Strategic Management Accounting
Strategic Management Accounting Introduction This report is intended as a review of the different systems…
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Outsourcing of non-core activities provides cost advantage and competitive edge to the multinationals. Other benefits involved are- cost restructuring, improvement in quality, time to focus on core business & innovations, speed to market , increased revenue etc. As the result of these benefits, multinationals are increasingly using outsourcing as the part of their global corporate strategy. Outsourcing industry has grown manifold during last ten years and has proved boon for developing countries like India, China, Malaysia etc. But people in home country of the multinational are criticizing it on the ground of job losses and loss of currency.
The topic of report is to analyze various aspects of the outsourcing. This report is literature review of the available resources on the outsourcing. Nature of reports will be qualitative in nature and it will be based on secondary data and material. Source of literature may be books, magazine, journals, reports, website etc.
Process of outsourcing and its various aspects will be analyzed in view of recent development. It will be followed by study of trend of outsourcing during last 10 years. What are advantages and disadvantages of outsourcing will be analyzed in view of economic and social impact. Based on above analysis, future direction of outsourcing will be analyzed.
U.S. businesses accounts for around 70 % share of the global market of offshoring and balance by European countries and Japan. In view of dominance of U.S. businesses on outsourcing, this report will focus on United States but it will also consider European countries like France, United Kingdom, Germany and Japan. India enjoys major chunk of the global outsourcing industry.Philippines, China, Malaysia, Vietnam, Bangladesh, S. Africa, Ghana, Senegal, Kenya, Jamaica, Mauritius, Nicaragua, Barbados, Mexico, Brazil etc. In view of major share by India, it will be considered as supply side.
AIMS: “To analyze outsourcing, which is used by multinational companies as part of their global corporate strategy? ”
Many multinationals companies are using strategy in their global corporate strategy due to various benefits associated with it. However, opinions are mixed; while some see outsourcing as a win-win situation where all the parties involved benefit, other disagrees. Aim of the report is to analyze various aspects of outsourcing including its future trends.
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OBJECTIVES: The main objectives of the report are as under:
Latest development in the business strategy is inclusion of outsourcing as part of global corporate strategy as it provides cost advantage. It was in practice earlier but recent past has shown greater emphasis on it by corporate. Objective here is to evaluate trend of outsourcing for the last 10 years. Under this topic, outsourcing trend of various countries will be analyzed. Further, global outsourcing industry will be analyzed in view of recent development.
Outsourcing production of work offers cost advantages to a multinational company. People in home countries criticize it on the ground of unemployment and flow of currency to other countries. Objective here is to develop arguments for and against this strategy, paying particular attention to its economic and social impact to home countries.
Outsourcing industry is booming and is being seen as emerging industry but it is also facing many constraints. United States contributes a major portion of outsourcing industry and it too facing criticism at home. As the result of this, they are adopting various protectionism measures. Further, future directions of outsourcing depend on growth of global economic. So, objective here is to evaluate future direction of outsourcing in view of past trends and recent development.
This report is literature review of the available resources on the outsourcing. This dissertation is qualitative in nature and will be based on secondary data and resources (Cooper & Schindler, 2006). Sources of data and resource are: books, magazines, reports, website, and search engine like Google etc. This report is comprehensive in nature and will cover most of the topic related to outsourcing. All the available material in the outsourcing will be analyzed to view the trend of the outsourcing.
Greaver (1999, P-3) has defined Outsourcing as the process of transferring some of business functions including factor of production and decision rights to outside service providers. All the terms & conditions are mentioned in contract between the outsourcing companies and service providers. Factor of production includes resources like people, facilities, equipment, technology and other assets which facilitates in the business operation of the company. Decision rights means authority given to service providers to take certain decision on behalf of the companies. The companies outsource their non-core activities to the companies which are having expertise and required infrastructure. Different types of business segments being typically outsourced are-call centre function & customer support, market research, telemarketing, human resources, accounting, information technology, engineering, manufacturing etc. Business processing outsourcing (BPO), a type outsourcing has emerged in a stronger way. Information technology enabled service or ITES, Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) is new trends of business processing outsourcing and is coming in big way as the result of development in information technology.
Off shoring is a subset of outsourcing in which business function is outsourced to the country other than home country of outsourcing companies (Norwood et al, 2006). An US based company outsourcing their works to India is an example of offshoring outsourcing. Same is possible due to improvement of international communication capacity, computerization & digitization of business process and availability of services at lower cost. This development has made national borders less important while deciding location of service. A type of off shoring is near shore outsourcing in which business function is outsourced to the countries nearby the home country of outsourcing company. For example, in case of the United States it is described as work relocated to Canada and Mexican countries. The major advantages of the near-shore outsourcing are- short distance and common culture & time zone.
Many times outsourcing and off shoring are used in place of one another but there are technical differences between the two (Babu, 2005). Many time outsourcing may or may not involve some degree of off shoring. Off shoring is relocation of work to outside the boundary of the home country and goes on regardless of the matter whether the work stays within the same corporation. As the result of rapid globalization of outsourcing activities, the difference between off shoring and outsourcing is becoming vague.
Nowadays, multinationals are increasingly outsourcing their business functions to the developing countries like India. As per Overby, S. (2007), reasons for the outsourcing include one or more of the followings:
There is cut throat competition in the market and in such a scenario outsourcing provides competitive edge to the multinational over its competitors. As the result of this more and more multinationals are adopting outsourcing as part of their corporate strategy.
United States contributes about 70% of total outsourcing markets followed by United Kingdom. India has emerged as hot destinations for the outsourcing works due to presence of skilled manpower and english speaking populations. Other countries in the list of service providers are- China, Ghana, Mexico, Brazil etc. Recent past has shown recovery from subprime crisis and growth in the world economy. Due to above development, a new type of industry has emerged which is known as outsourcing industry. Outsourcing industry is booming and it is predicted as sunrise industry.
