In the United States alone, there were around 1,457,000 outsourced employment (Bailey, Masson, & Raeside, 2002). This information makes it clear that firms now have to outsource. The act of moving an organization's operations to a third party company is known as outsourcing. Globally, businesses regularly engage in this activity. Companies outsource their activities to nations with inexpensive labor, such as Mexico, India, and China. Long-term consequences for American workers are as a result. Any company that wishes to be competitive must adopt new tactics. To cut costs and maintain market competitiveness, multinational firms can outsource. however, there are arguments against and for outsourcing. Some of the reasons for outsourcing include cost reduction, operational flexibility, technology advancements, improved quality service and access to global talent. The arguments against outsourcing are the loss of intellectual property, cultural differences, reduced employee morale, and loss of knowledge.
Arguments for outsourcing
Cost reduction
First of all, outsourcing reduces costs. According to Sparrow (2005), the cost reduction is the leading reason firms outsource their activities. Different countries have different wage levels. By outsourcing, a corporation can get the work done at reduced costs. Thus, companies can save money which can be used in other areas to explore ventures. Therefore, outsourcing will enable a corporation to expand to new horizons. Bailey, Masson, & Raeside (2002), found out that about 70% of the organizations outsource at least one of their activities. The most commonly outsourced activities include manufacturing, maintenance, catering, cleaning and security (Letica, 2016). Aird & Sappenfield (2009), found that 70 to 80 percent of the firms outsourced because of lower costs.
Operational flexibility
Secondly, firms that outsource some of their services enjoy operational flexibility. Operational flexibility enables businesses to deliver projects on time and thus meet the customer needs (Arias-Aranda, Bustinza, & Barrales-Molina, 2011). An organization does not have to go through the stress of recruiting the workforce and even paying for their insurance coverage. Additionally, organizations will not have to deal with reduced productivity due to employee absenteeism. Operational flexibility plays a vital role in reducing the organization's dependence on outsourced activities.
Technology advancements
Additionally, outsourcing helps companies to get technology advancements. Technological advancements have forced organizations to adopt new technology to keep up with the technology (Sparrow, 2005). Given that countries like China are leading in the development of new technology, thus by outsourcing services to these countries an organization can benefit from using modern technology. An organization will use the latest technology without purchasing them. Companies can take advantage of the new technology which would have been expensive to have in-house. Therefore, companies can adapt to the changes in the business environment.
Improved quality service
Outsourcing also leads to enhanced quality service. Offshore outsourcing enables firms to improve quality. For instance, Indians are qualified since they have the necessary educational qualifications. According to Rao & Varghese (2009), India has 22 million graduates. Therefore, any firm that opts to hire an offshore company is guaranteed to get quality service. It will not only be getting cheap labor, but the service is also up to par. The firm has to ensure that it goes an extra mile to hire an outsourcing agency that has skilled employees. Taking time to research the outsourcing agencies is a guaranteed way of getting the appropriate one.
Access to global talent
Finally, outsourcing provides corporations with access to global expertise. Global expertise is the primary motivation for firms to remain competitive and offshore talent is also cost-effective. Companies can maintain their competitive advantage by using global expertise. Furthermore, out of which graduates in India, there are 600,000 graduate doctors, and 1.2 million are graduate engineers (Rao & Varghese, 2009). It is clear that India has talented employees. A company may not have workers who are qualified to handle a new equipment in-house, and by outsourcing such tasks, it will be easier to get someone who is qualified. The firm will not have to spend money on training its employees in-house. It also has the flexibility of choosing the company to work with depending on the activity being outsourced.
Arguments against outsourcing
Loss of intellectual property
Firstly, the first argument against outsourcing is the loss of intellectual assets. Intellectual property may be lost in the process when the organization gives its activities to be done by a foreign company. There could be imitation of products. It will not be a surprise for the firm to find an imitation of its product in the local market. Moreover, it will be hard to protect the intellectual assets when they have been outsourced (Kakumanu & Portanova, 2006). Loss of intellectual property is a risk that organizations may face due to outsourcing (Hearth & Kishore, 2009). The vendors may, in turn, start a business in the same industry. The risk of losing intellectual property is high in IT outsourcing. As such, it is vital for companies to protect their intellectual property rights. Some of the intellectual property rights that organizations need to protect include trademarks and patents, copyrights and trade secrets.
Cultural differences
Secondly, there are cultural differences that result from outsourcing a firm's activities. The difference between client and vendor's culture is a risk that organizations will face (Sparrow, 2005). For instance, the Indian culture has a high power distance compared to the United States which has a lower PDI. The client and the vendor may have a hard time understanding each other. The cultural differences may also make it difficult for the two countries to do business together.
Reduced employee morale
Additionally, firms need to deal with reduced employee morale (Jeong-Eun, & Morgan, 2017). When an organization decides to outsource its activities, it may be forced to lay off some of its workers. The employees could also be transferred internally or to the outsourcing company. Majority of the employees do not agree with the idea of moving. They feel secure with their positions and would be motivated when they work in the job they enjoy. Employees may feel insecure about their jobs especially if organizations are not clear about their outsourcing terms. Therefore, they will not have the motivation to work hard. The result is reduced productivity. An organization whose employees are not motivated may not be able to increase their profits.
Loss of knowledge
Lastly, outsourcing an activity leads to loss of knowledge and skills. It is a by-product of outsourcing. When an organization no longer conducts a particular activity, the knowledge and skills that relate to that activity slowly fade away. Becker, & Zirpoli (2017), assert that loss of knowledge will occur over the years. When the company at some point decides to undertake the activity that had been outsourced, it will no longer have the skilled personnel to perform that activity (Jeong-Eun, & Morgan, 2017). In such a scenario, the supplier could become one of the competitors for the buyer. The supplier will become a competitor if the organization teaches the outsourcing company how to perform a given activity. The supplier may refuse to supply the product or service and sell to the customers directly.
Conclusion
Conclusively, outsourcing offer organizations with a way to remain competitive. It will help organizations to become profitable by reducing costs. Organizations will benefit from operational flexibility, cost reduction, improve quality service, and Technology Advancements. Conversely, firms will have to deal with risks associated with outsourcing such as cultural differences, Loss of intellectual property, loss of knowledge, cultural differences, and reduced employee morale. Organizations have to weigh the options and decide on what is best for the company. Overlooking the risks of outsourcing can affect an organization in the future. Outsourcing will help organizations to improve their customer service. Businesses are facing a hard time to retain their customers while at the same time reducing the costs. Delegating some activities to foreign countries will provide organizations with economies of scale.
References
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Jeong-Eun, P., & Morgan, R. M. (2017). Outsourcing Marketing and Organizational Learning: Managing Customer Relationship Management. Journal Of Marketing Thought, 4(1), 27-44. doi:10.15577/jmt.2017.04.01.3
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Rao, T.V & Varghese, S., (2009). Trends and Challenges of developing human Capital in India. Human Resource Development International, 12 (1), 15-34
Sparrow, E. A (2005) ‘A Guide to Global Sourcing: Offshore Outsourcing and Other Global Delivery Models’. Swindon BCS
