outsourcing: a common practice in today's business

Running Head: OUTSOURCING: A COMMON PRACTICE IN TODAY’S BUSINESS 1

Outsourcing: A Common Practice in Today’s Business

By Edgar Ojeda

Central Washington University

For Professor Terrence Linkletter

IT486: Critical Issues in the Information Technology

March 8, 2013

OUTSOURCING: A COMMON PRACTICE IN TODAY’S BUSINESS 2

Contents

Abstract ......................................................................................................................................................... 3

Introduction ................................................................................................................................................... 4

Local Outsourcing ......................................................................................................................................... 5

Overseas Outsourcing ................................................................................................................................... 6

Advantages, Disadvantages and Risks .......................................................................................................... 9

Advantages ................................................................................................................................................ 9

Disadvantages ........................................................................................................................................... 9

Risks ........................................................................................................................................................ 10

Conclusion .................................................................................................................................................. 10

Bibliography ................................................................................................................................................ 11


Abstract

The current trend in business has shifted dramatically in the last decade. Currently, businesses

found different ways to save money in their daily operations. Therefore, they keep looking for

different approaches on reducing operating costs, and at the same time, increase productivity and

maintain the quality of the products and/or services offered. This situation has led to different

opinions about outsourcing and the benefits or consequences that it brings to the American

business model and its economy. With the local outsourcing being on the rise in the last years,

employees are starting to worry about their current position, and the new generations are

concerned about the job opportunities after college.


Outsourcing: A common Practice in Today’s Business

Introduction

Outsourcing is defined as a practice used by different companies to reduce costs by

transferring portions of work to outside suppliers rather than completing it internally. In the

globalized world that we live in today, it is a common practice for businesses to require a third

party to perform work internally so that it can save money in the process. This has become a

common practice in the 21st century, mostly.

The term outsourcing can also be divided in different approaches or ways it can be

acquired. There is the local outsourcing that refers to all those individuals or firms that are

located within the same geographic area as the business that they are serving. On the other hand

there is the offshore outsourcing or overseas outsourcing. This type of outsourcing refers to the

individual, but mostly companies, that provide a service but are located in a different country, or

totally different geographical area.

The practice of overseas outsourcing has evolved in the last decade. Nowadays it is

common to see many Indian companies provide services to American businesses. This has

created some kind of tension and uncertainty about the future of the American jobs, or at least

that was the situation until recent years. However, in the last years, local outsourcing has risen.

There are many factors that have allowed this to happen, but mostly it is related to the efficiency

and mostly the communication issues.


Local Outsourcing

The main idea behind outsourcing is to allow businesses to become more profitable and

allow managers to focus their attention in more complex tasks that can allow the growth of the

company. This is actually the trend on businesses, especially for those that have plans for

expansion, to acquire some sort of contractor or outsource individual or company. By

outsourcing the companies cut costs and streamline their operations, especially after the recent

recession. Because nobody knows when is the economy going to start improving, businesses

have holed themselves up because they are trying to find ways to stop the financial bleeding

(Admin, 2009). And when managers realize that outsourcing saves not only money, but also

time, they just feel thrilled and opt for this practice.

In the IT field, it is common to hear the word “outsourcing,” and because this terms has

embedded the idea of manufacturing and/or customer service representatives; it is more accurate

to use the term “Managed Services.” It is really interesting how people tend to accept this term

with more ease than outsourcing; even though they basically refer to the same. However,

managed services are only applicable to the IT, and these services refer to an outside firm taking

care of the network and computers of a company in order to anticipate, detect and remedy

problems that can arise before they can actually affect the operation of the business.

The managed services option is growing quickly in the US. This is because business

owners realize that their information is very important, and perhaps they don’t have the

resources, economic and technologically wise, or the knowledge to protect that very important

asset of the company. Therefore, they turn to the “experts.” These experts are firms that have

been working in the field and will help the company protect their information, and they can also

provide network management services if desired. By having this kind of outsourcing, the


customer company can avoid the high costs of training and administering the network. It is

important to mention that the relationship between the managed services provider and the

customer has to be of mutual trust, especially because the customer will be handing over access

to the transactions of the company and basically allowing access to the core of the business.

Therefore, the trust relationship is the key motivator and also the hardest milestone in the

acquisition of managed services.

It is important to note that these types of services are preferable to have them locally, so

that the response time in case of emergency are reduced. This means that being IT the core

operation of mostly any business nowadays, it is important to have a fast response time from the

service provider. This will ensure that, if problems arise, the company will not have to stop

operations for a long period of time, if at all.