It is also facing criticism in home country on the ground of job losses (social impact) and flow of dollar to foreign country (economic impact). Many governments have adopted protectionism policy against outsourcing and are providing tax incentives to the companies which retains job within the country. Despite of many odds, outsourcing industry is growing and has potential to become the industry of future.
Outsourcing of business functions provides competitive advantage to the multinationals. As the result of this, multinationals have included it a part of their corporate strategy. It is being considered as the sunrise industry of 21st century. But, outsourcing did not necessarily guarantees higher profits to corporations. Its success depends on the various factors like firms ability to manage in remote locations and skill sets of local labour employed. External factor like political stability, language skills, infrastructure, enforceability of intellectual property rights and business contracts also affects it.
2.1 Factors of Outsourcing: Many multinationals companies are using outsourcing in their global corporate strategy. Multinationals are outsourcing their business functions due to benefits associated it. There are certain factors which has contributed a lot in development of outsourcing industry. Future growth of outsourcing industry will also depend on these factors. The factor which promotes outsourcing is as under:
There are many factors behind development of outsourcing but major factor as listed above are- availability of cheap labour, skill sets, global networks, adequate and reliable infrastructure, globalization and government support. These factors have contributed in the growth of outsourcing during last 10 years and its development will determine future directions of the outsourcing.
Outsourcing of business activities provides many advantages to the companies. Cost reduction is most perceived advantage but it has many other advantage too which is of strategic importance. Advantages to the company which outsource their business function are as under:
|Sector||Job Profile||Labour cost in US||Labour cost in India/China/Mexico|
|Service||Financial analyst||$35 per hour||$10 per hour|
|Manufacturing||Workers||$11–$20 per hour||$1–$2.50 per hour|
From above table, it is evident that there is huge disparity in labour cost is US and developing countries like India, China, Mexico etc. Due to this disparity, multinationals are outsourcing their non-core business activities to developing countries like India, China, and Mexico. Cost reduction is major reasons for outsourcing of business functions (Berrar & Gravis, 2007, p 4).
Above listed reasons are major factors which have contributed towards growth of outsourcing. Importance of these factors on outsourcing can be judged from the graph, given below:
Graph: Reason for Outsourcing
Source: Helios Innovations: Business Process outsourcing, White papers, March 2004.
From the above chart it is evident that reducing operating costs (36%), focus on core business (32%) and creating variable cost structure (13%) is major reason for outsourcing. Increasing speed of market, improve quality, conserve capital, foster innovation, grow revenue are other reasons for outsourcing. Due to this advantage, multinationals has started giving emphasis on outsourcing. This has lead to the emergence of new kind of industry known as outsourcing industry.
The outsourcing industry is booming as more & more multinational is outsourcing their non-core activities as way of cost saving. Investment consultancy firm McKinsey & Co. predicted that global outsourcing industry would be more than $ 180 billion by 2010. Forrester, a leading IT analyst, dissertation s that the number of U.S. jobs offshored will grow from 400,000 jobs today to roughly 3.3 million jobs by 2015 accounting for some $ 136 billion in wages. India, China, Philippines and Malaysia has emerged has major location for outsourcing the work due to availability of cheaper and English educated manpower.
According to McKinsey & Co. report U.S. business dominates the global share of off shoring, accounting for 70% of total market and remainder by Europe & Japan. In Europe, United Kingdom is a dominant player. Both U.S. & U.K. is able to offshore their function due to its liberal employment & labour laws and presence of English speaking population in the counties like India, China, Philippines etc.
Outsourcing industry is too facing many challenges; few of them are as under:
Multinationals are outsourcing their business functions to the developing countries because it provides many advantages as listed above along with cost reduction The future direction of outsourcing industry will depend on the competitive edge of the developing countries. If such advantage is lost by them due to new laws and regulations, then multinationals will cease to continue the business activities.
In spite of many odds outsourcing industry is booming as it provides added advantage to outsourcing company as well as to global economy. Developed countries are unable to adopt protectionism policy fully in spite of criticism due to increasing importance of outsourcing. In US, government is providing support of the company by way of tax incentive who retains their work in home country only but they are not forced to do that. Till the time the developing countries will have competitive advantage, outsourcing industry will keep growing.
Outsourcing of business functions has become new trend in the business community. Availability of cheap labour, global network, adequacy of infrastructure, globalisation, government support etc. are main factors of outsourcing .Outsourcing of non-core activities provides cost advantage and competitive edge to the multinationals. Other benefits involved are- cost restructuring, improvement in quality, time to focus on core business & innovations, speed to market , increased revenue etc. Growing protectionism in home country, lack of infrastructure and trained HR, need of strong risk control framework, loss of competitive advantage of developing countries are some of the major challenge for outsourcing industry. Further, there is risk related to IT outsourcing which should be taken care (Tho, 2005).
In such a scenario, success of outsourcing for multinationals will depend on selection of service providers. According to Bragg (2006, p-20), there are many parameters on which corporate should take a call while calling a bid for selection of service providers. Some of the key issue are as under:
Once, bid is received then next task is selection of business partners. Selection of service partners should be done in consideration with the following parameters.
Above parameters along with due diligence should be used for selection of service providers as it is crucial decision and benefits reflected from outsourcing will also depend on it. The objective of due diligence is to determine the quality and (financials) viability of the suppliers (Wijers & Verhoef , 2009, P-6)
From the discussions, it is evident that if service providers are selected with proper due diligence then benefits from the outsourcing is many. As the result of this, outsourcing industry is emerging in big ways. Multinationals has incorporated outsourcing as part of their corporate strategy. Developing countries are prepared to tap this opportunity and government of developing countries are also supporting as it has become major driver of their economy. But it is also facing criticism on the ground of job losses and flow of currency to other countries.
