In the era of economic recession, it is a fact that organizations are giving much importance to cost leadership strategy. The economic recession has control over the spending nature of people. By outsourcing the back office activities to a third part for a low cost supports the organizations intend to adapt the cost leadership strategy. The international monetary fund (IMF) has conducted a study on the increase in the outsourcing activity in comparison with the job losses. The study has revealed some interesting facts. As per the reports the outsourcing helped the organizations to give more focus to their core activities and it helped the organization to concentrate more on research and development activities and it further leads to number of openings in research and development sectors. The outsourcing also enriched the employment chances in the developing countries and forced the large organizations to set up their own offshore units in the developing countries. For example Bangalore has become one of the Indian cities with the most number of outsourcing units. The presence of the global brands helps the developing countries not only develop to their financial status but also help them to develop the infrastructure in the country. The studies conducted by the IMF also revealed another fact that some of the outsourcing host countries itself outsource some of their back activities to other countries. As per the study we can understand that developing countries like India and China also outsource some of their business services. In order to prove the impacts of outsourcing on the job losses, the IMF has taken the example of developments in the transport equipment sector in the United Kingdom; the sector has a higher rate of outsourcing services. And as per the results of the researches we can understand that the employment rate in the sector has also increased in the recent years. Based on the research it has been proved that most of the organizations outsource the activities of the least performing departments. By the outsourcing activity, the organizations aims to achieve control over the quality of services and another supporting fact is that there is less investment involved in the outsourcing activity. For example if an organization want to run its back office activities at their own location, they need to buy computers and other items necessary to run the office activities, it increases the working capital of the organizations. Another benefit of outsourcing is that it helps the organizations to give much importance to their core activities and customer relationship management. One of the common examples used to describe the outsourcing activity is the case of Nike shoes, one of the best manufacturers of shoes and bags. All the new designs of the Nike shoes are prepared at the office at Beaverton, Oregon, United states and none of the shoes are produced in the same place. The Nike company outsource the designs to their subcontractor in South Korea or china and production will take place somewhere in Seoul or Taipei. It helps the company to generate more profit from their business activities. As per the information available on the WTO website, the outsourcing helps the organizations to extend its service to round the clock activities and it provides easy access to different skills (including language skills). For example some organization prefer to outsource their work to Vietnam, it is simply because of the reason that most of the Vietnamese employee can speak French and English. The existence of General Agreement on Trade in Services encourages the cross-border trades between the countries. The outsourcing also enriches the research and developments activities of the bigger organizations. For example the software companies like Microsoft, IBM have its development centers in the southern part of India (WTO website, 2010).
According to the study conducted by NASSCOM (association of software companies in India) outsourcing activity not only for the call centers in India. The business activities which are mostly outsourced to the host countries are customer service, technical support, telemarketing and business process reengineering and most of the information technology jobs and IT enabled services are outsourced to India. The NASSCOM also revealed the factors which helped, India to become one of the favorite locations for the outsourcing activities. The factors are the availability of skilled technicians, quality of the human resource, the developments in the IT services and developments in the infrastructure in the country. India has more than 400,000 IT professionals working in the Indian IT industry and the country produces more than 120,000 software engineers on a yearly basis. The presence of technological institutes like Indian Institute of Technology (ITT) also supports the number of skilled engineers and graduates. Most of the software companies like Microsoft, IBM, HP has its presence in the Indian IT market. After the privatization of telecommunication services in India, the telecommunication and related services are improved. The above discussed are the factors helped the country become one of the host country for the out sourcing (NASSCOM website, 2010).
Cost cutting and outsourcing activity
Wipro technologies is one of the leading BPO companies in India. The study conducted by the Wipro Company revealed some facts about how organizations can benefit by outsourcing some of its operational activities to a host country. The following the pie diagram describes the allocation of working capital for a web hosting company in the United States. From the graph, we can understand that the organization spends more money on communication and technological facilities and for the wages of the employees.
[Source: Wipro technologies Case study.]
From the above pie diagram it is clear than an organization spends 77 % of money on technology and for the wages of the employees. By the outsourcing activity the organization can cut some percentage on its working capital.
The beneficiaries of the outsourcing activity are the investors, company shareholders, customers and the host countries. Thus we can say that the outsourcing activity is beneficial to both the provider country as well as the host country. It helps the developing countries by increasing the growth rate of the infrastructure as well as the developments of the human beings. It also helps the provider country to develop a free trade agreement with the host countries and open a new market for products from the outsourcing provider countries. If we consider the case United States of America, the outsourcing activity helps the host countries to pay back their debts to the United States. On the basis of WTO report we can understand that the outsourcing helped the developing countries to decrease the sexual unbalance among employees, it helped the gender empowerment in the developing countries. For example 40 % of the employees working in the Indian BPO units are ladies; it has a positive impact on the Indian culture. Outsourcing has a role in decreasing the poverty in the developing countries and it increases the employment opportunities for the people of the developing countries. For example it is estimated that the jobs in the Indian outsourcing sector will reach up to 2.7 million by the end of 2012 as compared with the 110,000 job opportunities in 2003. Another interesting fact is that the Indian companies also take advantage of the outsourcing activities and they have established their businesses in other parts of the globe. As per the report of WTO there are more than 450 Indian companies working in the United Kingdom and eighth largest investor country in the United Kingdom. The Indian companies have offshore units in the countries like China, Philippaines. For example Tata consultancy services, Infosys, Wipro (WTO website, 2010).
