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Norm Development In Outsourcing Relationships

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Question:

Discuss about the Norm Development in Outsourcing Relationships.
 
 

Answer:

Introduction:

According to Jaworski (2003) in the article Fund Managers Share Outsourcing Strategies: Communications, business outsourcing can be defined as the process of subletting a portion of the supply chain to either an offshore or a nearshore service provider with the main aim of reducing the costs associated with production.  The author also admits that this strategy plays a crucial role in reducing the time taken for raw materials to pass through the various stages of manufacturing.  Outsourcing is a strategy which has majorly been used by manufacturing companies in a bid to expand the scope of their operations. As noted by Roger Gill (2003) in Change Management—Or Change Leadership?, the process of outsourcing can be categorized into either front office outsourcing or back office outsourcing. While front office outsourcing involves processes such as contact center services, back office outsourcing majorly involves processes which take place within the internal business environment. These processes may include accounting, finance as well as the human resource fraternity. Randy (2000) in Making Changes, further highlights the two types of outsourcing which include offshore and nearshore outsourcing. As discussed by the author, offshore outsourcing is the process of contracting a business process to a service provider who is based outside the country where the contracting company is located. On the other hand, near shore outsourcing involves subletting a section of the supply chain or a business process to a service provider who is locally based. An organization chooses the type of outsourcing to use depending on the size of its structure and nature of its strategies. For instance, a multinational corporation for instance Ford or Coca Cola is likely to use offshore outsourcing as a way of reducing its production cost.

Monika Rola (2002) in Secrets to Successful Outsourcing Arrangements gives the example of Coca Cola which has gained dominance over the global market basically through aggregation and arbitration strategies like outsourcing and networking. The company works with bottlers based in different countries and outsources the process of packaging and branding to them. As such, the organization mainly manufactures the coke drink in addition to other beverages and transports the products to the contracted service provider for the final process within then manufacturing chain.

 

According to Sean (2002) in his article Let’s Make a Deal, it is a vital requirement for every organization to make the right considerations before outsourcing its processes to an outside vendor. Despite the fact that outsourcing comes with a number of benefits to the organization, it is also a fact worth noting that there are various disadvantages associated with this strategy. Thomas and Keith (2002) points out one of the advantages of outsourcing in their article Norm Development in Outsourcing Relationships, according to the author, outsourcing increases the swiftness of the production, manufacturing or supplying process. This is because the processes are always outsourced to individuals with good experience in the related field in addition to the readily available resources used by the vendors. The availability of skills and enough resources consequently increase the speed with which the processes are conducted hence reducing the time taken to complete the business processes. This in turn lowers the cost of production.

Adler (2003) in Making the HR outsourcing decision also points out that outsourcing increases the precision and efficiency with which the business process is carried out. This is because the processes are always outsourced to vendors who have the necessary expertise and are therefore specialists in their fields. With the right knowledge in their areas of operation the outside providers tend to offer the best they can hence leading to efficiency in production.

According to Aubert, Rivard and Patry (1996) in their article A transaction cost approach to outsourcing behavior: Some empirical evidence, outsourcing business processes especially the supporting ones enable the company to concentrate on the core business processes. When companies have more time to concentrate on the core processes, the management is able to come up with and hence install the right strategies which could help in strengthening the main business processes. As a result, the level of production is likely to escalate leading to higher returns.

Chakrabarty (2006) in Making sense of the sourcing and shoring maze - The various

Outsourcing & offshoring alternatives discuss another core benefit that comes with outsourcing business processes. As noted by the author, one of the major factors considered by a business organization before starting a project or process is the risk that would be associated with the venture. Analysis the risks involved is a vital step in ensuring minimal losses involved in the process of production. One approach of risk management is diversification. Outsourcing is therefore an appropriate platform through which the organization shares the risk with the outside vendors.

Dewire (2000) in Application service providers further  points out that outsourcing is always done to specialists who in turn put in place the right mitigating factors which are aimed at minimizing the associated risks. In a nut shell, subletting certain components of a business process plays a pivotal role in shifting the responsibilities and hence the associated risks to the outsourced service provides. Business process outsourcing therefore enables an organization to share the risks involved in these processes with the contracted parties.