According to Hira & Hira (2005, p-8), outsourcing is not good for United States and its potential effect are far reaching. It is affecting US economy as US dollar is being paid to the service providers in lieu of service. This dollar can be retained in US by retaining the job in US. It is also having social impact as it is exporting US jobs to other countries which otherwise can be retained in US. Loss of good and high paying jobs also lead to loss of tax revenue which is utilized to fund education, health, infrastructure and social security systems. It is also affecting national competitive and national security systems. The competitive edge of Us over other nations depends on the technology and its ability to create high end job. Outsourcing is taking away the workforce which was the part of US winning formula. Recent past has witness drop in the enrolments in subject like engineering, computer science and biotechnology. The key strength of US security system is its technological advancement. But due to outsourcing of works, US hegemony over it is getting eroded. Therefore, outsourcing has become ethical issue in light of the effect on American workers and threats to national security (Haugen, 2009)
2.5 Rational for Outsourcing
Literature review of outsourcing reflects that it has many advantage associated with it. The major advantages are- cost reduction, cost restructuring, focus on core activities, foster innovations, speed to market the products, competitive edge. As the result of these advantages, multinationals has adopted it as the part of their global corporate strategy. Due to which, recent past has shown emergence of a new type of industry called outsourcing industry. Outsourcing Industry is booming and has potential to become industry of future. But it is facing criticism on the ground of job loss (social impact) and flow of currency (economic impact) on the home country. As the result of this, many countries like US, UK, France etc has adopted protectionism policy. In light of above, analysis of various aspects of the outsourcing is being analyzed to find out the insight of issue. Hence, this topic has been selected for dissertations works.
Outsourcing of non- core activities offers many advantage to the multinationals. As discussed above, major advantages are: cost reduction, cost restructuring, focus on core activities, foster innovations, speed to market the products, competitive edge etc. These are the major advantage due to which multinationals has started outsourcing their business functions which was traditionally carried out in house (Mclvor, 2005, P-1). It is considered as part of global corporate strategy by the corporate. Global outsourcing industry is booming as more and more corporate are outsourcing their business functions. Developing countries like India, China etc. are taking proactive step to tap the major share of outsourcing. It provides employment opportunity as well as earning of foreign currency. It has become driver of economic growth of developing countries. It first sight, it seems that it provides win-win situation for both developed and developing countries. But it is being criticised in the home countries of multinationals on the ground of job losses (social impact) and flow of currency outside the border of the country (economic impact). In fact, outsourcing has become major issue in US next to terrorism.
First part of this dissertation provides a brief description of outsourcing process. It includes a brief note on outsourcing and outsourcing process, factor of outsourcing, its advantage and major challenge for global outsourcing industry. This part of dissertation will focus on various issue related to the outsourcing. Firstly, the major trend of outsourcing industry during last 10 years. This will include brief history of outsourcing, brief description of various countries and current trend of outsourcing. Secondly, to develop the arguments in favour and against the outsourcing and this will be done in view of its social and economic impact. Thirdly, to predict the future directions of the outsourcing and this will be done in view of trend in global economy vis-a-vis other financial indicators.
History of outsourcing by US backs to industrial revolution but modern form of outsourcing has started during 2nd half of 20th century. During, 1970s, the software companies of US started outsourcing their payrolls function to the service providers outside the companies. By1980s, other business functions like accounting, payroll, billing etc also become part of outsourced work. During late 1980s, outsourcing began to emerge as powerful force having potential to transform global economy. Outsourcing of non-core activities has become more prominent during 1st decades of 21th century due to development in the factor of outsourcing.
The major factors which have contributed to the growth of outsourcing during last 10 years are: development in information technology, globalization, growth in world economy, availability of required infrastructure, improvement in human resource etc. A brief account of these factors is as under:
Growth in world economy: Growth in world economy has lead to rise of many multinationals and has also provided new business opportunity. These multinationals has realized the importance of outsourcing and has adopted it as the part of its global corporate strategy. These multinationals has contributed manifold growth in the outsourcing industry during last 10 years.
Information technology: Information technology includes power of computer technology and telecommunications and its development has shortened the global distance. Now exchange of information and transfer of data from one corner to order corner of world are possible in fraction of second. This has lead to emergence of new types of industry called business process outsourcing (BPO) and ITEs (Click & Duening, 2005). A customer sitting in his New York office will get his queries regarding his account with Bank of America answered from an Indian sitting in Bangalore within fraction of second. A person sitting in China may transfer shares of NYSE listed companies from one shareholder to other after execution of sales on request of customer. This is power of information technology which has paved the way of outsourcing.
Globalization: Development in science and technology and opening of economy by most of the companies has lead to globalization of business activities, hence rise of multinationals. These multinationals has promoted outsourcing of business process as it provides cost advantage along with others.
Infrastructure: Like any business, outsourcing activities also require infrastructure. During last ten years, the growth of economy has contributed in the development of infrastructure facilities. Further, proactive role by government of developing countries has also contributed in development of prerequisite infrastructure facilities. This development in infrastructure facilities has lead to growth of outsourcing industry.
Skilled Manpower: Further, opening of new institution and improvement in the existing training institution has lead to availability of English spoken skilled manpower in Asian and African countries. Development of technical institution like IIT in India has lead to availability of technical experts. This skilled manpower is available at much cheaper wages in compare to their European and American counterpart. This provides competitive edge to developing countries in compare to developed countries. Increase in the number of skilled manpower during last ten years has also resulted to increase in outsourcing work.
The above factor has seen a big jump during last ten years as the result of development mentioned above. This has resulted into increase in the size of global outsourcing industry which has grown manifold. Future direction of the outsourcing industry will depend on the improvement in above factor.
