Advantages and Disadvantages of Offshore Outsourcing - Report Example

Executive Summary This report is written to provide information on offshore outsourcing and to discover what challenges await a small company that plans to get on it. By way of completing this report, practical suggestions are provided as to how the obstacles to offshoring may be surmounted. Facilitated by globalization and information and communication technology, affshoring, as it is known now, is relatively new. It was practically an offshoot of ever evolving history of economics, which is essentially concerned about lessening the cost and maximizing the gains of doing business. When this business option – with its advantages and disadvantages – is taken, offshoring has significant impact on the ways by which a business is managed. It results to having a diverse workforce, which requires a kind of leadership fitting for the kind of situation that it gives rise to. It impacts, too, on the kind of decision making style and process that the management follows and the system of human resource management that it implements. The planning and organizing functions of management is not spared either. Offshoring may be carrying with itself several challenges, but there are several measures that the management may undertake to get over these hurdles. For now, what is certain is that offshoring is going to be here as a business option – open even for small organizations. TABLE OF CONTENTS Executive Summary 1 Introduction Backgrounder on the report 3 The objectives of the report 3 Layout of the report 3 Conclusions from the research 3-4 Offshoring What is offshoring? 4-5 Advantages of offshoring 5-6 Disadvantages of offshoring 6-7 People Management Management of diverse workplace 7-8 Leadership 8-9 Decision making 9-10 Human resource management 10-11 Planning and organizing 11-12 Conclusion 12 References 13 Introduction Backgrounder Rethinking the way how the business organization is run, the management of small firm of fifty (50) persons seriously considers the option to have some key support functions of the business – such as the IT services, accounting, customer service and marketing – be offshored. This report is preliminary to deeper consideration of offshoring as a business option. The objective(s) of the report This report specifically delves into the fundamentals of offshoring, but its main concern is on the difficulties that are faced with managing staff in another country. This is meant to inform the management of a small business organization as they consider taking offshore outsourcing as a business option. The layout of the report This report is made up of two main sections. The first section focuses on the practice of offshoring, and brings to the surface the advantages and disadvantages that go with it. The second section identifies five management areas that will be impacted on by offshoring, features a short and snappy discussion of these, and makes suggestions as to how these impacts may be addressed. Conclusions from the research Expectedly, emerging business options necessitates adjustments especially on how firms are managed. Offshoring has accompanying challenges. But there are also measures that may be taken to offset these. This is especially significant to note as it constitutes a step towards a deeper probe into the option that the firm has taken. That is, having considered the advantages and disadvantages of resorting to offshore outsourcing, its practicalities may now be dwelt on. Offshoring What is offshoring? To more fully understand offshoring, it needs to be comprehended from within the bigger context of outsourcing. Outsourcing is the transfer of non-core business operations from internal employees to an external organization. More specifically, it is the use of external resources to carry out activities that were performed traditionally in-house (Pyndt & Pedersen 2006, pp. 11). As a strategy, outsourcing makes a company focus on its core business, add value to the outsourced job and save costs (see Green 2007). Offshoring is a form of outsourcing. The term “offshore” tells about where the work is going to be done – i.e., in another country, or any country other than one’s own. Succinctly put, it is export of jobs or a cross-border outsourcing. Formally defined, offshoring is the process of relocating or establishing discrete and labor intensive business functions or processes to foreign locations (Rutherford & Mobley 2004, pp. 87). It makes possible the engineering of US car models in China, the performance of database research in India, or the underwriting of US land titles in the Philippines (Rutherford & Mobley 2004, pp. 88). Currently, it is not only the big businesses that take advantage of the practice of offshoring. As information and technology progresses and breaks the national barriers to employment (Virtual Office Becomes A Reality 2010), small businesses have likewise taken advantage of low-priced labor by outsourcing works such as marketing, web design and office administration (Virtual Office Becomes A Reality 2010). Oftentimes misunderstood as a creation of 21st century commerce, offshoring started out of non-ending pursuit of cheaper resources – especially less expensive labor – that characterized centuries of economic history. The offshoring as we know it now actually began in 1970’s (GAO 2006, pp. 2); and its primary drivers are said to be the fact of globalization and the unprecedented progress of information and communication technology (ICT) (Rutherford & Mobley 2004, pp. 88). The first to be offshored are manufacturing jobs. The white collar jobs such as IT specialists came next, and were followed by the call centers. In 2004, the US government specifically admitted that various state agencies offshored some of its functions or operations (see WSLC 2009) To date, as offshoring has become much easier to do, even the jobs that many people never imagined going overseas – e.g., lawyers doing research, doctors