 


As noted b Keller, Gerhard and Thomas (1998) in SAP R/3 Process-Oriented Implementation, one of core advantages of outsourcing is the fact that the strategy goes a long way in reducing cost not only involved in production but also the expenses that would involve recruiting and hiring new employees for the specific projects. As noted by the authors, once a process has been outsourced to an outside vendor, the company is relieved of the need to employ individuals to take care of the responsibilities. As a result, the cost that would have involved recruiting new members into the human resource is greatly reduced. This amount can then be directed to develop other components of the chain within the organization. As noted by Kakabadse (2002) in the article Trends in Outsourcing: Contrasting USA and Europe, outsourcing plays a crucial role in enhancing the flexibility of an organization. This serves as one of the main benefits of this management strategy. By identifying the various support processes which would best be handled through outsourcing, the company is able to create more time and resources for other major components. Outsourcing which more or less involves sharing of roles relieves the organization in a number of ways hence allowing for flexibility. As pointed out by Tas and Sunder (2004) in Financial Services Business Process Outsourcing, the company which outsources its processes is able to initiate and oversee various business projects at the same time. In the case of multinational organizations, outsourcing enables the organization to easily gain entry into the global market arena. This is because the outsourcing, in most cases, is done to vendors who are based in the host country. Since they outside vendors have a better understanding of the market in which they currently operate, they are well in a position to establish the best market entry strategies. This eventually leads to good sales owing to the stable market for the products.

Disadvantages of BPO

According to Chaturvedi and Gulati (2004) in the article Information systems outsourcing: Issues and evidence, despite the numerous advantages which come with outsourcing, there are various disadvantages which could be associated with the management approach. As noted by the author, there is the risk of the outsourcing company compromising the confidentiality of its data. This happens mostly when a business organization is involved in information system outsourcing, outsourcing the human resource, services of recruitment as well as the payroll. It can therefore be deduced that outsourcing may expose a company’s crucial information to a third party. The party may therefore use this opportunity to initiate a destructive strategy owing to the rising level of competition for a share of the market.

Peric (2006) in the article, Bridging the gap: Complex adaptive knowledge management notes that the process of outsourcing may become a challenge to an organization when it comes to synchronizing the deliverables. The authors note that some of the processes are easier managed internally and hence outsourcing them may minimize the company’s control over the eventual output as the entire responsibility is left for the outside vendors. In cases where the outside vendors are not competitive enough, there is the likelihood of occurrence of poor final output in in addition to an increase in the time taken to complete the process. This becomes a major challenge especially due to the fact that once a responsibility has been outsourced to an outside vendor; it becomes a major challenge for the outsourcing organization to regulate the outcome. The author then summarizes this discussion by recommending that an organization ought to factor in the various related risks before outsourcing a business process. Through this strategy, it is possible to identify the processes that can be easily regulated within the business hence no need for outsourcing. He emphasizes that the process of outsourcing ought to maximize the gain to the organization as much as possible while minimizing any associated risks and losses.

 


Joshi (2013) in Management Information Systems highlights the aspect of hidden costs as the other challenge associated with outsourcing business processes. Most reviews reveal the fact that outsourcing business processes is a relatively cost-effective approach in completing the flow in business processes. However, Joshi notes that there are other costs which the organization incurs especially when signing contracts which could pose a threat to its financial wellbeing. This happens mainly in the process of offshore outsourcing where the contract involves service providers operating on international fonts. The process involving the signing of such contracts involves a number of formal stages some of which may end up being quite costly to the outsourcing organization. As a result, subletting business processes to overseas service providers ought to be done on the backdrop of a careful analysis and hence consideration of the costs and benefits that would be involved.  For instance, through financial projections, the organization can compare the cost of initiating such contracts to the expected return on investment in order to establish the possibility of gaining from the venture.

Sullivan, (2004) in the article Heavyweight Retailer Looks Inward to Stay Innovative in Business Technology outlines the aspect of lack of focus on an organization’s customers as the other disadvantage associated with outsourcing business processes. As noted by the author, the fact that the outside vendors are experts in their relevant fields makes them the point of focus for most organizations. As a result, these service providers can be contracted to several organizations at the same time. This may work against an organization since the vendors may not necessarily focus on the organization’s customers but primarily on accomplishing their contractual obligations. For instance, when the Coca Cola Company outsources the process of packaging and branding to the bottling companies in the designated global spots, the vendors are most likely to concentrate on packaging and branding the products. However, the outsider service providers are likely to take part in promoting the company’s products which may result in the instability of the company’s market. When the market is destabilized, an opportunity is given to the competitors to emergence and hence overturn an organization’s dominance in a given market area.

