Offshore Outsourcing: As a Contemporary and Future Challenge in Human Resource Management Essay

7410MGT CHANDAN BHATWADEKAR S2632604 Explanatory Essay on “Offshore outsourcing” as a Contemporary and Future Challenge in Human Resource Management Course: – 7410MGT Strategy and Human Resource Management Submitted By:-Chandan Bhatwadekar S2632604 Word Count:-3000 1 7410MGT CHANDAN BHATWADEKAR S2632604 the premises of this explanatory essay is an evaluation of “offshore outsourcing” as a contemporary challenge of Strategic human resource management. To start off with, first there will be review of literature for “offshore outsourcing” and definitions given by various academicians.

Followed to that, will be having a conceptual theoretical framework where impetus of “offshore outsourcing” will be traced and explained with the help of literature and relevant example. After that, a close look on some important industry data in terms of what is being outsourced with various research and survey paper which will be followed by risks and concern (business and ethical) of “offshore outsourcing” leading to conclusion and recommendation.

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The field of Strategic human resource management is being developed to endorse the fact that human resource needs to be managed strategically so that organization can enjoy sustainable competitive advantage over fierce competition which is occurred due to present uncertain economic climate and global market orientation (Appelbaum et al. 1999). According to Gaucher (1997), companies are experiencing a “paradigm shift” where their focus is shifted from size, specialization and job description to speed, integration, job flexibility and value.

This has triggered enormous new trends. One of the most prominent trends adopted by many companies is reposition themselves in market to gain a competitive advantage many companies are striving to increase efficiency and minimize cost (Leatt et al. 1997) and “offshore outsourcing” has emerged as strategic weapon for many companies to achieve this objective. However as side effect of the process loss of IT jobs and intellectual capital are main HR concerns.

To understand the nature of challenge posed by offshore outsourcing, it is essential to understand the definition and meaning of term. According to Gilley and Rasheed (2000), definition of outsourcing is much debated in research. One of the prime defines outsourcing as “reliance on external sources for manufacturing component s and other value adding activities” (Lei and Hitt, 1995). On the same line different researcher has given different definition on the base of various focus of outsourcing.

Perry (1997) has defined outsourcing with keeping a view of employment focus, where it is defined as, “another firm’s employee carrying out the tasks 2 7410MGT CHANDAN BHATWADEKAR S2632604 previously performed by one’s own employee. ” As per perspective of HRD by DeRose and McLaughin (1995), “outsourcing is turning over the heart and soul of the HRD function”. Sharpe (1997) defines outsourcing from competency perspective where outsourcing is defined as turning over to supplier those activities which are organization’s core competency.

In order to clarify the confusion of definition of outsourcing Gilley and Rasheed (2000), defines outsourcing as “vertical disintegration” (where procuring something that was initially sourced internally) or “make or buy” where could have been sourced internally by avoiding the decision to go outside. On the same line, literature also highlights and indicates different terminologies and concepts which is described by the help of following table Internal Vs external outsourcing Strategic make or outsource decision Contracting out Subcontracting /Purchasing/Privatization Strategic Partnering Scheuing 1989) Virolainen (1998) Gustafsson (1995) Seidenstat (1996) Walton (1999) Offshoring is a term which is developed in the emerging global market, where it symbolized for work that is not constrained by need for actual customer contact or local knowledge and thus has the potential to be undertaken remotely and globally and often in low- cost location. Higher end business processes are a complex and dynamic phenomenon.

In general, Offshoring means that business functions supporting home-based and global operations are sourced from a location outside the home country (Farrell et al. , 2005). “Offshore outsourcing” has emerged as core topic of debate in many advance market economies. One of the major issues in debate is exporting of skilled and white collar job to more cost effective region. However, before getting into debate, first it’s important to understand impetus of “offshore outsourcing”. “Offshore outsourcing” can free up asset and reduce costs in the immediate financial period.

On the same notion, “Offshore outsourcing” also emphasize on efficiency and effectiveness of organization process. According to Laugen et al. (2005), there is a correlation between offshore outsourcing practice and high performing companies. This can be further learnt with the help of 3 7410MGT CHANDAN BHATWADEKAR S2632604 Transaction cost economics (TCE) as per which the core advantage of Offshoring is the movement of direct labor cost from high wage labor market to low cost labor market. For e. g. s per research of Nancarrow (2004), In call centre industry in US it cost US$25 per hour to for customer service agent where in Australia it costs US$21 and in India its US$10 which directly saves 40 to 70 percent of savings in labor cost (Booz Allen and Hamilton 2003). According to survey conducted by Morris and Imrie as cited in Burnes and Anastasiadis (2003) apart from cost, flexibility is also can be one motivation factor for organization to pursue Offshoring. Companies also use offshore outsourcing to expand their product range in new market.

