On week 5 of our Managerial Accounting class, we were asked to view several websites and choose an activity that is necessary to outsource for a company’s operations. Then we were asked to discuss the pros and cons of outsourcing that activity. This was a very intriguing subject that provoked a lot of thought and discussion amongst the class. Because of this great discussion, I have decided to make Outsourcing the topic of my Final Project. Outsourcing is quickly becoming a huge trend in the corporate world. “What’s new is a concentrated effort to outsource back-office support operations–e.g., IT, finance & accounting, human resources, and procurement–to reduce costs and heighten performance, according to a report from Houston-based analyst firm EquaTerra : Outsourcing Trends in the Automotive, Manufacturing, and High-Tech Industries” (Fulcher, 2007). According to the above article, outsourcing is now being used in many industries. In order to better focus my paper, I will pick the most debated and used outsourcing activity; Information Technology. Companies are increasingly outsourcing the management of information technology (IT) for reasons that include concern for cost and quality, lagging IT performance, supplier pressure, access to special technical and application skills, and other financial factors. The outsourcing solution is acceptable to large and small companies alike because corporate strategies are now more common and the IT environment is changing rapidly. Because of cost and quality advantages, I will prove that outsourcing is a very advantageous way to do business.
Although the mix of factors raising the possibility of outsourcing varies widely from one company to another, there are a series of themes that explain most of the pressures to outsource. To get a better understanding of outsourcing, let walk through the process. When a customer calls a toll-free customer service telephone number, it is possible that the call will be routed to a foreign country such as India or Argentina. A technician in that country trained by the American company to answer questions will solve the customer’s problem, often within a few minutes, and the customer will typically not have any idea where the call center is located. Increasingly, American companies are taking advantage of highly educated labor outside the United States where wages can be one-tenth of what these companies would pay employees within the United States. This alone makes it financially viable to investigate outsourcing in Industry. As mentioned above, India seems to be the leader in foreign outsourcing. “For years, Indian developers have had a reputation as the offshore programming outsourcers of choice for Western corporations because of their high-quality, low-cost coding help. Now the continued availability of skilled manpower at costs far lower than in the West, cultural factors, economic conditions, and an improving telecommunications infrastructure in India and worldwide is leading U.S. and European companies to tap the skills of Indian outsourcers in other areas. Indian companies are providing sophisticated, IT-enabled back-office services for customer interaction and data processing” (Ribeiro, 2001).
It would be irresponsible of me to not mention some of the negatives that have circulated recently in outsourcing. Media coverage tends to focus on those American workers who are put out of work due to outsourcing. In many cases, jobs are transferred overseas with the result that American workers are put out of work. In other cases, jobs are simply created in the foreign country which limits job creation in the United States. The current presidential candidates on both sides talk about the need to keep jobs in America. Others also mention that by outsourcing jobs, it is putting a big strain on the American Economy. But, there are some economic analysts who maintain that relocating jobs overseas will result in more and better jobs domestically. Keeping the higher skill jobs in America can improve salaries and the economy. This concept could be considered highly debatable.
So, are their concerns from the management aspect? First of all, general managers’ are concerned about cost and quality drive outsourcing. The same issues such as getting existing services for a reduced price at acceptable quality standard came up repeatedly.
Secondly, failure to meet service standards can force management to find other ways of achieving reliability. It is not atypical to find a company in which cumulative IT management neglect eventually culminated in an out-of-control situation the current IT department could not recover from. Management can see outsourcing as a way to fix a broken department. If someone other than your employee can create a better consultation and knowledge about a product or process, it might be advantageous to outsource that specific process.
Third, a firm under intense cost or competitive pressures, which does not see IT as its core competence, may find outsourcing a way to delegate time-consuming, messy problems so it can focus scarce management time and energy on other differentiators. “Evaluate your company’s ability to provide in-house training. If your in-house tech support is unable to adapt to your growing supply chain needs and provide adequate training for new technologies, you should consider outsourcing your company’s logistics data and integrating it with that of a service provider that specializes in customized supply chain solutions” (Industry Week, pp 67-68).