reading x-rays remotely and the like – are now being offshored. In addition to globalization and ICT development, there are still other changes that currently take place making it possible for even the small organizations to take advantage of offshoring. Workers overseas have become better educated and have possessed better command of the English. There is no denying that governments of various countries are investing in preparing their own human capital for jobs that are offshored from rich countries. Then, there are now offshore vendors who cater to needs of the small companies. These were non-existent until recently, when offshore vendors were focused on servicing the large companies that were in need of hundreds and thousands of jobs (Green 2007). The advantages of offshoring There is no denying that offshoring brings about economic benefits in the sense that it is not a zero sum game – i.e., one party gains at the expense of the other. Companies that offshore are able to reduce costs of thirty to fifty per cent (30%-50%) for the same level of performance, resulting to the enhancing of their competitiveness, enabling them to shift to more productive and higher value activities and expand their operations in accordance with their business needs. In some instances, too, offshoring companies are able to repatriate their profits. For the recipient countries, offshored jobs translate to employment of their local workers, their local resources are tapped, and their eventual profits are reinvested (e.g., by procuring more sophisticated products from industrialized countries). All these gains by the recipient countries contribute to the widening of their taxation base (see Pyndt & Pedersen 2006, pp. 11). Moreover, offshoring facilities a company’s access to more – and, sometimes, better – talents – which provides a way for companies to get the job done by highly skilled, experienced and, often, more committed employees overseas. Given the availability of offshore employees, job positions are typically filled more quickly. Comprehensibly, it reduces the cost of and saves time meant for recruitment of talents particularly when an offshore vendor is being employed (see Green 2007). It needs to be pointed in here too that offshoring reduces legal exposure and minimizes employment liabilities and reduces the companies’ legal exposure that is born out of myriads of employee issues. For instance, unlike traditional employee relationships, offshoring does eliminate not result to termination costs. Besides, since overseas employees typically consider working for offshoring company to be prestigious, they are oftentimes loyal and committed (see Green 2007). The disadvantages of offshoring However, offshoring also has its share of criticisms. Until now, the impact on the economy and labor market of the nations from where jobs are sent for offshoring is yet to be ascertained categorically. In 2004, for instance, the US Bureau of Labor Statistics reported that the affected – that is, lost – jobs to layoffs as their works were moved offshore was merely a couple of per cent (2%). An American market research company – the Forrester Research, Inc. – however has projected an increase from 830,000 jobs that were moved to offshore in 2005 to 3.3 million jobs to leave America by 2015 (see Rutherford & Mobley 2004, pp. 88). Similar study commissioned in 2008 in Australia arrived at similar conclusion (Virtual Office Becomes A Reality 2010). On this account, trade unions are particularly against this practice. In fact, not only is loss of job (see WSLC 2009) the concern here but also the diminishment of local skills (Business Offshoring Gains Momentum 2006). The long-term gains from offshoring are also suspect. In the short term, offshoring makes things – such as wage – cheaper and easier. But, since often there’s a need to have locals fix up the mistakes that outsourced workers do (see Green 2007) as customers do not like the idea that they are dealing with somebody overseas (Business Offshoring Gains Momentum 2006), which translate to companies ultimately losing their reputation, the long term gains from offshoring is debatable (see Virtual Office Becomes A Reality 2010). Likewise, offshoring is criticized for unnecessarily compromising security of personal and confidential data. Of course, people are apprehensive to allow access to – for example – their valuable intangible property. Hence, outsourcing would require setting up controls within the workflow process to address the issues relative to data security (see Green 2007). Offshoring also stumbles across issues related to culture. With different cultures come different communication styles, attitudes towards conflict resolution and ways of getting work done. And, these have their own set of challenges – e.g., miscommunications and conflicts among workers (see Green 2007). Finally, offshoring may appear to be unsure as to its contribution to societies. But, it is mistaken to think about it as a mere routine extension of international trade. For, whether it is likable or not, it poses continuing significant impact on the way businesses are run and the global commerce is done (see Green 2007). People management Offshoring, as a business option even for small companies, has management implications. This section principally dwells on these subsequences, and the measures to address them are provided too. Management of diverse workplace Firstly, export of jobs to regions in the globe where resources are cheap necessarily results to managing employees whose primary description is diversity (see Waddell et al. 2007, pp. 120-138). More than mere union or mixture of people of different backgrounds accounted for by their culture, age, gender, religion, sexual orientation, race and ethnicity, socioeconomic status and capabilities or disabilities, diversity is about the different needs, attitudes, beliefs and values of people who happened to be stocked – as it were – in one room, a single office, one plant or