United States and European countries like United Kingdom, France, Spain etc. are on the demand side of outsourcing. Japan in Asian countries is also on demand side of outsourcings. These countries are outsourcing their business works to foreign countries due to benefit associated with it. Asian and African countries are on the supply side of the outsourcing as provides outsourcing services. India, China, Philippines and Malaysia has emerged has major location for outsourcing the work due to availability of cheaper and English educated manpower.
United States contributes a major chunk of total work being outsourced globally. Before the IT revolution, many companies in the US were outsourcing its manufacturing works to countries like Canada, Mexico and South America in order to cut costs. Many companies also set up separate workstations and factories in these regions. IT outsourcing has increased pace and magnitude of the outsourcing. The composition of outsourcing work being outsourced by US is as under:
Diagram: Composition ratio by area of the outsourcing market in the US (2002)
Source: 5th Annual Outsourcing Index 2002 (The Outsourcing Institute).
From the above graph, it is evident that Information technology constitutes about 20% of outsourcing followed by administration (15%). Real estate & plant and trade contribute 10% each followed by HR which contributes 9% to the outsourcing.
As of now mainly 5% of American countries with revenue range of 100 million to 4 billion are outsourcing their works. Size of outsourcing market will certainly grow when small and midsized firm will start outsourcing. GE, AIG, American Express, Citibank etc are major contributor of outsourcing. During 2002, US companies invested $ 120 billion dollar abroad in lieu of outsourcing services.
It has become a political issue in US because it is considered as major reason for unemployment. People are also protesting it on the ground of economic impact as outsourcing of any works involves flow of currency. In spite of these odds, US economy is contributing and will contribute a significant effect to the global outsourcing.
France, Japan, United Kingdom and Germany are the countries next to US which contributes to major chunk of global outsourcing. The main driver of outsourcing in France is cost reduction. Market share of France was 17.1% in 2003 and it was third largest market in Europe. Some of the characteristics of French outsourcing are: near-shore form of outsourcing, partnership with French companies, knowledge of French language etc. Knowledge of French language and quality of service are the important parameter which is followed by French company in order select the service providers.
Germany is another European country which is also contributing a lot in the growth of outsourcing industry. Business process outsourcing includes call centre services, payroll, purchasing, human resource management, customer care, billing process etc. Eastern Europe and India is the major service provider for Germany as the personal costs are lower. The main motto for outsourcing is “do what you can do best-outsource the rest”. During last decades, it has shown see changes in the volume of outsourcing transactions.
Cost reduction is the primary reasons for the emphasis on outsourcing by United Kingdom as it provides competitive edge. BPO and IT-enabled services are the major area of outsourcing in UK. India is the major investor in UK and more than 480 Indian companies are present in UK. As per the indications, growth in IT outsourcing in UK is at the rate of 15-20% from 1st decades of 21st century (Bernett, 1998, P-3)
Today Japanese companies are increasingly outsourcing their business solutions to meet their business needs faster, cheaper and smarter. They are facing pressure from domestic as well as international competitors to reduce the costs and to implement new technology in hassle free way. Composition ratio by area of the outsourcing market in Japan (1999), are as under:
Source: Survey on outsourcing (Strategic outsourcing council of Japan)
From the above table, it is evident that information technology, consulting and Human resources are the main area of outsourcing. Size of outsourcing industry in Japan is one fourth of that of US market still it is not in growth curve and is estimated to grow at the rate of 10% in coming years. Single point of outsourcing and multiple year contracts are the main characteristics of Japanese model of outsourcing.
Asian and African countries have emerged as hot option for outsourcing of works by multinationals due to availability of above factor of outsourcing. Major countries in the list are: India, Philippines, China, Malaysia, Vietnam, Bangladesh, S. Africa, Ghana, Senegal, Kenya, Jamaica, Mauritius, Nicaragua, Barbados, Mexico, Brazil etc. India and china are considered most hot option as it has a large number of English speaking manpower.
India has emerged as favourate location for outsourcing work (Engardio & Kripalani, 2006). In first quarter review of monetary policy for 2010-11, Reserve Bank of India has revised real GDP growth from 8% to 8.5%. This shows the momentum of the growth of Indian economy. During last ten years, Indian economy has grown at the growth rate of 7%-9%. This has resulted into development of infrastructure and other facilities. Availability of large number of English speaking manpower has made it hot option for outsourcing. In the late 1990s, India’s abundant and low-cost software engineering talent, combined with huge demand from the Y2K problem helped India to move in the value chain. As the result of above development India has become hot destinations of American high-tech firms, led by HP, IBM, Intel, AMD, Microsoft, Oracle, and Cisco. AT Kearney has compared attractiveness of various locations for outsourcing and has ranked India at most lucrative option.
According to UNCTAD presentation at Geneva on 28-29 April, 2005, India was having 18% share of global market of outsourcing with growth rate of 54% in 2003-04. It was reported that total export revenue from outsourcing will touch to US$ 57 billion by 2008 and US$148 billion by 2008. Further, it was reported that employment from outsourcing In India will grow from the level of 110,000 in 2003 to 2.7 million by 2012. US are outsourcing most of its IT related business functions to the India (Ganesh, 2007).
China has also emerged as hot option for outsourcing due to availability of cheap labour and solid infrastructure. In case of China, language is main barriers in way of development of outsourcing industry. But Chinese people has also started giving focus on English language and as the result of this development, it is emerging as hot option for outsourcing. Overall, China is emerging major competitors of the India in internationals market.
Vietnam has also emerged as a good option for outsourcing due to cost advantage, strong mathematical skills and knowledge of French and English. Many IT companies like NIIT, Oracle etc has opened their unit in Vietnam and is providing training. Further, government of Vietnam is also providing support by offering tax holidays to IT sector. As the result of this development many blue chip companies like IBM, H.P. etc has started outsourcing from Vietnam.
Ghana government is promoting outsourcing industry and is persuading US companies to set up their outsouricng centre in Ghana. Stable political environement, high literacy and English speaking manpower is main attraction. Diaspora of Ghana is also playing critical role by setting up their own companies in collaboration with foreign partner and educating people about foreign culture.