According to Freeman (2010) in Strategic management: a stakeholder approach, an organization’s choice on the  type of outsourcing to be used ought to be based on a number of factors each of which are meant to establish the effectiveness of the process. By thoroughly considering the necessary factors, an organization is able to establish the associated benefits as well as the risks that would accompany the process. The author emphasizes that business process outsourcing ought to be as cost effective as possible to the outsourcing organization. Additionally, the process ought to be accompanied by the least of risks.

 


From the above literature review, it is possible to deduce and hence summarize the advantages of outsourcing. The strategy is cost effective and improves the company’s flexibility. At the same time, outsourcing gives room for the sharing of risks in addition to reducing the time taken to complete the related organizational processes. Additionally, the review equally reveals that outsourcing enables an organization to concentrate on the core business processes after outsourcing the supporting ones. On the other hand, there are a number of risks associated with outsourcing for instance, the organization risks exposing its confidential data to a third party.  At the same time, there are a number of hidden costs which could be associated with outsourcing especially when the strategy involves offshore outsourcing. The organization may find it a challenge regulating the business processes once they have been outsourced hence minimal influence on the outcome which may be bad in some cases. Finally, there is lack of focus on the organization’s customers especially when the outside vendors are contracted to several other companies.

 

References

Adler, P. (2003) ‘Making the HR outsourcing decision’. MIT Sloan Management Review,

45(1), 53-60.

Aubert, B., Rivard, S. and Patry, M. (1996) ‘A transaction cost approach to outsourcing

behavior: Some empirical evidence’. Information & Management, 30(2), 51-64.

Chakrabarty, S. (2006) ‘Making sense of the sourcing and shoring maze - The various outsourcing & offshoring alternatives’. Journal of Outsourcing & offshoring in the 21st Century. 2(1), pp. 4-18.

Chaturvedi, A. and Gulati, R. (2004) ‘Information systems outsourcing: Issues and evidence’, International Journal of Information Management 14(4), pp. 252- 268.

Dewire, T. (2000) ‘Application service providers’. Information Systems Management,

17(4), 14-19.

Freeman, R. (2010) Strategic management: a stakeholder approach. Cambridge: Cambridge University Press.

Gill, R. (2003) ’Change Management or Change Leadership?’Journal of Change Management 2(1), pp. 307–318.

Gilley, A. (2000) Making More by Doing Less: An Analysis of Outsourcing and its Effects on Firm Performance. Journal of Management, 26 (4), pp. 763-790.

Jaworski, A.(2003) ‘Fund Managers Share Outsourcing Strategies: Communications Key’. Operations Management, 6(1), pp. 1-4.

Joshi, G. (2013) Management Information Systems. New Delhi: Oxford University Press.

Kakabadse. N. (2002) ‘Trends in Outsourcing: Contrasting USA and Europe’. European Management Journal 20(2), pp. 189–198.

Keller, G.  (2008) SAP R/3 Process-Oriented Implementation. New York: Addison Wesley Longman.

Monika, R (2002) ‘Secrets to Successful Outsourcing Arrangements’. Computing Canada.12(1), pp. 4-12.

Peric, O. (2006) ‘Bridging the gap: Complex adaptive knowledge management’. Strategic Management, 14(1), pp. 654-668.

Randy, G (2000) ‘Making Changes’. Executive Excellence. 2(1), pp. 23-25.

Sullivan, L. (2004) ‘Heavyweight Retailer Looks Inward to Stay Innovative in Business Technology’. InformationWeek, 27(1), pp. 12-16.

Sean, D. (2002) ‘Let’s Make a Deal’. Network Computing, 2(1), pp. 52–56.

Tas, J. and Sunder, S. (2004) ‘Financial Services Business Process Outsourcing’. Communications of the ACM, 47(5), pp. 2-7.

Thomas, K. and Keith, B (2002) ‘Norm Development in Outsourcing Relationships’.  Journal of Information Technology 17(1), pp.  33–42.

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