Offshore Outsourcing: Opportunities and Threats Essay

RUNNING HEAD: OFFSHORE OUTSOURCING: OPPORTUNITIES AND THREATS Offshore Outsourcing: Opportunities and Threats by Your Name February 11, 2010 Submitted to: Professor’s Name Name of University Name of Class Abstract Offshore outsourcing is one of the hot topics influencing the global environment, politically, economically, and socially. While offshore outsourcing is associated with several benefits, these ventures also pose many risks.

In this report, I am going to discuss various factors affecting the offshore outsourcing, including risks involved, the challenges faced by managers in these collaboration initiatives, and solutions that may aid in overcoming those challenges. Executive Summary The report outlines the prevailing trends of offshore outsourcing in a global perspective. The purpose of the report is to provide members of the Executive Board Committee, Educational Testing Service with the information essential for considering offshore outsourcing as a strategic decision. It also highlights the risks, challenges, and potential solutions of offshore outsourcing.

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Despite its widespread diffusion over the years, management of offshore outsourcing projects continues to challenge organizations. Competitive advantages, such as lower cost, technical knowledge, etc. , are key factors to search for external solutions. While offshore outsourcing is associated with several important benefits, it also entails number of risk factors. In order to manage outsourcing decision, it is important to have a clear understanding of various risks posed in collaboration initiatives, challenges faced by managers, and solutions that may allow overcoming some of these issues to succeed in these ventures.

Introduction Offshore outsourcing or outsourcing for short is the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) in a country other than the one where the product or service will be sold or consumed (Herath & Kishore, 2009). External vendors can range from local to global, utilizing technologies like phones, fax, internet etc. Some of the services that can be out sourced can include information technology, human resources, facilities, real estate, and accounting.

While outsourcing can improve company’s profits with the ability to utilize the know-how of other organizations, focus on distinctive core competencies which will help yield long term benefits, anticipate future costs through proper bidding process by the external vendors, and some times utilizing the less than par currency conversions; the most important factor driving the decision of companies to outsource some of their data processing operations is cost savings (Controller’s Report, 2003). Many firms have adopted offshore outsourcing as a means to manage their non-core operations.

Global outsourcing creates strategic advantages for firms in terms of access to highly skilled labor at low cost and potential market opportunities. Organizations outsource operations to achieve major benefits such as reduced costs, increased flexibility, higher quality of services, and access to new technology, as well as to enable staff to focus their efforts on higher value work, thus improving output. The economies of other developing countries will grow through outsourcing, also resulting in maintaining good relationships between the countries (Wikipedia).

This paper helps offshore outsourcing managers find the best way to manage outsourcing decisions by gaining a deeper understanding of the variety of risks and challenges they may face in offshore outsourcing contexts and solutions that have been successfully used in the past. It also highlights the considerations for a firm to choose whether outsourcing is worth pursuing as a strategic decision. Risks, Challenges, and Implications Undesirable outcomes, such as unexpected escalated costs, disputes and litigations, lock-ins, and loss of organizational competencies are resulted from a wide range of risks in outsourcing.

These risks results from factors, such as degree of expertise in outsourcing operations on both client and vendor side; transaction related risk factors; asset specificity issues, including investments on vendor side, as well as client side investments on contracts or contractual amendments; uncertainty; interdependence of systems and processes that are outsourced; measurement problems; loss of institutional knowledge; and loss of control over outsourced functions (Herath & Kishore, 2009). These particular offshoring risks, and their fallout, are clearly evident in the case of Dell.

Computer maker Dell called off its Indian technical support service operations, when some U. S. customers faced communication problems with the Indian technical service representatives. In outsourcing there may also be security problems because the customer information is given to outside access. As an example in April of 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names (Wikipedia).

Past experiences of many outsourcing companies revealed facts, such as the lack of cost savings, compatibility, resistance to change form vendors, and creative input from offshore workers, which negatively impacts present organizations (Rosenthal, 2007). Risks falls into four main categories and pose challenges related to: Strategic Decision Challenges, Vendor Selection Challenges, Vendor Management Challenges, and Technology Challenges (Herath & Kishore, 2009). Strategic Decision Challenges Through outsourcing, companies lose their innovative capability and intellectual capital gradually.

