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Business practices are the techniques, measures, methods, and rules adhered to by a firm with the sole aim of meeting the firm's objectives. Different firms use different business practices as suits their business. For instance, the practices employed by an IT firm differ from those of a marketing firm. As well, a small firm will employ different practices compared to a large and long established firm. Essentially, a firm will need sound and sustainable business practices for it to achieve its objectives besides retaining its employees, customers and increase productivity as well as increasing sales. This is where the issue of outsourcing has been brought into view.
In line with this, different scholars have tried to explain the meaning of outsourcing. According to Salwan (2007), Kotabe (1992) defines outsourcing as products supplied to the multinational firm by independent suppliers from around the world and the extent of components and finished products supplied to the firm by independent suppliers (p.169). More importantly, how a firm determines its business practices affects its operation in diverse ways.
As such, some firms prefer recruiting its own staff in sourcing for its day to day operation while other firms prefer outsourcing for reasons of technological developments and cost differentials. In the modern society, outsourcing is becoming an industry, with the most commonly outsourced functional areas being information technology and human resources among others, which exist in an international context. Even though there are benefits associated with the outsourcing of business practices, there are also disadvantages. This is what brings about the existence of proponents and opponents of the practice from the larger point of view.
Research Findings and Discussion
From the perspective of the proponents, outsourcing is an effective cost saving measure as it significantly reduces expenditures and lowers in-house operational costs. By outsourcing business segments and operations, companies can save on resources that will be devoted to wages, technology solutions, IT infrastructure, energy requirements, and technical expertise (Blokdijk, 2008, p.158). Outsourcing is believed to reduce labor costs by 75% which usually represents 60% to 100% of the total costs of products or services, though in reality it only reduces 10% to 40% of these costs.
Additionally, outsourcing enables a company to gain access to outside broadband base of expertise and skills unavailable by in-sourcing. Outsourcers can be a source of original ideas for improvements in core and non-core competency services and product (Schniederjans, Schniederjans, & Schniederjans, 2005, p.24). As such, outsourcing skills and expertise enables the company to produce high quality products and can meet the needs of its customers more effectively. This gives a company a competitive advantage and sustainability in the market.
Furthermore, outsourcing business practices improves the company's flexibility especially in the outsourcing of rapidly developing technologies or fashion goods (Mclvor, 2005.p22). This allows it to adapt to the changing market conditions by increasing productivity during high customer demand and to quickly decrease production during turn down periods by hastily decreasing production and ending outsourcing contracts. It is thus an efficient business practice as it improves business performance. In addition, it causes a psychological impact on the company's employees to work harder in order to retain their jobs. Besides, a firm can easily introduce new technologies and gain access to new distribution channels quickly.
Above and beyond, outsourcing allows the client firm to focus on core competencies thus aiding strategic planning. It enables a company to concentrate its efforts on outputs and outcomes. As such, the client firm can gain unique market access and business opportunities that the outsource provider brings with them (Schniederjans, Schniederjans, & Schniederjans, 2005, p.26). So to articulate, in the current competitive society, world class service provision is vital for a firm to be able to outstand. This can therefore be achieved when a firm concentrates its efforts on its objectives.
Moreover, the outsourcing industry has promoted the use of modern advanced technology especially on the area of information and technology. These advanced technologies can be provided by the outsource provider without the client firm having to invest in them which might be expensive. As well, the client firm personnel can be acquainted with newer technology. With this therefore, the client firm will be updated in all newer technologies hence improving its performance and productivity. The new technologies also give the firm high quality output therefore promoting its image sustainability in a competitive market.
Of more importance, outsourcing business practices enables the client firm to mitigate risk by transferring problems with human resources, technology, and systems to the outsource provider. It also encourages global relationships and networking that are important in the business world thus building a company's reputation and facilitating faster growth. More to this point, established networks gives the firm access to a wider market.
On the other hand, outsourcing is a highly risk practice as it leads to loss of control for some business operations. As a result, some company trade practices can be compromised thus losing an advantage over its competitors. As such, this can lead to loss of market share. Besides, the local labor market is also highly disgruntled by companies outsourcing their business processes. This could lead to labor unrest at the home front which could be very detrimental to the company's operations.
Nevertheless, outsourcing is coupled with the risk of outsourcing the wrong partners. This arise whereby the client's firm assumes that the outsourcing provider has a fully automated system and end-to-end electronic data interchange or web-based links with its suppliers (Salwan, 2005, p.175). This might as well result to a firm not achieving its targets and also incurring high costs compared to its benefits. Besides, it leads to high dependency on the outsource provider and the company may not develop internally.
According to (Schniederjans, Schniederjans & Schniederjans (2005) outsourcing results to increased costs in the sense that there is lag time in service from outsource provider due to distance (p.29). This can therefore lead to substantially higher delivery costs to client's customers, such as airfreight and airmail, among others. Besides, changing outsource agreement is difficult and can attract costly penalties. Nevertheless, high costs are involved in provider training and the expenses of enforcing outsourcing agreements may outweigh the benefits.
Despite the growing need for modern technology and development of the outsourcing industry, it can only apply to large companies since it is a costly practice for the small and most medium sized enterprises. Therefore, these small and medium sized enterprises may lag behind in technology and at times the technology that they use may become obsolete and they may not readily afford external expertise. Consequently, they are likely to lack a competitive advantage.
Khosrow-Pour (2006), states that, outsourcing brings up a range of security concerns due to the sensitive nature of information handle by people outside the company and in some cases outside the country (p.132). In this case, outsourcing can lead to security and confidentiality infringement. For instance, it may occur when the outsource provider shares the information of the company with its competitors. As a result, the client firm may lose its competitive advantage. In China for instance, there are concerns about security and protection of intellectual property.
Additionally, outsourcing has a pessimistic impact on the employees' morale as they feel demoralized and are thus de-motivated in their work. They become insecure of their jobs when they turn out to be outsourcing supplier workforce. As a result, they might loose their competitiveness and disorient their careers. More to this point, outsourcing leads to company reorganization, ensuing in displacement and social outlay for employees. The practice may as well lead to some employees being redundant thus losing their jobs as they will be replaced by the outsourced services.
Another limitation of outsourcing some business practices is language and cultural barriers. This may result to the outsource provider not achieving the client objectives. More importantly, most other risks associated with outsourcing are long term and thus the company's CEOs may choose short term planning and other managers interested only in bottom-line improvements for quick gains at the expense of future objectives and company's survival
Conclusion and Recommendations
Before coming to a decision to outsource some business practices, it is advisable for companies to do a cost-benefit analysis as well as assess the risks attached. This will enable a company to outsource those services that increases profitability as a core objective of the business. For that reason, this will call for strategic planning and first-class decision making. A company will also need to find out the needs of its target market such that outsourcing will meet those needs at the least cost possible.
Additionally, when outsourcing the customer and the outsource provider should have a strategic alignment between each other and set a standard that can be measured. Mechanisms need to be established to manage problems and insure ongoing management of relationships. This will serve to avoid disappointments in outsourcing (Khosrow-Pour, 2005, p.21). It should be noted that telecommunication is increasingly becoming efficient into the 21st century and positively impacting the global economy. As such, outsourcing is increasingly becoming a faster growing industry with China developing into a world power.
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