Overseas Outsourcing

Offshore outsourcing is the practice of hiring organizations or employees to perform

company tasks overseas. The most common areas for overseas outsourcing are related to

customer service and technical support. However, data entry is becoming popular trend for

companies that require entering big amounts of information. One of the reasons for offshore

outsourcing was thanks to the development of internet, and the improvement of its speed

connections. With the use of internet, companies can have an immediate response from the

company overseas, so that some changes to the process can be done instantly.

There are four main categories that can help understand better how offshore outsourcing

works. The first one is known as ITO, it stands for Information Technology Outsourcing. As its

name suggests, it involves everything regarding information technology that is outsourced


overseas. The next category is known as BPO, which stands for Business Process Outsourcing.

This category is related to the call center management and the processing of claims. The third

category is Software R&D, it stands for Software Research and Development. This is self-

explanatory; it refers to everything related to software development. The last category is called

KPO, which stands for Knowledge Process Outsourcing. In this category the processes that are

taken into consideration are those that require a higher level of skill, experience, and knowledge.

Offshore outsourcing has been the target of criticism. This is due to the fact that many

people believe that offshore outsourcing takes job opportunities away from the country of origin,

while some other criticize the quality of the work performed, which they feel is not at the same

high standards as it could be if the service was produced domestically. However, some

specialists have demonstrated that overseas outsourcing creates an opportunity for growth.

Although it might be true that some jobs are lost by offshoring, it also leaves a gap where

entrepreneurs, developers, and the general population can have an opportunity to find some new

areas of opportunity that were not discovered before. This means that offshoring leaves space for

innovation, creation, and development.

It is also important to mention some of the reasons that have led offshore outsourcing

become so popular:

1. Lower Wages. This is probably the strongest part of overseas outsourcing, since it has

become the most competitive factor when deciding on the location to get the services.

In comparison with the US, an individual from a third-world-country can do the same

job but for less money. This is the reason that motivates companies to use overseas

outsourcing. Especially because sometimes with the salary that a company would pay


an employee in the US, the company can pay more than three employees in another

country, which results in greater results and more people focusing on the job.

2. Lower Regulatory Costs. This is another factor that motivates companies to outsource

overseas. This is due to the fact that the costs of employing a person in the US means

that the costs would increase; especially because of the benefits that the company has

to offer, for example, Social Security, Medicare, FICA, OSHA regulations,

unemployment insurance and all the costs that are required by law.

3. Tax Benefits. Overseas countries are aware of the desire of companies to reduce to a

minimum the income taxes; therefore, these countries create tax incentives so that

they can motivate those companies to invest there or outsource there.

4. Ability to Downsize at Will. This one refers to the protection that companies want to

have against a lawsuit in case they decide to reduce costs by laying off people. This

means that companies can get rid of a big amount of employees without fearing for a

lawsuit. This can be compared to the US, where downsizing a company with US

employees would require lots of money, resources, and there is also the risk of a

lawsuit.

5. Improved Performance. It has been proven that companies that outsource overseas

benefit from improvements in their IT performance. However, there is discrepancy in

this point, especially because many people feel that sith lower costs comes lower

quality, at least compared to that of the US.

6. Freeing up Resources for Core Activities. In this point, companies usually use the

money “saved” for improving processes of the company, or for the purposes of

expansion.


7. Risk Management. This one refers to the company turning over certain risks, such as

demand availability and capital investments. This means that the company can save

money by minimizing risks if a product is not available in time, form, and quality

expected.

8. Commodification. Some companies, especially small firms, sometimes don’t have the

resources to deal with the expense of managing a system; or they might not have the

resources available to satisfy the need for an in-house system. Therefore, they look

for an offshore outsorcing firm, which can have the experience and it would cost the

company less.

Advantages, Disadvantages and Risks

Advantages

Outsourcing (locally or offshore) allows companies to focus on what is most important,

the main business of the company. When IT is outsourced, it actually relieves some concern in

the company about the management, since the outsourcing company will take care of all the

processes and everything related to the IT. Many organizations see outsourcing as a cost-

effective operation, which can help expansion of the company.

Disadvantages

One of the most important aspects that is lost through outsourcing is the opportunity to

build a relationship vendor-customer. In other words, the company that is making use of

outsourcing, will probably lose contact with the customer, and it might not even know how to

understand better its customer. This creates a competitive disadvantage, since it is important to

have an understanding of the customer so that the company can develop products/ services based


on the needs of the customer. By not knowing the customer fully, or losing the contact, there is a

big opportunity of growth lost.