Innovative capability of the firm is largely dependent on cumulative knowledge built up over many years of experience. Over time, if a company outsources an activity completely, it loses the core group of people who were familiar with it. They retire, they leave for employment where their skills are more valued, or they simply become less technically competent and out of date. Reliance on outsourcing is problematic, not only because key areas of expertise may be gradually lost to the outsourcing organization but also because outside providers may not have the desired leading edge expertise over the long-term or may spread heir expertise among many clients so that it degrades from core competency to mere industry standard. Examples of some key risks include inadequate infrastructure, loss of internal know-how, loss of core group, operational risks due to vendor locations, communication problems, cultural differences, antiquated communication infrastructure, reverse engineering of critical business processes, and stealing and/or using proprietary information for secondary purposes (Herath & Kishore, 2009). Vendor Selection Challenges

Outsourcing projects often includes the cross-functional integration of business processes and the penetration into the core of organizational functions. The difficulty is to select those suppliers that offer the best deal, and here the focus tends to be on what cost efficiencies suppliers can deliver. The likely danger is that suppliers can out-bid themselves and subsequently find it impossible to continue with the deal as priced and structured. Challenges for managers are then to select an appropriate vendor who has expertise in assessing the scope of the project, as well as the vision to foresee the scenarios that may arise.

Outsourcing ventures are also exposed to operational risks caused by the breakdown in operations at the vendor locations, not caused by deliberate actions by the vendor or by unethical behavior of the vendor. Rather, they are a byproduct of the complexity of operations, the geographic separation between client and vendor, the cultural gap between the environments of the client and the vendor, and/or the limitations of the communications and transmission systems between the two (Herath & Kishore, 2009). Vendor Management Challenges

Managers are often faced with challenges about what is the appropriate length of the contract, and how to achieve a right balance between flexibility and cost implications. Some of the worst situations companies have experienced with vendors are: unexpectedly large demands on executive time; outsourcer doesn’t meet service level agreement; and unexpected add-on costs (Controller’s Report, 2003). While claiming full payment, the vendor may not be as efficient to accomplish the given work as desired. They can also misuse information that was originally provided in a legitimate ontract, such as reverse engineering of critical proprietary business processes, stealing them, and reselling them or using them as a direct competitor of the client. One of the major risks in outsourcing is contractual conflicts, which arise because of: differences in objectives of the client and vendor; incomplete and/or poorly designed contracts that do not cover all future contingencies; different interpretations of the contract; change in the business needs and requirements of the client; or technological changes (Herath & Kishore, 2009).

Technology and Technical Challenges The lack of technical synchronization between the client and the vendor can be particularly critical and have an adverse impact on the outsourcing relationship (Herath & Kishore, 2009). Considerations for Effective Management of Outsourcing Strategic Decision Considerations In considering what functions to outsource, all the core competent functions should be retained in the organization.

While many off shoring contracts relate to operating business processes, the analysis and modeling skills that are required for process redesign must reside in the organization’s internal strategic planning function. Division of processes into smaller chunks and into non overlapping activities, can reduce the knowledge transfer associated with outsourcing and can reduce the risks of knowledge leaks (Herath & Kishore, 2009). Defining the rules clearly from an operational standpoint is the start for effective communication and coordination.

Transparency is what will help fluidify the information, make it available to all involved in a process and allow for quick rectification when needed, thus creating a seamless and efficient process (Dibon, 2009). Vendor Selection Considerations In vendor selection, managers have to pay attention to select a vendor with appropriate expertise and experience, as well as matched cultural and other needs. When considering offshore outsourcing, additional factors, such as cultural similarity and communication expertise of the personnel on teams may need additional attention.

Vendor evaluation can be based on the following dimensions: Performance (image, market share, and reliability); technical expertise (tools maintenance, skilled staff, and innovation); commitment (project management, political stability, and proximity); Time – to volume (capacity, orders, and cycle–time); quality (audit scheme and management capability); and total cost (design/ development, tariffs, relationship management, inventory, and freight) (Herath & Kishore, 2009). Vendor Management Considerations

Companies outsourcing for the first time must sign short-term to medium-term contracts with vendors to avoid a contractual stranglehold and to acquire a better understanding of outsourcing and transaction costs. Mutual understanding and empathy for the attitudes, norms, and values of the parties is required. A key tool for averting unexpected charges from vendors is the service level agreement. Here, companies have to identify and prioritize their needs before signing the contract. Then, they have to create penalties with teeth, should the vendor underperform.