singular organization. In effect, management of diverse human resources is finding out the most effective way by which their skills and talents are fully utilized for the good of the organization. It would also practically mean addressing particular issues that arise in organizations pertinent to having a diverse workforce, such the ethical imperative to provide equal opportunity and extend fair and just treatment to one and all, the need to nip in the bud or put a stop to biased opinions, sentiments or behaviors/actions towards anyone in the organization, and the crucial task of translating the fact of diversity to improving organizational effectiveness. Principally, there is a need for the management to make a commitment to correctly understand the phenomenon of diversity in the workplace, appreciate what it may positively offer or provide to an organization, and work for fair, just and equal or equitable treatment of all members of the organization. Concretely, this is tantamount to developing diversity awareness and encouraging flexibility among the workforce through multi-pronged trainings and mentoring schemes, furthering diversity skills of employees, empowering employees to challenge discriminatory opinions, remarks and/or actions which in the process uncovers biases and stereotypes by organizational members, improving inter-personal relationships, and rewarding efforts that promote understanding among people of varying backgrounds in the organization – among others (Waddell et al. 2007, pp. 120-138). Ribbink (2003) dwells on a very practical concern of cross-cultural communication, and came up with seven tips to avoid miscommunication – which is a commonplace result of having a diverse workforce. Leadership Expectedly, management of a mixed group is much more demanding than administration of a homogenous people. And, more specifically on instance of managing a diverse workforce that results from taking the option of offshoring, leadership proves to be a major element that would bring out success. Essentially, leadership is influencing others – that is, inspiring, motivating, and directing them and their efforts – towards the attainment of the singular goal of the organization (see Waddell et al. 2007, pp. 199). Now, offshoring actually provides a rather unique leadership situation. Ideally, managers become effective when they are placed in a situation that fits their leadership style (Davidson & Griffin 2002, pp. 576). With a diverse workforce, though, flexibility and openness to adapt differing leadership tacks or styles become the norm for success (see Dubrin et al., 2006, pp. 199-200). Specifically in the context of a workplace that is diverse, leadership is effective when it is able to detail the specifications required by the job and the outcomes that are expected to be obtained from it. Leadership, likewise, is effectual when it is ready and swift to reward workers for their high performance, and when they help the workers attain the organizational goals with the outcomes of their work (see Yukl 2006, pp. 243). In similar vein, a leader of a diverse workforce is expected to make clear the path towards the attainment of the goals of the organization, remove whatever obstacles there are along this path, and believe in the ability of the workers (see Robbins, Bergman & Stagg’s (1997) emphasis on the need to create a manager-workers relationship [pp. 595]). These specific courses of action draw from the contingency approach to leadership – which is expectedly going to work in a context that is more tentative than permanent owing to its varying situations ((Dubrin, Dalglish & Miller 2006, pp. 176). Regardless of rank, leaders are very crucial in the management of offshoring organization. They may not be able to completely rule out cultural biases that are inherent in the individual members of organization, but they can begin by insisting that their institution, group, or unit is not tolerant of prejudice and is in fact full of opportunity for all. For this to be realized, it is imperative for leaders of diverse workplace to understand and support cultural competency and diversity management concepts (see Mujtaba & Sungkhawan [2009]). Decision making Another area that needs to be acknowledged before offshoring is taken as an option for business operation is connected to decision-making. Building on the preceding discussions on diversity of workplace and the rather inimitable situation that it gives rise to, decision making may actually be enriched by the fullness and richness of concepts and experiences that go with the fact of diversity or, more precisely, by the individual attributes of the members of a diverse organization (Jackson, May, & Whitney1995, pp. 217-219). For, when a group is increasingly diverse, its members are actually capable of considering and dishing out wider sets of alternatives. However, making decisions involving a diverse organization that is born out of offshoring practice is not without problems. Generally said, diverging perspectives by different personalities are usually the font of interpersonal dysfunctional conflicts (Tufts University 2006; Page 2007). Diversity in the workplace also translates into costs in time and financial resources, which can negate the benefits of synergy (see Amaram 2007, pp. 4). As a manager of a diverse workplace who is expected to empower his employees as a concrete measure of recognizing the demands of the novel situation, one has to assign more importance on group- than on individual decision-making. Either of these decision-making styles has advantages and disadvantages; thus, the management’s responsibility consists in deciding not whether, but when and how the attributes of a diverse workplace can be exploited and capitalized on particularly in the task of making decisions (Amaram 2007, pp. 5). But, taking into consideration that diverse workplace is a possible source of many concepts and solutions, the group decision-making is definitely going to be