Advantages and Disadvantages of Offshoring - Example

Case study report Introduction Offshoring is a form of outsourcing where a company moves its business services to another country other than the home country with an aim to cut costs, enter new markets, tap talent that is domestically unavailable or to overcome domestic regulations that prevent specific business activities domestically. History of offshoring Moving jobs to another country from the domestic country started in 1960s in the developed countries. Factories were transferred from developed countries to developing countries. Offshoring has since created a structural change in the developed countries to post-industrial from industrial service society. There was decrease in transportation and communication costs in 20th century which brought a big difference in paying rates, thus increasing offshoring from countries that are wealthier to less wealthy countries. Internet growth, fiber-optic and World Wide Web reduced costs of transportation for information work, and at some point there were no costs incurred at all. Reading medical data like magnetic resonance imaging and X-rays, call centres, title searching, computer programming, and preparation of income tax are being offshored by the development of internet. One of the poorest countries in the EU in 1990s was Ireland. US companies started offshoring electronic, software, and intellectual property to Ireland because its corporate tax rates were low. Ireland then became one of the richest EU countries because offshoring helped it create a high tech boom. Production offshoring involves physical manufacturing processes being relocated to country that has low costs. However it is difficult to offshore product design, research and development process which leads to new products because these activities require a skill that is very hard to obtain in cheaper labour regions. India was the first to benefit from offshoring trend because it has many people speaking English and manpower which is technically proficient. India’s offshoring industry started in the early 1990s. Currently, engineering talent of India has made it an offshoring destination of America high tech firms. Innovation offshoring takes place where companies lets other countries innovate their products to cut on costs, shorten product lifecycle and access talent pool available in those countries. Countries in that are less developed are not utilized for this. In the transfer of intellectual property, when valuable information to the offshore site is transferred, offshoring is enabled. This information enables remote workers to produce results that are of the same value as the internal employees. Advantages of Offshoring Offshoring has benefits that a company can take advantage of; large talent pool availability, low cost and fast turnaround time. First, offshore countries have large pools of talented and professionals who are motivated. Universities and higher education institutions produce many graduates each year. This makes it easier for companies to have sufficient options to choose from when recruiting for their offshore centers. This ensures labor for offshoring companies as demand for labour increases. Some countries like India have a large population speaking English which makes communication easier between the customer and the vendor. Most of the time BPO employees in offshore countries work hard and are motivated for the availability of jobs that are well paying and this enables them be satisfied with their work. When a country gets access to the large talent pool and employees who are highly satisfied, employee performance becomes better and thus saving on recruitment costs and training. This also leads to productive as superior and quality work done. Second advantage of offshoring is saving on costs. Companies involved in offshoring are able to save for most of their services. Costs savings is in terms of labour, capital and labour management. Labour in offshore countries is very much lower with availability of professionals and low infrastructure costs save on capital. When managing labour, a company only employees the number of people required on a certain project unlike in-house where companies pays for office space as well as pay those employees if when they aren’t working on any project. Expenditure on bench labour is avoided by offshoring. Third advantage of offshoring is that it enables faster turnaround time. There are normally differences in zonal time between an offshoring country and the offshore country if it is daytime in offshoring country, it is day time in the offshore country and so on. When an onsite team is working during the day at the site of the client and retires for the night, the offsite team works on the same project as it becomes daylight. This means at any particular time according to those countries, work is being done and there is no backlog in the front end and processing tasks. Fourth, by offshoring, organizations are able to concentrate on other areas that need its support, and more time available to strengthen the business process. It allows companies to focus on the initiatives of business that are critical. Fifth, offshoring enables a company to employee people from other countries who are experts and specialize in that field. Tasks thus can be completed effectively in a faster and better quality way. Expertise may have experience in a particular technology like Asian countries that have high skills in hardware and digital technologies. Experience in a particular scientific domain are those concerned with biomedical discipline, and experience with cultural, marketing and management issues are those that can manage and operate multiple projects. Fifth, offshoring provides market presence of a company in another country. Offshoring could be a highway through which a company can sell their products as well as create and improve its products awareness amongst customers in those countries. Sixth, companies from IT background often have periods when they have either a lot or less work. In order to be flexible and profitable at the same time, offshoring works well. This is because companies can send work to offshore providers who distribute to professionals with the right expertise, at the right cost and right time. Disadvantages of Offshoring Level-of-service in offshoring is sometimes very low. Offshoring of call-centre suffers lack of quality of customer service and technical support received by customers. This is usually brought about by the language barrier created. Though offshore countries have many young and skilled workers who can speak English as their native language, those English skills are still very low. Another disadvantage is that the knowledge transfer to another country may enable creation of competitors. Lack of effective data security as a disadvantage may cause customers to move to other institutions especially customers of financial institutions who may feel that their details have been spread over the borders. They may not feel comfortable if their financial details are handled somewhere else besides the home institution. It may not be possible to offshore jobs that are complex in nature like fixing data and algorithms, research, process design or business analysis. Companies may not prefer to disclose this to an offshore provider or employees. Some jobs may be difficulty to distributed if employees are distributed geographically. Some