Risks

There are some risks associated with outsourcing. Some of the most important and that affect the

most to companies, are related to offshore outsourcing. These ones relate to the quality of the

work; it is the employee turnover, which results in a low quality of the work performed because

of the need to train constantly the new employees. Another risk of offshoring is related to the

technology, this one sometimes is obsolete and it can cost a lot to satisfy or be equal to the one in

the company.

Conclusion

Outsourcing is a good way to conduct business, in the IT area it helps reduce costs.

Businesses have been looking for ways to achieve goals that can help them be more productive

and increase profitability. This trend has been on the rise with the boom of internet in the last

decade.

As a good practice for selecting a good contractor, whether it is local or offshore, it is

important to denote the importance of the business and what impact the company wants to have

on its customers. Therefore, when selecting a contractor, the policies have to satisfy those of the

company and make sure that the outsourcer will respect the contract. It is better to have a local

contractor that would help the customers feel more comfortable in the country where the

business operates, rather than having to deal with the barriers of language.


Bibliography

Admin. (2009, February 28). Local outsourcing saves time, money. Retrieved February 26, 2013, from

The Bellingham Business Journal: http://bbjtoday.com/blog/local-outsourcing-saves-time-

money/1704

Barrett, J. (2012, November 6). Outsourcing vs. Offshoring. Retrieved February 28, 2013, from The

Washington Times Communities:

http://communities.washingtontimes.com/neighborhood/status-

update/2012/nov/6/outsourcing-vs-offshoring/

Blaine, K. (2012, June 25). Outsourcing and Offshoring: Is There Really a Difference? Retrieved March 1,

2013, from abcNews: http://abcnews.go.com/blogs/politics/2012/06/outsourcing-and-

offshoring-is-there-really-a-difference/

Diffen. (n.d.). Offshoring vs Outsourcing. Retrieved February 28, 2013, from Diffen:

http://www.diffen.com/difference/Offshoring_vs_Outsourcing

Hit Rate Solutions. (n.d.). Offshoring Vs. Outsourcing. Retrieved March 2, 2013, from HitRateSolutions:

http://www.hitratesolutions.com/faqs/offshoring-outsourcing/

Lesonsky, R. (2012, May 17). The Pros and Cons of IT Outsourcing: Globally, Nationally and Locally.

Retrieved February 27, 2013, from Readwrite: http://readwrite.com/2012/05/17/the-pros-and-

cons-of-it-outsourcing-globally-nationally-and-locally

Maltby, E. (2008, November 11). Overseas outsourcing heats up again. Retrieved March 4, 2013, from

CNN Money: http://money.cnn.com/2008/11/10/smallbusiness/outsourcing.smb/index.htm

Meehan, C. L. (n.d.). Advantages & Disadvantages to Outsourcing IT. Retrieved February 25, 2013, from

Chron: http://smallbusiness.chron.com/advantages-disadvantages-outsourcing-it-764.html

Mishra, P. (2009, February 20). Local outsourcing gains momentum in America. Retrieved February 26,

2013, from Nebraska Public Power District: http://sites.nppd.com/article.aspx?ID=408

Morgan, R. (2006, November 1). Local Outsourcing of Technology Services. Retrieved March 1, 2013,

from PCMAg.com: http://www.pcmag.com/article2/0,2817,2048823,00.asp

Reybern, S. (2009, December 22). 12 Reasons Companies Outsource Operations Overseas. Retrieved

February 26, 2013, from GE is good: http://www.billshrink.com/blog/6741/12-reasons-

companies-outsource-operations-overseas/

Roberts, P. C. (2010, April 10). The Offshore Outsourcing of American Jobs: A Greater Threat Than

Terrorism. Retrieved February 28, 2013, from Global Research:

http://www.globalresearch.ca/the-offshore-outsourcing-of-american-jobs-a-greater-threat-

than-terrorism/18725


Sivapriya, N. (2012, August 4). Local outsourcing on rise in US; Indian IT cos taking advantage of the

trend: Forrester report. Retrieved February 26, 2013, from The Economic Times:

http://articles.economictimes.indiatimes.com/2012-08-04/news/33035537_1_visa-rejection-

market-client

WiseGeek. (n.d.). What is Offshore Outsourcing? Retrieved February 28, 2013, from WiseGeek Clear

answers for common questions: http://www.wisegeek.com/what-is-offshore-outsourcing.htm

outsourcing: a common practice in today's business

Documents