CASE4

1. What is Outsourcing?

Base on the wikipedia, outsourcing refers to the process of contracting to a third-party. While outsourcing may be viewed as a component to the growing division of labor encompassing all s the term did not enter the Ebglish-speaking lexicon until the 1980s. Since the 1980s, transnational corporation have increased subcontracting across national boundaries. In the United States, outsourcing is a popular political issue.outsourcing is often viewed as involving the contracting out of a business function - commonly one previously performed in-house - to an external provider. In this sense, two organizations may enter a contractual agreement involving an exchange of services and payments. Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as offshoring or offshore outsourcing(which are odd terms because doing business with another country does not mean you have to go offshore). In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks such as nearshoring, multisourcing and strategic outsourcing. Almost any conceivable business practice can be outsourced for any number of stated reasons. The implications of outsourcing objectively and subjectively vary across time and space.
According to T Thompson, Outsourcing refers to a company that contracts with another company to provide services that might otherwise be performed by in-house employees. Many large companies now outsource jobs such as call center services, e-mail services, and payroll.These jobs are handled by separate companies that specialize in each service, and are often located overseas.


2. What are the advantages and disadvantages of outsourcing?

The advantages of outsourcing are the following:
a)Focus on Core Activities-In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
b) Cost and Efficiency Savings-nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing.
c) Reduced Overhead-Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.
d) Operational Control-Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.
e) Staffing Flexibility-Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.
f) Continuity & Risk Management-Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
g) Develop Internal Staff-A large project needs to be undertaken that requires skills that your staff does not possess. On-site outsourcing of the project will bring people with the skills you need into your company. Your people can work alongside of them to acquire the new skill set.

Disadvantages of outsourcing are:
a) Loss of Managerial Control- Whether you sign a contract to have another company perform the function of an entire department or single task, you are turning the management and control of that function over to another company. True, you will have a contract, but the managerial control will belong to another company. Your outsourcing company will not be driven by the same standards and mission that drives your company. They will be driven to make a profit from the services that they are providing to you and other businesses like yours.
b) Hidden Costs- You will sign a contract with the outsourcing company that will cover the details of the service that they will be providing. Any thing not covered in the contract will be the basis for you to pay additional charges. Additionally, you will experience legal fees to retain a lawyer to review the contacts you will sign. Remember, this is the outsourcing company's business. They have done this before and they are the ones that write the contract. Therefore, you will be at a disadvantage when negotiations start.
c) Threat to Security and Confidentiality-The life-blood of any business is the information that keeps it running. If you have payroll, medical records or any other confidential information that will be transmitted to the outsourcing company, there is a risk that the confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (e.g. product drawings, formulas, etc.), this must be taken into account. Evaluate the outsourcing company carefully to make sure your data is protected and the contract has a penalty clause if an incident occurs.
d) Quality Problems-The outsourcing company will be motivated by profit. Since the contract will fix the price, the only way for them to increase profit will be to decrease expenses. As long as they meet the conditions of the contract, you will pay. In addition, you will lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes.
e) Tied to the Financial Well-being of Another Company-Since you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. It wouldn't be the first time that an outsourcing company could go bankrupt and leave you holding-the-bag.
f) Bad Publicity and Ill-Will-The word "outsourcing" brings to mind different things to different people. If you live in a community that has an outsourcing company and they employ your friends and neighbors, outsourcing is good. If your friends and neighbors lost their jobs because they were shipped across the state, across the country or across the world, outsourcing will bring bad publicity. If you outsource part of your operations, morale may suffer in the remaining work force.

3. What is the implication of outsourcing?

IT outsourcing is a growing phenomenon in the developed economies. However, it is not often managed as strategically as it might be. Drawing on evidence from 30 case histories in the United Kingdom, this article presents the basis for a strategic approach. It identifies six critical factors around which IT outsourcing decisions can be based, provides a framework for decision-making based on organizational experiences of different levels of success, and discusses the additional factors that need to be borne in mind as a reality check, to ensure that the IT outsourcing decision can be delivered upon. The paper argues for a more strategic approach to IT outsourcing and provides frameworks to enable decision-makers to think through the issues presented by an impending IT sourcing decision.
The potential performance enhancement that may result from a carefully formulated outsourcing strategy are suggested by the competency-based and resource-based perspective om strategic management. Potential benefits of outsourcing, such a cost improvement and more narrow focus on core competencies, make outsourcing an attractive option. Firm performance is being influence by the two types of outsourcing, the peripheral and core. Peripheral allows firms to focus on activities they do best and improve the quality of those activities. Peripheral outsourcing intensity has a positive effect in the firm performance. Core outsourcing may lead to declining innovation and eventually competition from suppliers. This has a negative effect in the firm performance.