jobs still require face-to-face interaction despite provision of video conferencing with the advancement of technology. Offshoring is very profitable but there are costs involved when starting which might even involve building transportation, telecommunication and so on. Smaller companies may hesitate to make huge investment. Lack of proper security while interacting with internet is a disadvantage to offshoring. A company dealing with internet is advised to have proper security but there is uncertainty on what is proper security for a particular company. Security is a problem where there is sensitive and confidential data. It is hard to control data privacy and security at the offshore site. It is also uncertain that the client’s intellectual property will be protected in the other country. There are also other issues like implementation of new structures that are bureaucratic like authority, incentive and operating procedures systems. Additional costs for evaluating the offshore providers, contract management and so on are also involved. The other issue is cultural issues between the company and the offshore provider in another country which involves social behaviour, attitudes, languages and authority between domestic employees, customers, and offshored employees. Despite the fact that they may speak English, there could be differences in the way workers and customers use language which might lead to problems. What seems polite in one culture may seem rude in another. When there is tension between countries of offshoring, governments may impose tight trade constraints which can cause a business to shut down especially if all operations were performed in that country. Governments may shut down some offshoring industry like medical transcription and other financial process because of data privacy concerns. Finally offshoring eliminates job opportunity for a fellow citizen in the domestic country. This can cause attention from workers’ unions who might later be supported by the government. Areas related to managing people that need to be considered before adopting offshoring Managing people is very important in any organization. There are areas in managing people the organization must consider before adopting offshoring; Strategic HRM activities, managing diversity Strategic Human Resource Management Human resources are a primary asset of a company or organization. Strategic HRM activities in any company are planning, job analysis, recruitment and selection, training, development, performance appraisal and feedback, wages and conditions, career development, occupational health and safety and managing change. Recruiting top personnel and retaining new hired people is becoming a real challenge as offshoring companies compete for skilled workers. Companies thus need to address these challenges to prevent their trained workers from being taken by competitors. The Strategic HRM activities always work towards attracting potential employees, retaining new hires, and effectively using the employees. Planning for human resources needs has to be done with job analysis and forecasts. Creation of a pool of candidates that are then selected in the selection phase is done in recruitment. To enhance performance for current and future tasks training and development is done. The offshore team will give a quality output depending on how they are satisfied in their demands being fulfilled, how they feel they are valued as workers and their work. They need to feel they are part of the company success; they are employees instead of offshored workers and consultants. A company needs to give the offshored team a clear idea of what the company objectives are all about as this will promote accountability for the job. This also allows employees to align their goals with the success of the company and that the success of the company is reflected by the quality of their work. The offshore team also needs to be respected for their knowledge and skills besides being hired to lower operating costs. The company should ask for their ideas, consulted on how to improve processes and brainstorming sessions. The company should also provide training which offshore team considers besides paychecks and other benefits. Providing training enables the offshore team to tackle the business aspects that are most difficult. Employees feel confident when they know they have the right skills and knowledge to do the job. The company should also provide room for employees to learn. Significant learning curves are needed by offshore teams to accustom themselves with the nature of the company, its corporate culture, company process and technical requirements. By time they will learn and adapt to the business culture of the company. The company should also communicate clearly the business and requirements needed for the project. Lack of clear communication of requirements creates frustrations. If it is a project, objectives, requirements and designs should be clearly interpreted. Screen shots, video conferences, diagrams and visual aids can be used to emphasize this. The required infrastructure like hardware and network should be put in place by the company to enable the offshore team to accomplish their tasks. Lack of all these leads to frustrations which later create stress. Stress leads to absenteeism bringing about missed deadlines and low quality outputs. Offshore team’s time should be respected putting in mind that workers live in different time zones. While a manager is sleeping, the team is awake working on the project and so the manager should not expect them to be around when he is awake to provide answers needed on time. If this happens, employees may leave the company. Managing Diversity Diversity is differences among people in sexual orientation, age, religion, gender, ethnicity, race, capabilities and socioeconomic background. The level of diversity a company has to deal with is increased by having employees located from different countries. This is a major risk a company faces and a critical factor for offshoring initiative success. Diversity is often seen as a threat and a challenge which companies try to minimize or ignore. It is also presented as an opportunity for r a company to create value and develop a competitive advantage. Companies should in response to competition for talent reach out and embrace diverse pool of employees from wherever they are as globalized economy increases. It is also important for a company to have diverse workforce in this global economy to understand and anticipate the needs of customers better leading to increased market share. Greater diversity brings about greater perspectives which lead to greater innovation and problem solving. So diversity management is the right thing that needs to be done as cultural diversity is becomes a fact of business today. Issues emerging in diversity are ethical management that is provides equal opportunity, legal requirements for fair and just treatment and bias towards diverse individuals. Effective managing diversity improves the effectiveness of the organization. A diversity of employees provide wide range of creative ideas, diverse employees are connected to the diverse customers’ needs, and managerial decision making can be improved by a variety of opinions and approaches to problems. When a company sources for services from other countries it results in difference between team members. This makes managing across cultures to be