Philippines has also emerged as lucrative option due to cultural affinities with United States. They are well versed with the accounting standards and other standards for services. This is why Procter & Gamble has moved their accounting work to Philippines. AIG, American Express, Citibank are other some of the companies which has shifted their works to Phillipines.
From the above discussion it is evident that U.S. businesses accounts for around 70 % share of the global market of offshoring and balance by European countries and Japan. In developing countries India accounts for major portion of outsourcing business followed by China, Vietnam etc. Other countries which are supply sides of outsourcing are Brazil, Easter Europe etc. Further, once trend which can be worked out is that the volume of outsourcing work in all the countries has increased manifold during last 10 years.
The outsourcing industry is booming as more & more multinational is outsourcing their non-core activities as way of cost saving. As per Deloitte Research, world’s 100 largest financial services firm expect to transfer $350 billion of their cost bases abroad by 2008. Further, it has estimated that 100 largest financial services will save $ 71 billion a year 2005, rising to $153 billion in 2010. Investment consultancy firm McKinsey & Co. predicted that global outsourcing industry would be more than $ 180 billion by 2010 (economywatch.com). Forrester, a leading IT analyst, dissertation s that the number of U.S. jobs offshored will grow from 400,000 jobs today to roughly 3.3 million jobs by 2015 accounting for some $ 136 billion in wages.
Subprime crisis of 2008 has resulted into slowdown of global economy and US economy was worst affected. This has also resulted into increase in the unemployment level in United States. To counter the effect of subprime crisis on unemployment and US economy, US government started giving incentives to the corporate which retain their work in US. The subprime crisis of US and decision by US government has affected the growth of global outsourcing industry but again it has started to gain its momentum. According to the global TPI Index- which measures commercial outsourcing, the further quarter of 2009 saw $ 24.7 billion of new business, the best performance of six quarters. Lower cost structure is seen the major guiding force behind it.
Global outsourcing summit 2010 was held in February 2010 in association with Internationals associations of outsourcing professionals (IAOP). In the summit, 70% of the nearly 600 attendees said they were pursuing more outsourcing opportunities than just a year earlier. As per the summit report titled “2010 The Global Outsourcing 100”, the following are major trend of outsourcing:
From the above discussions, it is evident that cost reduction is still the major driver of the outsourcing. Latin America, Brazil, Chile, Easter Europe etc. are some of the emerging centre for outsourcing work. Technology, corporate social responsibility and government policy are also driver of outsourcing. Recent outsourcing data shows that, it has great future.
The major factors which have contributed to the growth of outsourcing during last 10 years are: development in information technology, globalization, growth in world economy, availability of required infrastructure, improvement in human resource etc. United States, Japan and European countries like United Kingdom, France, Germany etc. are on the demand side of outsourcing. United States contributes to major portion of global outsourcing. India, China, Philippines, Malaysia etc has emerged has major location for outsourcing the work due to availability of cheaper and skilled manpower. Investment consultancy firm McKinsey & Co. predicted that global outsourcing industry would be more than $ 180 billion by 2010. Cost reduction, technology, corporate social responsibility and government policy are key driver of outsourcing. During last 10 years, size of industry has gown manifold.
Outsourcing of the business function provides cost advantage to multinationals and helps it to offer products and services at competitive price. Even global consumers are being benefited by this as they are getting products & services at lower price. It is providing job opportunities to millions of people in developing country like India, China, Mexico etc.
United States is leading country in outsourcing of business functions to developing countries. Outsourcing creates wealth for U.S. companies and consumers and in turn for the United States as a whole. It is this innovation which keeps U.S. companies at the leading edge of competitiveness. The more companies innovate, the more competitive they become and the more benefits are passed on to consumers. Further, it is also able to generate job faster than outsourcing eliminates them.
But it is being criticized on the ground that it leads to loss of jobs (social impact) in the home country and outflow of money (economic effect) to other counties.
People against the outsourcing oppose it on the ground that through its jobs and dollar is being exported to foreign countries. They are not only concern to job loss but also to loss of income. According to them, the dollar being paid to foreign firm in lieu of providing outsourcing can be kept within the country by banning it. So outsourcing is not only a social issue but economic issue too.
Outsourcing is providing benefit to economy of home country in many ways. Major advantages of outsourcing to U.S. economy are as under: The outsourcing benefits economy by lowering labour costs, increasing core competency, increasing efficiency without any monetary losses. According to recommendations made by Baily and Farrell (Azu, 2010), on the one hand it must be flexible enough to accept such innovations because they lead to growing productivity and a higher standard of living. On the other hand, policymakers should consider what laws and regulations are needed to cushion and assist those who suffer as a result of these changes. Economic effect of outsourcing is given as under:
As the result of above benefit associated with the outsourcing, most of the multinationals has started outsourcing their non-core business. Depth and breadth of outsourcing rooted in U.S. economy can be judged from the table given below.
Table: 2004 S&P data for 769 US firms
|Particulars||Cost- $ Million||% of Total|
|Depreciation, Interest, Taxes||$ 89,381||11.20%|
Sources: Paul A. Strassmann (2006)
From the above table, it is evident that outsourcing forms the major portion of total costs. Share of outsourcing in the total expenditure is about 46.60%. From the above discussion, it is evident that cost reduction is major benefit economic benefits associated with this.
The offshore IT outsourcing added $33.6 billion to real gross domestic product in U.S. in 2003 and by 2008, it was expected to add another $ 124.2 billion (ITAA report). In conclusion the outsourcing benefits US economy by lowering labour costs, increasing core competency, increasing efficiency without any monetary losses. In fact, of the full $1.45 to $1.47 value created globally from outsourcing $1.00 of U.S. labour cost, the U.S. captures about $ 1.12 to $ 1.14 while the receiving country captures just 33 cents (McKinsey Report, 2004). It means the country like India which provides outsourcing services to U.S. only gets 33 cents of every dollar spend by US firm. Similar is the case with other outsourcing countries like United Kingdom, France, Germany, Japan etc. Service providers gain a small chunk of investment in outsourcing.