Other financial issues can make outsourcing appealing. One is the opportunity to liquidate the firm’s intangible IT asset, thus strengthening the balance sheet and avoiding a stream of sporadic capital investments in the future. Also, outsourcing can turn a largely fixed-cost business into one with variable costs. This is particularly important for firms whose activities vary widely in volume from one year to another or which face significant downsizing. Other financial benefits from outsourcing included rapid funding of new systems development and economies of scale and scope. As consolidate infrastructure through IT outsourcing, a firm can experience cost reductions in hardware and software licensing, facilities, and support headcount. Hardware and software function can be extremely expensive. Outsourcing, also, can capitalize on an outside vendor’s extensive IT problem solving knowledge. An outside vendor had the ability to get more of the technology that came out. They could spend money on investments that a company couldn’t afford internally. That opens up a lot more avenues to future technologies. An outside vendor would manage the IT function more efficiently.
A vendor’s main competency is managing computer systems. Through their skills, leverage, and economies of scale, they could provide a level of efficiency that could not be achieved at the outsourcer.
Finally, Perhaps most important, outsourcing allow internal IT folks to focus on the development of a new IT infrastructure. Underlying the outsourcing effort is a fundamental strategy to offload legacy applications and operations so a firm could focus on developing new strategic application to support the global business processes, which were being reengineered.
There are many ways to manage outsourcing since every company has different culture, strategy, structure, people, and process. Also, many important issues such as structure, Information management operating processes, management processes, and human resources management should be clarified.
Many outsourcing contracts are structured for very long periods in a world of fast-moving technical and business change. Eight to ten years is the normal length of a contract in an environment in which computer technology performance is shifting by 20 to 30 percent per year. What is the best and newest toy today is old news tomorrow. Consequently, a deal that made sense at the beginning may take less economic sense three years later and require adjustments to function effectively.
The situation from the outsourcer’s perspective is just the reverse. The first year may require a heavy capital payment followed by the extraordinary costs for switching responsibility to them and executing the appropriate cost-reduction initiatives. All this is done in anticipation of a back-loaded profit flow. At precisely the time the outsourcer is finally moving into its earnings stream, the customer, perhaps feeling the need for new services, is chafing under monthly charges and anxious to move to new IT architectures. If the customer has not had experience in partnering activities before, the relationship can develop profound tensions.
The evolution of technologies often changes the strategic relevance of IT service to a firm. From the customer’s viewpoint, assigning a commodity service to an outsider is very attractive if the price is right. Delegating a firm’s service differentiator is another matter. The customer that made the original decision on efficiency will judge it differently if using effectiveness criteria later.
IT outsourcing has so many positive effects for a company even though it still contains various problem needed to be solved. In the Internet age, any company may want to focus its internal staff on moving it to the environment that will support them tomorrow and outsourcing could be one of the best solutions. Also, outsourcing is really more of an integration of two separate businesses to be successful. Both want to take the best parts of each culture and put them together. In addition, critical success factors including existence of a multi-years, corporate commitment to the IM strategy and outsourcing, and quality culture and attitude should be considered in outsourcing.
“Outsourcing decisions is also called a make or buy decision. It entails a choice between producing a product in house or purchasing it from an outside supplier” (Hilton, p- 593). What it all comes down to is that if a part of your business can run smoother with the help of an outside side; and can potentially save money in the long run, and then the answer is simple and concise. Outsourcing is continues to be the wave of the future and many different industries will continue to tap into this source of business. As stated in my thesis, I hope I have proved that benefits and advantageous nature of outsourcing.
1- Jim Fulcher (2007, August). Back-office IT and business process outsourcing seen as another means to cost containment. Manufacturing Business Technology, 25(8), 40. Retrieved September 4, 2008, from ABI/INFORM Complete database. (Document ID: 1319266941).
2- John Ribeiro (2001, August). The back office moves to India. InfoWorld, 23(34), 26-28. Retrieved September 4, 2008, from Research Library database. (Document ID: 78299045).
3- SO YOU THINK YOU WANT TO OUTSOURCE YOUR IT? (2008, August). Industry Week, 257(8), 67-68. Retrieved September 4, 2008, from Research Library database. (Document ID: 1519268681).
4. Hilton, R. W. (2008). Managerial accounting: Creating value in a dynamic business environment (7th ed.). New York: McGraw Hill. ISBN: 0073022857