Using examples, discuss the potential advantages and disadvantages of offshore outsourcing for A) western companies, B) emerging market companies C) the workforce of western countries D) the workforce of emerging market countries. Offshore outsourcing is defined as “Geographical relocation of specific business functions abroad … to be performed by contractually outsourced independent party” (Prasad and Prasad 2007 cited in Javalgi et al. 2009,p. 157). INTRODUCTION Context: Western companies: Clients (Importers of the services/products) Emerging market companies: Vendors (Service providers/Product manufacturers/Exporters).
Outsourcers:Western companies Business Service providers/ Product Suppliers:Companies from Emerging/developing countries like Mexico,Philipineees,Indonesia,China,India etc ADVANTAGES AND DISADVANTAGES OF OFFSHORE OUTSOURCING TO WESTERN COMPANIES AND WORKFORCE OF WESTERN COUNTRIES ADVANTAGES TO WESTERN COMPANIES The process of Offshore outsourcing benefits the outsourcer to have an edge over the other competitors in terms of gains in productivity,reduced production and company costs and increased profits for shareholders by relegating support functions to other countries and concentrating mainly on their core business.
The exploiting of geographical location advantages such as low cost(lower prices for input),availability and quality of resources, larger pool of skilled labours, transportation costs, trade restrictions such as tariffs and quotas creates a repositories of valuable rents thus enhancing productivity(Prola 2004; Bunyaratavej 2008;Bahrami 2009). According to Kaplinsky(2000), the dynamic rents can be a part of the effective value chain.
Many of the US companies like IBM, General Electric, Citibank,JP Morgan outsource part of their internal software development,back office or call-center operations (IT-related business processes) to India due to availability of cheap labour,ample number of educated English-Speaking workforce and government incentives. This is in consistency with the RBV (Resource based view) according to which competitive edge for the firm is gained through maximization of the long-term profits by developing and exploiting resources(Javalgi,2009)
The flexible labour laws and time zone difference in developing countries helps to gain in speed where employees work round the clock in various shifts. The well known US companies like American Express,Dell Computer and Eastman Kodak are offering 24/7 customer care by Offshore Outsourcing such services to developing countries like India. This is in consistent with the Dunning’s OLI theory emphasizing location element. The offshore outsourcing process gives the liberty for western companies to switch between the vendors if they are not satisfied with the service/product offered by them.
DISADVANTAGES TO WESTERN COMPANIES The idea that offshore outsourcing as a cost saving approach appears to be profitable only superficially. According to UNCTAD (2005), unless all the hidden costs like taxes, duties,management attention,communication and co-odination expenses etc. are taken into account, the proposal for offshore outsourcing would be absurd. Thus emphasises on thorough budgeting before signing a contract is advisable.
The geographical distance acts as a barrier for client in keeping check of the quality of the service/product offered by the vendors which can be resolved to a certain extent if a manager from outsourcer company keeps visiting the vendor and encouraging the reengineering of business process in order to track progress thus controlling the quality issues(Khan et al. 2003;UNCTAD 2005) The absence of global law or enforcement about intellectual property rights,privacy laws and negligent entrustment laws will be a major threat to the western companies who indulge in offshore outsourcing(Javalgi 2009;Bahrami 2009).
These laws are not considered seriously or enforced strictly which puts the confidential data of western companies at risk. As a measure to avoid fraudulent cases (Khan,2003) suggests the joint venture or alliance between vendor and supplier could be an option to consider which binds the vendor to handle their customer’s data who will also be their partner in this case more seriously. The loss of western country jobs to foreign providers might ignite controversy leading to negative publicity of the company. Also in case of the suppliers/service provider’s bad reputation will have impact on the western companies as well.
The case of Nike being criticized for exploiting workers in Indonesia by providing low-wages and inqdequate workplace standards had tampered its position in the market serves as a perfect example of this issue. (Doh , 2005) Criticisms have been especially sharp in relation to the activities of multinational companies – such as Nike, Levi’s, United Fruit, and others – whose sourcing practices in developing countries have been alleged to exploit low-wage workers, take advantage of lax environmental and workplace standards, and otherwise contribute to social and economic degradation (Adidas/American Express example )
If the Company involves itself in offshore outsourcing of its engineering and design technologies,in the long run it fails to keep abreast of current technological developments since it will not be directly involved in the process which might lead to diminishing value of firm’s competitive advantage,level of expertise and competencies. ( Kotabe, 1998, cited in Kotabe and Mudambi 2009 ).
The case of General Electrical’s(GE) heavy dependency on Samsung for skills when it got into offshore outsourcing of manufacturing of its Microwave ultimately led to success story of Samsung in south Korea establishing itself in the same market serves as a good example of the negative side of offshore outsourcing. (Javalgi,2009) Many academicians have addressed other common challenging factors like the term and the detail of contract, distance , infrastructure and cultural differences which are pervasive and can be avoided to an extent by choosing the ideal location and experienced vendors based on the requirement.
ADVANTAGES TO WESTERN WORKFORCE Edwards (1998), cited in Bahrami(2009) describes that by offloading a part of the repetitive business processes to emerging market workforce, the skilled labour in the western labour pool gets an opportunity to be innovative and hone managerial techniques which helps in productive utilisation of resources thus leading to the profitability and strategic asset to the company.