From the above discussion, it can be concluded that the major chunks of cash outflow is captured by home country. Further outsourcing is also considered as competitive advantage to the multinationals (Williams, 1998). In the world of globalisation, there is cut-throat competition among the multinationals and in such a situation it provides competitive edge.
In developing countries, outsourcing provides additional flow of foreign currency into the economy. Outsourcing activities is seen as new business opportunity in developing countries. Economy of India, China, Mexico, Ghana, Brazil etc. is being benefited from additional flow of foreign currency in the country. From them, outsourcing is boon for their economy and in future it will be key driver of their economy.
From above discussion, it is evident that the from economic point of view, outsourcing of business functions provides win-win situation for both developed and developing countries.
People in home country are criticizing outsourcing on the ground that it off-shores jobs to foreign country and creates unemployment in home country. In developing countries, it creates new employment opportunity and raises the living standards of the people. It has become social issue in home country on the ground of job losses. The seriousness of issue can be judged by two statements given below:
“There are people looking for work because jobs have been overseas, and we need to act in this country.” -George W. Bush
“Half of our sales are outside the United States. If you want to sell in places like China, India and Europe you’ve got to employ people there. GE is a global company.”
(Source: Vietor & Veytsman, 2007)
During 2004 presidential campaign, the recent losses of American jobs were a major issue for both President George W. Bush and Senator John Kerry. That time both of candidates agreed that outsourcing of works has resulted into loss of more than 2.5 million jobs since 2001. Critics blamed outsourcing behind domestic employment woes. The general belief in people is that through outsourcing jobs, skills, experience and money are being exported to foreign countries. Those foreign countries are growing socially as well economically at the cost of home country.
The debate over the impact of outsourcing to home country deepen further with Nobel Prize winner Paul Samuelson and Columbia professor Jagdish Bhagwati coming on opposite side of issue (Olian,2004) . These two economists disagreed with the argument that short term job losses due to outsourcing, are mitigated in long run by gains to American workers from free trade and consumption growth in low-wage countries. Samuelson argued that the loss of competitive advantage to low wage countries like India and China is of permanent nature. He asserts that the loss to American economy and US worker is permanent. According to Bhagwati and colleagues as cited in Olian (2004), there is temporary dislocation in low skill jobs as the result of outsourcing but in long run it will offer substantial gains to U.S. economy through cheaper imports and stronger market for exports. During 2003, 98% of total contract value for outsourced business process service delivery in the US was done domestically and only 2% was off shored. Service jobs like retail, catering, personal care and other professional roles cannot outsource as it requires personal interaction with customers. Service sector contribute 70 to 80 of U.S. economy and impact of outsourcing is to the limited extent for the U.S. unemployment (Olian, 2004).
Critics of outsourcing feared that it will not only impact employment opportunity but also on effective wage. Low skilled worker who lost their jobs due to outsourcing of their jobs to foreign market were able to get new replacement jobs at 20-40% lower earnings than previous earnings. According to the American Policy Institute, a newly expanding firm is less likely to provide workers with health insurance than firms that were cutting jobs. This is leading to income inequality in U.S. as low and middle household is experiencing decline in income whereas wealthier is becoming more prosperous. As per one estimates, $ 151 billion in wages would shift by 2015, from U.S. to countries with cheaper labour costs (Vietor & Veytsman, 2007).Mobility of employers overseas are also hurting workers by decreasing their bargaining power.
As cited by Judy Olian in his article titled “Outsourcing of U.S. jobs: Bad or good”, Forrester Research has estimated that 400,000 U.S. jobs had moved abroad by 2003 and that the total would hit 3.3 million by 2015. There is loss of 200,000 jobs each year due to global outsourcing whereas about 7 million jobs were gained and lost in United States during calendar year 2004. According to McKinsey reports, between 1983 and 2003, two million manufacturing jobs were lost in the US but 36 million new jobs were created in services. Further, 22 million new jobs were created in the US during 2000-10. Loss due to outsourcing is minimal compared to mass layoffs as the result of corporate mergers and restructuring when the economy grows. According to one estimates for outsourcing, 317,000 net new jobs were created by 2008 in the US.
Further, people opposes outsourcing on the ground of job losses based on assumption that there is a fixed number of jobs in the US job market and its outsourcing will lead to permanently job losses. US market is a flexible market and mobility of US worker will enable the US to generate new jobs faster than outsourcing eliminates them. American employees who lose their jobs as the result of outsourcing are re-located to value added jobs. Hence, job displacement is unfounded.
The supporters of outsourcing of business activities asserts that it has created jobs in the U.S. export sector, lowered cost and is offering products and service at lower cost. According to one economist, “instead of altering the number of jobs, free trade changes the mix of jobs in the country to reflect those areas in which we have the greatest competitive advantage over other countries. International trade in services expands the process of job specialization and raises living standards.”
In view of above, it can be concluded that although outsourcing of jobs to off-shore effects employment but that is of temporary nature and same is replaced by new job created. Further, rise in profits of corporate is good for economy and same can be used to create more jobs. Employment problem as seen at the time of subprime crisis was not due to outsourcing but due to ongoing recession in industry. Overall, outsourcing has positive social impact by increasing standards of living. Similar is the situation with other outsourcing countries like United Kingdom, Germany, France, Japan etc.
From the above discussion, it is evident that social and economic impact of outsourcing as hyped by the media is myth. Outsourcing provides win-win situation where all the parties involved is benefited. Further, Government in consultation with corporate should focus on redeployment, placement support, training grants to labour being affected by offshoring of business function. Society should be flexible enough to accept innovations like outsourcing as it lead to increase in productivity and economic growth. Policymaker should consider laws & regulation which will promote outsourcing and will provide cushion to those who is affected by it.