A study conducted by the information technology association of America (ITAA) revealed that, the outsourcing helps companies in US to save more money and it also open new opportunities for the workforce in the United States. It also helps the American citizens to hold more high profile jobs in the companies. It helps the provider country to import cheaper products or services from developing countries and export more valuable products or services. India is one of the favorite locations for American and European continents. As per the study conducted by the NASSCOM, there are many factors behind the success of Indian outsourcing industry. One of the main factors is the difference in the geographical locations; the Indian work time begins at the work end time of the United States. Another important factor is the availability of skilled young people in the country. The exchange rates of the currencies also a supportive factor for the outsourcing activity. The lifestyle and living expenses of a developing country are always cheaper than that of the developed countries. This enables the companies in the developed companies to outsource some of their activities to the developing markets. For instance, in this report we take the example of one developing country and one developed country namely India and United States of America. The following is the comparison of expenses in India and United States on the basis of money spends per employee.
Expense of full time employees in USD($)
United States of America
India
Wages
42,927
6,179
Insurance and Taxes
8571
1000
Expenses for rent
2600
847
depreciation
3,000
1500
The above information is prepared on the basis on the report of NASSCOM and it includes the most important factors which facilitates the organizations to outsource their works to India. We can see a huge difference (in terms of money) in the above drawn table. There are some examples for the actions taken by few big companies to cut down their costs. Prudential, the British insurance company saved $26.2 million dollars (USD) by outsourcing 1000 customer service jobs to India. GlaxoSmithKline Company saves around 35 % by outsourcing their IT operations to India (WTO website, 2010). According to WTO research report, the factors which helped the growth of outsourcing activities are the advancement in the technological sector and some of the developing countries have made a substantial investment in the sector of education. The use of innovative ideas in the business also enriched the growth of outsourcing (WTO website, 2010).
The outsourcing can help an organization to increase its productivity and timely service to customers and helps the organization to grow in all sectors of its business. It also helps the organization to make of use of the skills of the skilled labors from the developing countries and become a loyal company to the customers. It also fastens the deliveries to customers and can make the customers satisfied with their services. For example most of the BPO units works in the 24/7 structure and this enables the organization to answer the customers round the clock. Another benefit of outsourcing is that the advantage of time difference between the provider company and the host company. For instance there are many offshore units of web hosting companies and the software testing companies works in India, it helps the organization to continue its work during the night time for the provider company. The risk factor is comparatively less for the outsourcing as it invites less investment from the provider and we can see there are lots of BPO companies in India ready to work as the support staffs and the provider organization does not worry about recruitment of the new employees or setting up other physical amendments for the new employees. Outsourcing is also beneficial to the small and medium level of business organizations as they can act as “big†organizations by setting up an offshore call centre. It also provides competitive level to the small organizations. The small organizations can make use of the experiences of the staffs at the outsourcing centers. It also enables companies to start the new projects quickly. It is possible when the organization outsource its back office operations to a third party organization and it make the employees of the in-house to think about the new ideas. It also reduces the workload of the employees. For instance, we have already discussed the case Nike Company, the employees at the US office do not need to worry about the production and distribution of goods, and they just need to create new designs. The employees working in the Nike US center does not need to worry about the day-today activities of the office, as their outsourcing provider carry out the production and distribution of items. As we already discussed before the outsourcing helps the organization to invest less in the infrastructure and it helps them to worry less about the rapid changes in the technology or any other factor. Outsourcing helps the organization to get support from the skilled people and use new technologies in their day today activities. A long term agreement of outsourcing with the provider company helps an organization to achieve its competitive edge over its competitors.
Outsourcing helps the organizations to open up new market segments for their business activities. For instance the skilled workforce of the India forced the big organizations like IBM, Microsoft to open its offshore development units in the Indian cities. It helps the organizations to get in touch with the local skilled people in a developing country and the big organizations can form a good relationship with these companies and together they can expand their business. For example Accenture is one of the outsourcing support company, the company keep long term relations with their clients it helps them to exchange their knowledge and resources with their partner companies. The outsourcing enables companies to learn new things and provide easy access to technical knowledge and domain expertise. For instance, outsourcing helps the pharmaceutical companies to outsource their work to Chinese companies, with out the medium of outsourcing the companies can not get in touch with the Chinese companies and the Chinese medicines. Outsourcing acts as the medium for big organizations to contact the skillful resources in fact it enables easy access to the resources. There are some companies which use outsourcing as an effective way to train their employees. It enables the employees of the company to get experience in the technical or non technical areas and helps the employees to improve their quality of work. We can say outsourcing provide a better work platform for companies. For instance we know that human resource management is also one of the outsourcing business units, the service provider develop the entire human resource policies and other company rules and regulations for the company. Outsourcing encourages the organizations to undertake more projects and helps them to finish the tasks with in the allocated time.
The report helped us to look in to the benefits of outsourcing. Outsourcing helped organizations to expand its services to round the clock with less investment. Outsourcing provides monetary benefits to organizations and it also becomes a part of the success of companies and developments of human resources. We can also understand that apart from the monetary benefits, outsourcing helps the organization to access the human potential of the developing countries and expand its products and services to the new market segments. It is a fact that the monetary benefits of outsourcing are shared between the provider and host countries. We can understand that the developing countries like India, China and Philippians are the most benefited countries from the outsourcing. We have referred the study reports of organizations such as WTO and IMF, all the reports supports the existence of outsourcing. Recent reports from the media reveal that there is lots of unemployment in the United States and other countries due to the growth of outsourcing activity. The US senate has passed certain bills to prevent the companies to outsource some of the back office operations to the developing countries. It is a fact that even though there are rules to prevent to the growth of outsourcing, the monetary benefits and the availability of skilled employees force the organizations to go on with the outsourcing. Even the protestors of outsourcing agree to the fact that outsourcing can not be eliminated completely. Outsourcing is an innovative idea developed by the dynamic business world, there is no end to it until further development of a new cost effective method.
