The Role of Outsourcing in Improving Financial Performance

The role of outsourcing in improving financial performance

Outsourcing is when a company contracts another company to provide a service which is essential in the company’s production and function.  This can be in the form of outsourcing things which are not in direct involvement with production, for instance accounting, advertising or other jobs which require very specialized knowledge or skills.  Outsourcing can be considered as a division of labor, but the labor is divided outside of the company.

There are some people who consider outsourcing to be an unfair trade practice because companies are able to take advantage of cheap labor in other countries which leads to unemployment in their native country.  Hence, outsourcing is a very politically charged issue.

Some benefits and risks of outsourcing include the following:

“Benefits
• Labor Arbitrage

Outsourcing allows you to take advantage of wage differentials from all over the globe. This is called labor arbitrage. Less developed countries have citizens which generally charge less than their counterparts in the First World; hence many companies outsource jobs to them, to earn more profit. However, given the current trend, there will be less advantage with arbitrage since the wage gradients are now lessening, until it becomes equal the world over.

• Focus

Supply chain optimization calls for focus in your field. It would be best if you can hire more people to do the end product, and not being muddled up in tasks which do not directly affect the production. For instance, a polymer factory will find it prudent to outsource its accounting than to hire a resident accountant full time, since accounting is only done sparingly and does not affect the quality of the end-product. However, accounting is a necessary activity for any business, so you would save if you hire an accountant only when you need to.

• Cost Savings for Specialists

Some jobs require extremely specialized knowledge in different fields. This is particularly true in technology and science. For instance, you may outsource the design of a power plant to an engineer, and have him do jobs for you on contract. This is cheaper than hiring him full-time, particularly if his skills are very particular

Risks
• Dispute Resolution

Outsourcing is a relatively ambiguous field in law. Contracts may be signed but you may never know when either party may have a differing interpretation of the contract, necessitating litigation. This is also complicated when you outsource offshore, since the jurisdiction itself will be under question. It would be best if you agree fully on how to go about the contract and ensure that both parties are respected and well-compensated.

• Differing Cultural and Trade Practices

Different cultural and trade practices may also result in supply chain risk. This may be due either to differing marketing practices, or even existing law. Religion sometimes would play a role, such as the prohibition of lending with interest in Muslim countries. This may affect the supply chain, since complications may arise from the handling and the procurement of the goods and supplies.

• Lack of Tenure

The most often point of contention in outsourcing is the lack of a sustained job or tenure. This tenure provides security for the employee and will be able to attract him or her to stay in your company. Also, secrecy may be compromised when a former consultant joins a competitor. This may expose your plans and will preempt your efforts. Thus, precaution must be taken in order to keep these freelancers loyal and a tight policy on trade secrets must be enforced. (Outsourcing risks and benefits.  http://supplychain-mechanic.com/?tag=outsourcing , retrieved 4 April, 2011.)

The outsourcing decision-making process has changed.  The traditional view of outsourcing as a tactical, cost takeout solution can spell failure in today’s intensely competitive, dynamic business climate.  Companies that want to compete on a global stage need to take an enterprise-level view and make strategic judgments about which business operations they want to keep and which they think are best suited to external partners.  For these companies, outsourcing is not simply about labor arbitrage; it’s about leveraging the global tapestry of talent and moving work to its best, most profitable location around the world.  Such a boundless view of outsourcing is essential to leading in the global economy and becoming a globally integrated enterprise.  Companies that are prepared to take advantage of this emerging business model can dramatically increase their opportunities for collaborative innovation, operational efficiency and cost savings.  Leading organizations will create an array of strategic partnerships to optimize the production and delivery of services and in the process, drive substantially greater business and transformational value.  (The Outsourcing decision. https://docs.google.com/viewer?url=http%3A%2F%2Fwww-935.ibm.com%2Fservices%2Fus%2Fcio%2Fpdf%2Foutsourcing-decision-white-paper.pdf, retrieved 4April 2011.14-15.)

 

Credit:ivythesis.typepad.com