Outsourcing of business activities has become an inevitable trend in the global economy. It has potential for huge gains for both developed and developing countries. As discussed above, it is a win-win situation where all the parties involved benefit. In spite of some of the protectionism measure taken by countries like US, France etc., global outsourcing industry is flourishing. McKinsey & Co. predicted that global outsourcing industry would be worth more than $180 billion by 2010. This clearly indicates the future potential of outsourcing. Future direction of the outsourcing will depend on many factors (Engardio & Arndt, 2006). Global economic growth is one of the major factors which will affect future potential of outsourcing. Increasingly emphasis by multinationals on outsourcing wills lead to outsourcing industry at greater height.
Analysis of global outsourcing trend during last 10 years indicates that global outsourcing industry has grown manifold. United States, UK, France, Germany, Japan are the major countries which is outsourcing their work to the Asian countries. Global economy was facing recession on account of subprime crisis of US. Now, the global economy is recovering from subprime crisis and is gaining their growth momentum.
Future directions of the global outsourcing industry will depend on many factors. Some of the major factors are- global economic growth, political support, social factor, technological factor and legal/regulatory factor. A brief description of these factors and its future movement are as under:
Global Economic Growth: Future movement of global outsourcing will depend on future movement of global economy in general. World GDP is more than $ 65 trillion and it is growing at the GDP rate of 5.2%. Contribution of service sector to the global GDP growth rate is 64% followed by industry sector (32%). Agriculture sector contributes only 4% of total global GDP. As outsourcing industry is a part of service sector, it has great future potential.
Further, outsourcing is seen as win-win situation for developed as well as developing countries. It increases productivity, provides competitive edge, higher employment and faster economic development, hence it has become inevitable. Every dollar of outsourcing creates $1.45 to $1.47 of value out of which US captures $1.12-$1.15 and India gets only 33 cents (Mashayekhi, 2005). Outsourcing industry has already crossed the level of $1trillion and total saving from global outsourcing has grown from $6.7 billion in 2003 to $ 20.9 billion in 2008.
Worldwide ITES-BPO spending by region 2002-06, are as under:
Source: (Mashayekhi, 2005)
The above tables indicates that ITES-BPO spending has grown at the CAGR of 13% during 2002-06 in Asia/Pacific region followed by 8.5% CAGR growth in EMEA region and 7.5% CAGR growth in America alone. Comparing by absolute figure, United States contributes more than 50% of global ITES-BPO industry. Further, global ITEs-BPO economy was expected to grow by CAGR of 8.5 % which is quite higher than global GDP growth.
As per UNCTAD ppt., during 2003, 98% of total contract value for outsourced business process service delivery in the US was done domestically. India accounted for only 1% of total US imports of private services (of which, 2% – business services). Total export revenues of India was Projected to touch US$ 57 billion by 2008; US$ 148 billion by 2012. Due to increasing benefits of outsourcing, US based multinationals are increasingly outsourcing their works to India and other countries. Similar development is also taking place in other countries like United Kingdom, Germany, France, Japan etc. In such a scenario, size of global outsourcing industry is expected to increase manifold.
As of now mainly 5% of American countries with revenue range of 100 million to 4 billion are outsourcing their works. Size of outsourcing market will certainly grow when small and midsized firm will start outsourcing.
Social Factor: Outsourcing of business functions has become economic as well as social issues. People in home countries are criticizing outsourcing on the ground that it is creating job in developing countries at the cost of unemployment in home countries. But the data shows that outsourcing of business functions is not fully responsible for unemployment. In US, there was net creation of 22 million new jobs in the US (from 2000-2010). Estimates for outsourcing reflect that there are 317,000 new job creations by 2008 in US.
As evident from above discussion that as per the available data, job displacement due to outsourcing has been unfounded. Still, there are many people, social organization and NGO who are protesting outsourcing on the ground that it is responsible for unemployment and other social issue like effective wages in the home countries.
In light of above two impact of outsourcing i.e. impact on employment opportunity and effective wages, it can be concluded that future directions of the global outsourcing will be affected by the social development on this issues.
Political Factor: Outsourcing of business functions has also become a political issue on the ground of its economic and social impact. The government of developed countries like United States, United Kingdom, France, Germany, Japan etc. which are major supplier of outsourcing activities opposes effects the direction of outsourcing by various protectionism measures. Governments of developing countries are supporting the outsourcing industry by various promotional measures as it contributes in economic as well as social growth.
The role of government of developed countries like US, UK, France etc. plays vital role to the outsourcing industry. Sometimes they use protectionism policy to curb the outsourcing of work to foreign countries. Tax incentive to company in US and France is example of it but it varies from time to time. Sometimes they curb protectionism through industry support measures like redeployment, placement support, training grants etc. International trade negotiations also facilitate the work of outsourcing.
In developing countries, outsourcing helps in earning (exports) of foreign currency as well as increasing employment opportunity. Some of the proactive measures taken by governments of developing countries are as under:
As the result of proactive role by government of developing countries like India, China, Malasia etc., the outsourcing industry in these countries are booming. In conclusion, future directions of outsourcing will be affected by government policy.
Technological Factor: Technology plays a significant role in the smooth processes of outsourcing works. Major portion of the outsourcing work involves work related to information technology. These are the field which requires technological appetite and research work. Future direction of the outsourcing will depend on the ability of the developing countries to leverage technology. Skilled manpower updated with recent development in the field will be great assets for developing countries. Further, knowledge of latest technology is pr-requisite for outsourcing.
