The Role of Offshore Outsourcing in Contemporary International Business The WritePass Journal

The Role of Offshore Outsourcing in Contemporary International Business Introduction The Role of Offshore Outsourcing in Contemporary International Business Introduction Offshore outsourcing is a term most widely used in today’s international business prospective describing the companies contracting or subcontracting their service or manufacturing oriented jobs and business functions to a location beyond their national boundaries. The trend started in 1980s with the amplified import of materials used in basic US manufacturing industry from about 10.5% to 16.2% and in hi-tech manufacturing such as electronics and computers from 26% to 38%. These created a hint of belief in the western companies about the benefits of using offshore outsourcing to their advantage and reduce their cost and enhance the product quality. The incentive seen by western companies was the low cost manufacturing driven by cheap labor cost abroad especially in the eastern part of Asia such as China, Taiwan, and Philippines etc. In today’s scenario offshore outsourcing is majorly motivated by the relocation of service based business process such as call centers, info rmation technology, document management, accounting and tax processing to the emerging economies such as India and China. Reduced communication costs, standardized software and international procedures have fuelled offshore outsourcing to immense extent. The dissembling of production process and introduction of value chain system boosted the need of globalization and with it outsourcing by adding value to a single product at different parts of the world. All major corporations over the world are striving for economies of scale and to capture and fulfill demands of every possible segment of the market, regarded as a major reason behind offshore outsourcing. According to XMG Global the outsourcing market value is in tune of US$ 373 billion with its portfolio ranging from banking, travel, automobiles and telecommunication etc.( www.businessweek.com, 25 Sep 2009). In global prospective China is leading the way in production offshoring and India in service offshoring. The western companies which were more financially sound and capable than their counterparts in rest of the world started the trend of offshore outsourcing. They realized that focusing on their core competencies will bear them more lucrative fruits in long run rather than spending their critical resources on processes which were categorized as strategically less important. Ever increasing globalization, swiftly changing technology, increasing demand and constant shift in taste of consumers forced managers to differentiate their offerings and increase operational efficiency of the firm. They started segregating the components involved in the business process and outsourced them to places around the globe at lesser cost with almost equal qualitative delivery. The larger dollar value compared to the currencies of the emerging economies made the offer attractive for both the customer firm and the vendor. Services are usually measured to be very labor concentrated and are not regarded unde r core competency for majority of the firms is the key target for outsourcing to low cost economies (Elmuti and Kathawala, 2000;  Purcell, 1998). While labor cost constituted almost 70 per cent of call center costs in the USA, they only account for approximately 30 per cent of costs in India.(Loh and Sharma,2009) Western companies take benefit of these differences by using capital equipment more intensively (more shifts), using cheaper (unbranded) capital equipment, and reducing automation (replacing capital with labor) (The McKinsey Quarterly, 2003) cited in (Loh and Sharma,2009). The fees in service outsourcing are usually charged as per usage basis changing the fixed cost into variable costs proving advantageous for them. Western Companies can add extra market value and increase their savings significantly through outsourcing, while focusing majorly on their core proficiency. Apple Inc used this feature to its success and is a prime example of a firm concentrating on its core c ompetency and outsourcing rest of the process to remote location. The product designing is done at its California headquarters while the manufacturing is done in China and the delivery is completed by a different vendor, every procedure is done under a strict quality control making Apple an untouched leader in its segment. There are major risks also involved with the outsourcing of the services to an unknown vendor in the other part of the world. Risks range from privacy and security violations, diminished technical returns, hidden costs, loss of expertise and difference in cultural values of the vendor and the consumer nations. There is always an emphasis on meeting of the Service level agreements to maintain the quality of the services being delivered. The North American free trade agreement (NAFTA) gave a big thrust to shifting of manufacturing related process from US to Mexico, the trend later benefited China which offered the same products on more competitive cost because of the very low wages, few