As per research based on country done by Gay and Essinger (2000), perceived benefits of offshore outsourcing achieved by companies in US and UK is outlined in following table: United Kingdom Service cost reduction Headcount reduction Flexibility Access to expertise Improved services United Status of America Accelerate re-engineering benefits Gain access to world class capabilities Obtain cash injection Free resources for other purpose Rid the organization of activities which are difficult to manage or out of control Extra management time Focus on core service Improved quality Reduced need for capital investment Improved cash flow Improve the corporate focus Make capital funds available Reduce operation cost Reduce risk Compensate for the lack of availability of internal resources Croom (2000) concluded that the main impetus behind companies adopting offshore outsourcing is direct cost reduction, conversion of fixed cost to variable cost, and new product development in new-fangled markets. 4 7410MGT CHANDAN BHATWADEKAR S2632604 In order to understand what is being outsourced/offshore in current global economy, it’s important to know the market size of offshore outsourcing market. in 2001 the global offshore market size was $26. 3 Billion (Mckinsey Global, 2004) Offshore market size 1

In literature, special emphasize has been given to IT outsourcing (Murray and Kotabe, 1999). The IT outsourcing market, which was worth $76 billion in 1995, reached an estimated market size of approximately $140 billion in 2002 (IDC, 1998). It would be also important to know as what is being outsourced in global market scenario. According to, Mckinsey Global (2004) following analysis has been derived after surveying what services are being outsourced 5 7410MGT CHANDAN BHATWADEKAR S2632604 As it can be seen from the figure that there is an incredible tendency to offshore back end it operation. It would be also important to found that the reason for such tendency has been identified as labor cost and access to high skill labor.

As per research done by WTO (1998), in USA the in production of particular “American” car 63% of production value is generated at offshore and only 37% of production value generated in US which can be well explained by following figure: All values are in % HR Offshoring has been another domain which has grown since early 1990s (Galanaki and Papalexandris, 2005). Once again USA where up to 90 percent of HR functions has been offshore along with Western Europe (Banham, 2003). According to Mahoney and Brewster, (2002), the core four generally outsourced Hr function found in literature could be categorize in four sector i. e. recruitment and selection; training and development; pay and benefits; and merger- outplacement-downsizing. 6 7410MGT CHANDAN BHATWADEKAR S2632604

From the previous discussion of impetus of offshore outsourcing and strong data based evidence , it can be learnt that offshore outsourcing can be a beneficial for organization in many ways, however, According to Lonsdale (1999) and McIvor (2000) suggested from their survey that only 5% of companies achieved substantial benefits from offshore outsourcing . On the same line Gay and Essinger (2000), reports that 28 percent organization could not achieved desired benefits from Offshoring process. As the market of offshore outsourcing is turning lucrative, it is an opportunity to reflect upon the challenges in order to address the challenges in a way that maximum efficiency and benefit can be achieved and offshore outsourcing can be sound and successful.

The first and foremost challenge of “offshore outsourcing” can be termed as “Security, privacy and legal issue”. According to Norrington and Gluyas (2005) in financial outsourcing sector approximately 130,000 Australian credit card holders and 40 million worldwide being informed that there is feeling of “compromise of security and privacy” of their information in Indian call centre. Shiu (2004) also noted a incident of undercover British news paper reporter buying confidential data from call centre in India as well Indian employees offering source code for software packages to rival software companies. Holland, Sheehan, Donohue and Pyman (2007 P. 48) noted that issue of security, privacy and legality is related to professional standards.

This relation can impact consumer, economic and professional implication of process. For e. g. in a recent case London hospital offshore process of medical dictation to India in order to achieve the low cast benefits. However because of low level language skill of transcribers in comparison to high nature of technical work, the transcription was faulty as misspellings and gaps made record dangerously inaccurate and made it worthless. The take away notion which can be derived from this discussion is organization needs to understand that responsibility of security and privacy of process cannot be outsourced with the process. Other burning challenge which hurdles the success of outsourcing venture can be “Culture”.

According to Simmonds and Gibson (2008), some firms are better fit for offshore outsourcing to other because of difference between the cultural sensitivity or cultural training program of organization and outsourcing firm. This difference can put an extra cost in a way that senior 7 7410MGT CHANDAN BHATWADEKAR S2632604 executive may have to visit overseas location for resolving issue as well extra training. It can also add to the training cost of the company as it can make training cycle long, increased need for additional middle and senior level positions and result in to mismatched expectation or goal conflict. In addition to same loss of organization performance can also become crucial challenge for HR professional.

Offshore outsourcing directly weakens and changes the current organization structure and hampers the fragile relationship between employee and employer as it results into Job loss or restructuring of organization (explained in detail in approaching section) which affect organization’s ability to perform effectively as HR professional have to spend lot of time in dealing with people issue (Pfannenstein and Tsai, 2004). Literature on offshore outsourcing also highlights certain operational challenges such as recent study by Farrell (2005) identifies that lack of experience and management attitude of organization towards Offshoring can become a serious operational issue. Geographical dispersion and local competition can add to these kinds of operational issues.

In India and China majority of labor work force suitable for Offshoring process is unwilling to relocate as majority of offshore facilities are based is such location which have direct access to international airport where the majority of workforce based away from these kind of location. This results in to low talent pool. As per research of Minoli (1995), further operational challenges could be loss of control, difficult to reverse decision, new cost required if change in existing outsourcing operation module. However, the burning challenge and ethical issue which is gaining utmost popularity and attention in debate for Offshoring is loss of Jobs and skills (Holland et. al. 2007).