Legal/ Regulatory requirements: Outsourcing industry is in growth phase and its future direction will be also affected by legal/regulatory requirements. Outsourcing of business activities has become a global phenomena and it also requires law/ regulation for international control and monitoring. Many countries have adopted some kind of protectionism policy which hinders the growth of industry. Further, many companies/ countries has regarding transfer of data like restriction on transfer of data. As outsourcing of work requires transfer of data also which may be confidential in nature.
From the above discussion, it is evident that future direction of outsourcing will depend on economic growth, social factor, political factors and legal/ regulatory requirements. Favourable development in above factor will have positive effect on outsourcing industry whereas unfavourable development will hinder the momentum of outsourcing. Looking into current scenario, it can be predicted that these factor will have favourable effect in future.
3.4.2 Reason for future growth potential of outsourcing: The outsourcing industry is booming and I am in firm opinion that in coming future outsourcing industry will grow manifold. The primary reason to believe this is as under:
The above technique will certainly improve the quality of work by service provider which in turn will attract more outsourcing work. In coming future, it is expected that quality of work will improve and corporate concern about quality of work will start outsourcing their works.
From the above discussion it is evident that main reasons to believe that in future size of outsourcing industry will increase are- outsourcing industry is in growth phase, development in supplier markets, decrease in resistance level of executives and improvement in the quality of works. Further, outsourcing industry is derived from global economy as whole. As global economy is growing at the GDP growth rate of 5.2%, outsourcing industry is also expected to grow in future.
According to the global TPI Index- which measures commercial outsourcing, the further quarter of 2009 saw $ 24.7 billion of new business, the best performance of six quarters. Lower cost structure is seen the major guiding force behind it. Global outsourcing summit 2010 was held in February 2010 in association with Internationals associations of outsourcing professionals (IAOP). In the summit, 70% of the nearly 600 attendees said they were pursuing more outsourcing opportunities than just a year earlier. This clearly shows the increasing emphasis of outsourcing by multinationals.
Favourable development in factor of outsourcing i.e. economic growth, social factor, political factors and legal / regulatory requirements etc. is expected to improve in future. Looking into trend of outsourcing during last ten years and response from various stakeholders, it can be concluded that future of outsourcing industry is bright. Outsourcing industry has potential of becoming industry of future.
From the above discussion, it is evident that outsourcing has become inevitable for the society. Therefore, society should be flexible enough to accept innovations like outsourcing as it lead to increase in productivity and economic growth. Policymaker should consider laws & regulation which will promote outsourcing and will provide cushion to those who is affected by it. As it is beneficial for all the economy, everyone should support it.
Outsourcing is contracting out of non- core operations from the internal production to an external organization specialized in that operations. Different types of business segments being typically outsourced are-call centre function & customer support, market research, telemarketing, human resources, accounting, information technology, engineering, manufacturing etc. The aim of the dissertations is “To analyze outsourcing, which is used by multinational companies as part of their global corporate strategy”.
Outsourcing of business functions has become new trend in the business community. Availability of cheap labour, global network, adequacy of infrastructure, globalisation, government support etc. are main factors of outsourcing .Outsourcing of non-core activities provides cost advantage and competitive edge to the multinationals. Other benefits involved are- cost restructuring, improvement in quality, time to focus on core business & innovations, speed to market , increased revenue etc. Growing protectionism in home country, lack of infrastructure and trained HR, need of strong risk control framework, loss of competitive advantage of developing countries are some of the major challenge for outsourcing industry
McKinsey & Co. predicted that global outsourcing industry would be more than $ 180 billion by 2010. U.S. business dominates in the global share of off shoring and accounts for 70% of total market and remainder by Europe & Japan. The outsourcing benefits economy by lowering labour costs, increasing core competency, increasing efficiency without any monetary losses.
The impact of outsourcing on the economy of home country is favourable. Outsourcing impact economy of home country by reducing costs, generating new revenue , bringing money back in form of repatriated earnings , providing opportunity to corporate to focus on core business and redeploying labour. As per McKinsey Report, of the full $1.45 to $1.47 value created globally from outsourcing $1.00 of U.S. labour cost, the U.S. captures about $ 1.12 to $ 1.14 while the receiving country captures just 33 cents. The offshore IT outsourcing added $33.6 billion to real gross domestic product in U.S. in 2003 and by 2008, it was expected to add another $ 124.2 billion. Outsourcing is essential for the growth of economy.
Critics of outsourcing feared that it not only impact employment opportunity but also on effective wage. Data shows that 22 million new jobs were created in the US during 2000-10. Outsourcing is providing more employment opportunity than the job loss by it. Further it is improving standards of living by offering products and service at cheaper costs. Hence, it can be concluded that outsourcing provides win-win situation where all the parties involved are benefited. Outsourcing is here to stay (Burkholder, 2006, p 17)
The future direction of outsourcing will depend on global economic growth, social factor, political factors and legal/ regulatory requirements. Global economy industry has gained the momentum of its growth on account of growth in developing countries. Looking into trend of outsourcing during last ten years and response from various stakeholders, it can be concluded that future of outsourcing industry is bright.
From the above discussion, it is evident that aim & objectives of the dissertations had been achieved. Further, outsourcing provides win-win situation where all the parties involved are benefited. Therefore, society should be flexible enough to accept innovations like outsourcing as it lead to increase in productivity and economic growth. Policymaker should consider laws & regulation which will promote outsourcing and will provide cushion to those who is affected by it.
The dissertation topic, “To analyze outsourcing, which is used by multinational companies as part of their global corporate strategy.” is a subject in itself. Many multinationals companies are using strategy in their global corporate strategy. However, opinions are mixed; while some see outsourcing as a win-win situation where all the parties involved benefit, other disagrees.
The proposed dissertation has following shortcomings:
Recommendations for future works on this topic are, as under:-
The incorporation of above recommendations in the dissertations has certainly improved the quality of dissertation. In spite of the above odds, the dissertation is comprehensive in nature and was successful in achieving aims & objective of the project.