workers rights and higher value of US dollar compared to fixed valued Yuan. Wal-Mart Stores Inc. the biggest retailer in the world is the emblem of Chinese export to the US market. It is expected to increase its imports from China to US$ 18 billion up by 20% compared to last year (China Daily, 18 March 2011), this shows the advantage of offshore outsourcing with increasing sales revenue for the firm and better strategic opportunism by getting its goods just in time and of the superior quality as demanded by the Wal-Mart. So far 70% of the products sold in Wal-Mart are imported from China. (China Daily, 18 March 2011). The workforces concerned with the Western Companies are majorly affected if the company decides to go for offshore outsourcing. Almost 3 million manufacturing job has been relocated from the developed economies to the emerging low cost nations due to offshore outsourcing(Whalen, 2005), the figure is 3.4 million for the service industry further inducing fear and stress in a major chunk of population to lose their job in near future(Associated Press, 2004). Another concern is the workers losing their jobs due to Outsourcing have to forcefully settle for almost 20% less reduction in pay. (Whalen, 2004)  . The supporting division of offshore outsourcing believes that outsourcing has created new positions domestically. By displacing one thousand jobs to India in 2003, Delta Airlines reduced its cost by $25 million. This money was utilized to create 1200 new reservation and sales jobs in US (Weidenbaum, 2004).  Outsourcing the low skill jobs has shaped an opportunity to create a niche and expert workforce in the core ield of the company. In some cases the employees of the customer firm are hired by the outsourcing vendor to get the insight technical expertise. The emerging market companies were the second beneficiaries of the globalization and offshore outsourcing. The examples of offshore outsourcing in the manufacturing are the electronic components, Apparels, toys and consumer goods in China, Thailand, Korea, Indonesia, India and Malaysia. While the service sector offshore outsourcing is mainly done from India, China and Philippines. The emerging market companies have the chief advantage of cheap labor compared with their western counterparts which reduces the production costs significantly. Emerging market companies can move up the ladder from low value to high value in the global supply chain and gain invaluable technical expertise which it can use for further developments and acquiring new customers.   India gained with this recent development from its huge pool of technically efficient and English speaking manpower. There are around 2.5 Million IT/ITES professionals in India (NASSCOM, 2011) .Western Multinational Companies are int ensifying offshore operations insistently in India, even as offshore vendors continue to grow at home (Associated Press, 2007) and abroad (Hamm, 2007) cited in (Sharma and Loh, 2009). In India the total value of Outsourcing is valued at US$ 88.1 billion in FY2011 up significantly from US$ 76.1 billion in FY2010 and it has become a noteworthy part of national GDP with a contribution of 6.4% (NASSCOM). The important companies being Tata Consultancy Services (TCS), Infosys, Wipro and Mahindra Satyam. Narayana Murthy, cofounder and chairman of Infosys states that India has a competitive lead and that successful offshore outsourcing involves the development of distinctive capabilities, rather than simply offering low labor costs. (Strategic Direction,2004) The offshore outsourcings have also created some challenges for the emerging market companies which are of great concern to both nation and society. The growth shown is not very well spread and concentrated on a very few parts of country and population. The companies are more focused on catering the needs of foreign multinationals thus neglecting the domestic market needs. There is a huge amount of investment required in training and keeping up to date with the needs of overseas customers. If the service delivery of the vendor is not as per the customer requirement and if the privacy and security issues are compromised there is a possibility of legal hassle between them. The workforce involved with the emerging market companies has the opportunity to enhance their career with the growing market needs and acquire more knowledge and expertise in their field. The disadvantages of offshore outsourcing are sometimes the exploitation of the workforce in terms of long continuous working hou rs and very low salary. The poor condition of workers in factories producing leading apparels in Indonesia is the prime example of this type of exploitation. The workers are mostly bounded by legal contracts to serve their company for a longer period of time barring them to move to better jobs. The offshore outsourcing has thus created wealth for both western as well as for the emerging market companies and bridged the gap across the national boundaries. It also has created many challenges for to be overcome in the near future and derive the world towards a better future and prosperity. Bibliography: Associated Press. 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