a critical factor and a major managerial challenge which requires time and effort. Cultural differences cover differences in business practices, language, legal system, environment, human capital, political, infrastructure and economic development. In managing diversity, the company should ensure that the top management is committed, increase awareness of diversity and diversity skills, encourage flexibility to diversity in the company, be attentive to how employees are evaluated, encouragement of diverse employees mentoring, rewarding employees for managing diversity effectively, and employee empowerment to challenge actions, remarks or behaviours that are discriminatory. Managing strategy and planning Planning is the identification and selection of goals that are appropriate and course of action for a company. Strategy in the other hand is a collection of decisions the goals to be pursued, actions to be taken and how resources are to be used in order to achieve those goals. Managing strategy and planning is very crucial in offshoring and especially where a company plans to offshore its services. Planning is also concerned with coming up with a mission statement which employees and other stakeholders can identify with. A mission states explains the reason why an organization exists by giving its purpose, the organization’s products and customers which distinguishes itself from the competitors. In planning the company determines its mission and goals, formulates its strategy by analyzing its current situation and developing the strategies needed to achieve the mission. Managers of the company then decide on how to allocate the resource between the offshore teams to ensure the strategy is achieved. Managers should also find out if the plans are working and modify them according to the feedback received from offshore teams. There should also be an organization structure which is a formal system of task and work reporting relationships that coordinates and motivates workers so that they work together in the achievement of the company goals. It is also important for the management to group jobs into functions and divisions. Functional structure encourages learning from others who are doing similar jobs and encourages managers to monitor and evaluate workers, however it become difficult for those departments to communicate with others. Divisional structure is where separate departments within each function work together to achieve company goals. This creates a business level strategy to compete and create manageable parts of a firm that are smaller. Due to diversity in employees an organization should strategize on the best organization structure that will serve all of them without any one feeling they are left out. Employees from different places value different organizations structures Decision making This is the process to which manager respond to threats and opportunities. This is done through analyzing options and making decisions about goals to be achieved and course of action. Manager may make decisions on how to improve the organizational performance. The kind of decisions managers make will affect the offshore team in one way or another. Any matters that are to do with employees should involve them. Employee involvement in decision making is the kind of an environment where employees have an impact on decisions affecting their jobs. The management should allow offshore teams to contribute towards continuous improvement in the success of the organizations. This motivates offshore teams to feel they are part of the organization despite being in another country. Managing Ethics and Corporate Social Responsibility It is very legitimate for a company to cut costs when responding to competitive pressure. Offshoring accrues benefits to a recipient country in terms of improvement in skills, needed job, and multiplier of jobs. However in the home country there are jobs lost and even the current employees being on the verge to loose their jobs too. This might create a bad reputation for the company in the home country, because the individuals loosing their jobs are not gaining those new jobs. So the company in partnership with government and communities in the home country should provide training, skills, redeployment and job development to its employees. The concerns in the recipient country are good practice at supplier companies like transfer of technology and work conditions that are decent like working hours, physical environment, wages and benefits. The use of false names or accents to deceive customers on the location of call centres is also a concern in the recipient country. Thus the ethics of the offshoring practice has raised concerns which also include short and long term consequences. This is leading to customers protesting against the offshoring activities and governments stepping in. Recommendations In order to attract and retain new hires and prevent them from being hired by competitors, the company should plan human resource needs by doing job analysis, selecting the right candidates and training and developing them as well as rewarding them highly. Communication channels should be developed in which the management can communicate with the offshore team for them to feel part of the company. In order to deal with issues both in the domestic and recipient country, the company management before making a decision should consult affected stakeholders in the home country. Policies should be clearly articulated; honesty and transparency practiced all stages. The company should also try to avoid involuntary job loss and invest in retraining and developing the skills of affected employees in the home country. The management should also develop best practice and CSR awareness by working with workers in the recipient countries. The company should dedicate its time and resources in developing the local community to form a stable relationship with it. It should also share technologies and skills to enable local employees to advance To effectively manage diversity, the management should embrace employee involvement in formulating and executing diversity initiatives in the company. An attitude of openness in the company should be encouraged to bring a sense of equal value to all. Diversity should also be promoted in leadership positions to realize its benefits. A policy regarding diversity should be formulated and training on the same. In making decisions especially the ones affecting the employees, the company should involve their employees by seeking their opinions and brainstorming sessions. Whatever the outcome of the decisions the employees will feel they were involved. In planning and strategy and structure management, the company should decide on the mission and goals for the company and communicate to employees so that they work towards achieving it. The right organization structure should be put in place to manage employees in regard to their cultural differences. Reference List Federal Deposit Insurance Corporation. 2004. Offshore Outsourcing of Data Services by Insured Institutions and Associated Consumer Privacy Risks GAO. 2005. Offshoring of Services: An Overview of the Issues. Report to Congressional Committees. Milutis, M. 2004. Challenges of Offshore Outsourcing: Understanding the Risks and the Hidden Costs. Computer Aid Inc. Waddell, D, Devine, J, Jones, G & George, J. 2006. Contemporary Management. 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