
(viii) A joint location and outsourcing sustainability analysis for a strategic offshoring decision Yijie Doua & Joseph Sarkisb International Journal of Production Research Volume 48, Issue 2, 201, pages 567-592.
(ix) Outsourcing or restructuring: The dynamic choice ; International Journal of Production Economics Volume 123, Issue 1, January 2010, Pages 1–7.
(x) Cardoso, F. H. and Faletto, E. (1979). Dependence and Development in Latin America. Berkeley, CA: University of California Press.
(xi) Taylor, A. M. (1999). ‘Sources of convergence in the late nineteenth century’. European Economic Review, 43, 1621–45.
(xii) Dunning, J. H. (1993). Multinational Enterprises and the Global Economy. Reading, MA: Addison Wesley.
(xiii) ‘Offshore or onshore?’ Misra Sarvarth - Legal Process Outsourcing Handbook - 2012|2013 The inside perspective for buyers of legal services

The  author can be reached at: shalinichuni@legalservicesindia.com