These penalties must be large enough so that the outsourcer fixes underlying service problems immediately (Controller’s Report, 2003). In addition, provisions are frequently included that require both parties to meet regularly to discuss the status of the relationship and address specific issues or concerns. This is one of the most common methods of measuring the quality and consistency of service being provided by the preferred provider. More and more outsourcing decisions should be preceded by site visits and live demonstrations of core processes (Richard, 2007).

Vendor management, project management, and process management are key aspects for successful outsourcing. Technology Considerations When a company outsources its service to a third party, it is important to ensure that the vendor possesses the right capabilities and its skills are not outdated. Executives from client organizations must independently assess evolving technology in order to maintain an awareness of potential improvements that may become feasible through technological advances. The client in addition must continuously be aware of the technological offerings and service levels offered by other vendors (Herath & Kishore, 2009).

Besides the above mentioned considerations, the following recommendations could help in deciding internally to choose whether outsourcing is what the company needs and if so how to implement that (Business Week, 2006). 1. Reason: Before outsourcing any job think whether it is necessary or not. Don’t offshore the job because your competitors are doing so. Try to see whether the same job can be done at home, by changing or improving the technology, training the employees who already know the business very well. 2.

Model: Instead of outsourcing jobs to out side contractors, compare the pros and cons of setting up a subsidiary in off-shore, where you can have your own employees and decide the best solution. For that reason, Boeing Co. opened its own center in Moscow, where it employs 1,100 skilled but relatively low-cost aerospace engineers on a range of projects, including the design of titanium parts for the new 787 Dream liner jet. On the other side of setting up a subsidiary, it might lead to more than expected over heads, not having a complete control on the unit etc.

Choose a model where we can utilize advantages from both the options. 3. People: Employees and managers are the persons who can bring the company on top level or remain at the same level. Before outsourcing, inform the employees about shifting and try to maintain full time communication with the managers and staff. 4. Time and Effort: Serious time management and effort must be invested while outsourcing. Regular meetings or communication must be held. Offshore workers should receive rigorous training in business practices.

As an example Penske invests heavily in teaching its contractors, English language skills not only to improve their call-center worker’s communication and fluency but also their managers can better understand them. 5. Treatment: Try to take the ideas of offshore partners, make them feel as a part of the team and treat them equally. If you treat them as outside contractors telling them exactly what to do, then the things might not work well. Performance monitoring and appreciation helps to motive the employees in-house as well as off house (Rosenthal, 2006). Summary

This paper made an attempt to identify the various risks posed in outsourcing initiatives. These risks pose several managerial challenges for outsourcing (client) organizations. Managers need to understand the present and future risks that may arise in outsourcing endeavors. While some risks are more generic and may be applicable to many, some risks may be situation specific and thus managers need to evaluate the scenarios that may evolve in their organizational contexts. Managers also need to understand various mechanisms, tools, and techniques that may allow them to effectively deal with these challenges.

Of all the above considerations and facts, a company’s management needs to weigh on various options before outsourcing. Proper planning, estimation, experience, and effort will help succeeding through outsourcing. Otherwise it might become a nightmare. References Controller’s Report (2003). InformationWeek, 2003(1), 7. Dibon, M. A. (2009). Global Cosmetic Industry. Exploring Outsourcing – Challenges and Opportunities, 177, S4-S9. Engardio, P (2006, January). Business Week. Best Practices in outsourcing that will pay off. Retrieved from http://www. businessweek. om/magazine/content/06_05/b3969401. htm Herath, T. ; Kishore, R. (2009). Information Systems Management. Offshore Outsourcing: Risks, Challenges, and Potential Solutions, 26(4), 312-326. Richard, G. (2007). Applied Clinical Trials. Preferred Providers Face Outsourcing Challenges, 16(11), 46-50. Rosenthal, B. E. (2007, June). New Study Details What Makes Outsourcing Relationships Work [Outsourcing Journal]. Retrieved from http://www. outsourcing-best-practices. com/study. html Wikipedia. (n. d. ) Outsourcing. Retrieved on February 11, from en. wikipedia. org/wiki/Outsourcing


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