preferred more (see Tufts University 2006). A principal step that may be suggested to make the most out of diversity viz. management decision making is to acknowledge the individualities of the members of organization. Amaram (2007) proposes a multi-cultural model of operation, which culminates in encouraging a truly (culturally) diverse model where multi-cultural accommodation is evident all throughout the organization. Accordingly, this is realized primarily with the commitment and support by the top management (pp. 5). Human resource management The area of human resource management is similarly expected to be thoroughly considered, too, prior to resolving for offshoring. As a system of activities that intend to attract and retain employees who will contribute to the accomplishment of organizational goals, the management of human resources ultimately targets the enhancement of the efficiency, quality, innovation and responsiveness by the organization particularly viz. its stakeholders. Ironically, however, human resource professionals are not always involved in decisions relative to organization’s decisions to go offshore. Concretely, the human resource professionals are playing crucially important roles in the effective management of the cross-border human capital – from training the personnel from offshore sites in the home organization’s corporate culture and policies, to setting up and sustaining effective channels of communication between global satellite offices (Miller 2010). It is also by human resource management that other problems – such as the loss of control by the organization over the output of offshored jobs, the non-committal employees overseas (see Green 2007) and the opposition of the unions to practice that is eliminating their members’ jobs (Business Offshoring Gains Momentum 2006) – arising from offshoring is handled. With the system of human resource management, offshoring needs to be preceded by the management resolve to decide on certain matters in the company, say, regarding its employees’ needs and salary or wages. Neither underpayment nor overpayment is acceptable especially in diverse workplace. The bottom line of all this is that particularly, with human resource management system, just, fair and equal treatment of everybody in an organization is realized and made true. But, the most basic of all these is Miller’s (2010) observation that human resource managers of organizations need to be made involved in every steps relative to offshoring. Planning and organizing Finally, the planning and organizing process of management is also an area that is influenced or determined by an organization’s decision to offshore some aspects of its operations. Diversity is definitely a strategy that may be adopted during the planning process. But, right before the shift to offshore outsourcing is finally resolve, there are numerous factors that need to be learned about and carefully weighed in. These factors include the organization’s real resolve to engage in outsourcing, the cost of the offshoring venture, and whether the offshore vendor is stable, trustworthy and has a good repute – among others (see Kyle 2003, pp. 1-2). Further, outsourcing has made organizations face complex issues of organizational structure, including the challenges of the offshored operation and the imperatives of integrating the disparate outsourced and offshored activities seamlessly into a consistent global corporate strategy and structure, or the issue of acquiring additional dimension of risk and uncertainty and the task of matching organizational structure to innovational requirements – among others (see Bardhan 2006, pp. 106; see the specific cases cited by Nielsen, Pedersen & Pyndt 2008). Specific to management processes of planning and organizing, offshoring of jobs requires that it be counted as a defined business strategy and that the structural order of the organization follows from the adopted business strategy. As a business strategy, it necessitates a careful analysis of the offshoring environment. Goel, Moussavi & Srivatsan (2008), for instance, clearly point out the factors of soaring oil prices, a depreciating dollar, and rising wages in recipient countries are to date undermining the reasons by some businessmen to move their business operations offshore (pp. 1-4). Too, diversity – which is the direct result of offshoring—needs to be among the issues tackled and decided on during the organization’s planning process (see Amaram 2007, pp. 5). Conclusion By way of concluding this report, it may be useful to identify strategic directions for the management to undertake especially as the option to offshore some of its operations is being considered. The primary result of offshoring is management of diverse workforce. It is important that the firm’s management is firmly committed to rightly understanding diversity, and to implement measures to capitalize on what diversity has to offer. Offshoring, too, is important to leadership. For one, leading a diverse workforce begs for an exercise of situational or contingency leadership. Likewise, offshoring as a business option challenges any manager to re-think his/her style and process of decision-making. Diversity is potentially rich; and, as such, the different talents and experiences that the individual members of a diverse workforce have are potential to benefit the organization. Further, the system of managing the human resources definitely needs to be adjusted. Diverse workforce is a fertile ground for biases, stereotypes, and other discriminating behaviors by individuals or by the very organization. Finally, the management processes of planning and organizing are similarly not spared from the impact of offshoring. It calls for a more meticulous planning and more careful gathering and thorough analysis of data. It also requires a potential tinkering of the organizational structure of a firm. References: Amaram, D. (2007). 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