The question which is being asked by all is “is Offshoring is win-win situation? ” in last five year the Offshoring market has been grown at the rate of 30 to 40 percent of year with an estimation of 3. 3 million new job creation by 2015. However, this will create a shift of 473,000 Jobs to offshore from home country to another country. As per the analysis given by different report cited by Holland et. al. (2007) alone in United States 86 % of organization are expecting to move their technology job elsewhere;25 percent of It related Jobs will be relocated from developed to developing 8 7410MGT CHANDAN BHATWADEKAR S2632604 world by 2010;500,000 jobs from US financial sector will be offshore by 2008. his data resemble the dilemma of many government and global organization where in “offshore outsourcing” is acting as double edge sword for them as in one way its achieving the objective of cost reduction and achieving free trade and on the other hand they are creating backlash of “Jobs going overseas” It would be surprise to know that even in Australia globally renowned organization are Offshoring the business processes to developing country like India and Philippines. The close look of this phenomenon can be described with fact and figure as per following table: Organization ANZ AXA CML/GE Capital Citigroup Hewlett Packard Hutchinson Work/Function IT/Software IT Credit Card Call Centre Call Centre Support Customer/Business Support Nab Optus Telstra/EDS Telstra/Infosys Telstra/IBM Qantas Accounts Processing Call Centre IT IT IT Data Processing/Flight Attendants Westpac/BT Back end Processing 400 India 20 150 580 180 450 500 India India India India India England Jobs 530 65 150 150 128 200 Location India India India-Melbourne Philippines India India

However, it would important to note that when E-LOAN offered the choice to their customer whether to process their loan in India or US, 86 percent customer chose India. According to survey by Kremmer (2006), following graph creates a bit of worry for Australian work force as it 9 7410MGT CHANDAN BHATWADEKAR S2632604 shows how many jobs from respective sector can be outsourced from Australia in next few years if the trends maintain as status quo. Organizations who are well experienced in outsourcing draw special attention to sensitivity of human resources issues (Willcocks et al. ,1995) . in outsourcing process employee often feel that “This is done to me, not by me” . part from that, the employee group whose jobs are not 10 7410MGT CHANDAN BHATWADEKAR S2632604 being outsourced will also affected by same as these group of employee need to work with outsourcer’s organization employee and have to undergo a change process of understanding new organization structure, practice and process of different operation and their individual performance will be affected. In addition to that, they also feel the fear of losing their job as they can be the next one on chopping block which will affect their employee loyalty and productivity. This can create a problem of talent management as worry of job security may also motivate existing talent to look for change in company.

This damage can be reduced by transferring the greatest number possible from existing organization to outsourcer’s organization; try to find an alternate career option inside the organization for displaced employee and if in worst case employee has to be retrenched from company because of outsourcing than organization should assist retrenched employee to find a job in external job market. In process of outsourcing management should focus and committed to manage the outsourcing impacts and should help employee to achieve positive outcome out of process in order to create win – win situation for employee and employer. The objective of this essay was to understand and review “Offshore Outsourcing” as challenge to HRM . as discussed in earlier in present economy organization are constantly seek for improvement and looking for avenues of cost reduction where “Offshore Outsourcing” stands as very lucrative offer.

As reviewed it enhance organizational effectiveness by reducing the labor cost, streamline their business process, help to explore new market and new talent as well as try to help company to convert their fix cost to variable cost. However, it does act like two age sword where many challenges arise which can be fatal in terms of successful of outsourcing such as Quality of service, legal and privacy issue, operational issue . this essay also reviewed the issue of Jobs and employment with the help of current research and indicated strategy to overcome it. As per the literature and data discussed in essay “Offshore Outsourcing” can be a positive experience. rganization should always step up for outsourcing however before undertaking a process organization should take one step back and rethink again about their decision with keeping in mind feasibility of outsourcing and indicated challenges to make the process positive. The decision should not be made blindly as in order to 11 7410MGT CHANDAN BHATWADEKAR S2632604 follow market trend. It has to be backed up by strong business case where the relationship between business costs where outsourcing is the only best possible option left for competition or survival reason. 12 7410MGT CHANDAN BHATWADEKAR S2632604 Reference List ? Appelbaum,S, Close,T and Klasa,S. (1999), “Downsizing:an examnination of some successes and more failure”. Management Decision,37/5 pp. 424-436 ? Banham, R. (2003), HR Outsourcing Leads the Way. Outsourcing Essentials. Vol. , 30, The Outsourcing Institute, available at: www. outsourcinginstitute. com/mmr/hr_ leads_market. asp (accessed 22 May 2009) ? Booz Allen Hamilton, (2003). “Business Processing Offshoring: making the right decision”, Business White Paper,USA ? Burnes,B. and Anastasiadis,A. (2003), “Outsourcing: a Public-Private sector comparison”, Supply Chain Management :An International Journal,Vol. 8 No4 pp. 355-366 ? 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