In addition, the workforce in western economy who would have lost their job to foreign vendors will have to be trained and reallocated to an advanced level of working which would aid in developing of new skills and techniques contributing to an improved set of domestic resources. (Kedia and Mukherjee 2009) The time and the money saved because of offshore outsourcing when invested on the workforce would produce favourable results (Elaborate the point! ) EXAMPLES DISADVANTAGES TO WESTERN WORKFORCE
On one hand, Management benefits in terms of cost cutting by opting to contract the services to vendors in emerging countries on the other,it puts a drastic amount of pressure on domestic IT workforce because of their replacement with the equally skilled lower wage outsourced employees and also builds an intense competition for they will be competing with the global workforce. (Shao and David, 2007). The labour force sustainability in any economy is inter dependent and hence will cause a knock on effect.
The clerks,Human resource personnels and other support jobs will also suffer and become redundant along with the technologists as a result of offshore outsourcing IT activities to the developing countries(Shao and David, 2007). Ex:“offshore outsourcing conference during 2003 says 400,000 US jobs have already gone offshore”. ( The Guardian – Final Edition,September 25, 2003) The society might have to bear financial burden in terms of older workers failing to acquire new skills or undergo training or search for alternate jobs ultimately leading them to leave the workforce. (Bahrami, 2009)
ADVANTAGES AND DISADVANTAGES TO EMERGING MARKET COMPANIES AND WORKFORCE IN EMERGING MARKET COUNTRIES Advantages to Emerging Market Companies: The new business opportunities available to emerging market companies because of offshore outsourcing puts the company in limelight and aids in global recognition by being a part of global commodity chain() which would attract many more clients and hence enhance its reputation and profitability. Example:Infosys,Wipro,HCL are a few of the most renowned Indian based information service companies which have carved their niche in the global market mainly by serving their US clients.
The services offered by the emerging market companies should be of high quality to match the requirements of the western companies and also to encourage new customers. This leads to improvement in quality and standards of the emerging market companies. Disadvantages to Emerging Market Companies: Emerging market companies heavily relying on offshore clients for their survival will have its profitability entwined with the western economic and political stability and hence will be affected when there is fluctuation in foreign currency rates or political instability. Birou and Fawcett 1993, Huchzermeier and Cohen 1996;Cho and Kang 2001; Kouvelis 1999; Chopra and Sodhi 2004),cited in (Canbolat,Y. B. et al. 2008). Ex:Recession caused job cuts The “brand bullies”(Kobrin, 2009) in market might be very strong and have total control over their suppliers in terms of setting prices. Example:Wal-Mart,the well-known US retailer approximately outsources 6000 global suppliers and 80% are from China(Source:VideoIs wal-mart good for America) The communication and co-ordination with the clients might become a problem due to cultural and language barriers.
Also the possibility of powerful western companies acquiring their suppliers to exploit the low cost location advantage by backward integration will pose as a major threat to the emerging market companies. ADVANTAGES TO EMERGING MARKET WORKFORCE The slicing up of the value chain due to offshore outsourcing activities by western companies lead to the “international division of labour on global scale” which would in turn lead to “Multilateral reinforcement mechanism between institutional arrangements”(The existence of western companies facilitating the existence of the vendors in developing countries and vice versa).
Also the job opportunities and the wages for some occupations in developing countries will be more than they would otherwise expect which might result in an improved standard of living (Farrel, 2006) Ex:”India exports about $50 billion of IT-ITeS services every year, 65% of which come from the US. ”( The Economic Times,November 7, 2010 Sunday) The stimulation of growth and starting of local vendors due to new company establishments would increase the infrastructure standards,availability of supporting clerical,human resource jobs in the developing economy . (Farrel, 2006)
The quality not just the quantity of the talent of the labour pool(Example:Language,Computer skills) will be improved because of the competition to attract the multi-national companies from developing countries and also due to the effect of spillover. The mushrooming of service industry which demands the workforce to be educated acts as a motivator to enhance the quality of future workforce (Farrell et al. 2006;Javalgi et al. 2009) Ex:Statistics about the English-speaking graduates in India which reflects the responsiveness of Indian future workforce to match the demand
DISADVANTAGES TO EMERGING MARKET WORKFORCE The best employees will be lured and employed to work for the benefit of the companies of developing country which would lead to “enclaved development and international brain drain. (Kobrin, 1999) Example:In India,only the elite workers in a few metropolitan cities like Bangalore,Pune etc working for MNC’s are exposed to the civilized society while the rural population still faces the stark reality called ‘poverty’(statistics abt how many). Replacement of the low wage outsourced vendors due to automation poses as a threat to emerging market workforce (UNCTAD, 2005)
The effect of polarization,dualism and geographical isolation would lead to unequal distribution of wealth amongst the developing county’s workforce (Kobrin, 1999). Like Anti-globalists suggest , offshore outsourcing which is a part of globalisation process aids only those developing countries with a comparative advantage to thrive economically and the others remain neglected which is the same case with respect to the fewer cities in a country enjoying the limelight and the others remain drowned in poverty.
Example: Shangai in China is well developed and people enjoy top class services and aminities while the majority of the rest of china still faces dire poverty and is far out of reach from all these facilities. REFERENCES Bahrami,B. 2009. A look at outsourcing offshore. Competitiveness Review: An International Business Journal incorporating Journal of Global Competitiveness 19 (3), pp. 212-223. | Beulen, E . et al. 2005 . From Application Outsourcing to Infrastructure Management:: Extending the Offshore Outsourcing Service Portfolio.
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