The topic of the class over the next few weeks will be outsourcing. We start today by talking about motivation - Cathay was outsourcing to drive down costs and Cisco was outsourcing to spur innovation. From your experiences, what reasons have you seen for rationale for outsourcing in your company? And in the news, what outsourcing deals have you seen announced and what was their rationale?
Even close to home, some recent analysis has suggested that one reason for the BP oil spill was due to the outsourcing relationships (scroll to the bottom of this article).
And all of this leads us to ask - where do organizational boundaries end? And what does it mean for a company to geaux virtual?
I think the only operations of a business that should be outsourced are operations that do not affect the company’s customers or the company’s image.
ReplyDeleteIn BP’s case they outsourced operation they did not think would affect their customers; however, they failed to realize that the implications of their contractors could destroy their public image. They only viewed the decision as a cost decision. This hurt them because as we found out today with Cathy Pacific and Cisco, there are other factors besides cost that affect the company’s decision of whether or not to outsource.
There may be cases where it would be in a company’s best interest to outsource functions that do impact their customers. For example, small businesses are a perfect example. Small businesses do not have the resources or the sheer size to really gain any advantage by keeping some functions that are not part of their core competency inside. Case and point would be a small trucking company and IT. They do not have the size or resources to really need or support a full time IT agent; therefore, it may be in their best interest to outsource their large IT problems to a company that can handle their IT problem better than they could.
Since discussing the Cathay Pacific case today in class, I've had the opportunity to reflect more on the implications of outsourcing. One of the things I've been thinking about is the trust factor involved with outsourcing. Is outsourcing every function of a particular non core function of your business ever a shrewd decision? Considering Cathay, the point was made that their core competency is providing safe, reliable and comfortable air travel. But it is undeniable that IT plays a huge part of enabling the airline to be able to provide that service. Systems Deliver (a function of IT that Cathay was keeping in house) was definitely an area in which the company could run more efficiently. Outsourcing the systems that the SD function was responsible for could help bring some continuity and coherency to systems management by placing an architect engineer to serve as mediator between the vendors and Cathay, but at what point does it become a security concern to entrust outside companies with internal information essential to the business. I look forward to going more in depth into all of the intricacies of outsourcing.
ReplyDeleteI also feel that outsourcing should only be used if there is an efficiency gain to the company while encompassing convenience to the employees and customers. I also do not see the need for a company to outsource if it is not large enough, or does not plan to expand beyond their own capabilities. For example, I have janitorial and painting companies. Yes, they are very small, but there still needs to be some type of marketing campaign done to attract business. I can’t afford to have the added expenses from outsourcing some firm to help with this process, unless it attracts a lot more service revenue. This is obviously the reason to expand and outsource, but I do not have the resources available to take on much more work. This would involve expanding my business to lengths that I could not handle and do not feel the need to spread myself too thin. As mentioned before, there are some boundaries that companies need to be very careful of.
ReplyDeleteWhen a company examines its outsourcing strategy, it must first examine its organizational structure, and then where this outsourcing would fall in line with the socio-technical views of the firm. In other words, each firm is different; therefore the outsourcing strategy needs to fit a firm down to specific mechanisms that make it run. As we learned in class today from the two cases on Cisco’s IT Enterprise and Cathay Pacific, one broad reason for outsourcing your firm’s information technologies is to minimize costs. While the actual outsourcing may be firm specific, all firms have the objective to minimize costs and maximize revenues. Another reason Dr. Schwarz touched on at the end of class for outsourcing is to mitigate risks. This sparked my interest to do some further research on broad IT outsource trends for 2010. In an article I found, here are a few of the broad market trends that we have seen unfold:
ReplyDelete• Rates of outsourcing pricing declines are expected to slow in the year ahead
• Sourcing providers are not likely be as accommodating as they were last year
• Market activity in 2010 should be busier, as many outsourcing projects were put on hold in 2009
• Do-it-yourself sourcing by internal teams will continue, with less reliance on consultant/advisory firms while favoring incumbent suppliers
While IT outsourcing is firm specific, we can identify certain patterns based on external factors, like economic conditions and the global marketplace. I wonder what these trends will look like for 2011?
If you're interested in checking out the article, here is a link for it... http://news.thomasnet.com/IMT/archives/2010/02/2010-global-outsourcing-trends.html
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ReplyDeleteI am totally agree with Doug. The outsourcing should be coordinated in a way that company's social view would not be affected by malfunctioning of one of the outsourced tasks. For instance we see many people in gulf now put some placards with sentences "I HATE BP" on them in front of their houses. Outsourcing intense transaction tasks with low profit, which are categorized as internal tasks, could be the best option for targeting outsourcing.
ReplyDeleteThe limit of outsourcing is highly related to the nature of the business. For example in the case of Cisco which is an IT oriented company huge amount of out sourcing may result in losing innovation and productivity of employees, but in the case of Carnival outsourcing the IT would not affect the operation of the company.
I think the important thing to take from BP is outsourcing can be dangerous if not managed properly. The service you outsource is still a representation of your company and needs to be managed. For this reason it is very important to know the company you are going to outsource to. Since they represent you it is necessary to keep an eye on their operations to make sure disasters don't happen like the BP spill.
ReplyDeleteCurrently, I am working on a new start-up company which outsources its production and distribution. Each of the four owners contribute a special skill set but we have come to an agreement that we should focus on product development, securing investments, and branding. Because of the nature of the company, we do not need to actually develop and distribute, we simply need to oversee the end product.
ReplyDeleteI agree with Patrick that outsourcing is appropriate as long as the company benefits. However, as an "outsourcer" it is important to note that not all outsourcing is going overseas. Our company has partnered with a local production and distribution channel to keep the jobs and taxes in our state. As our product grows, we hope to do the same in other key areas around the country. Thus, before you judge outsourcing, consider my example!
I have to agree with what Kevin said. Cathay was an airline designed to give their flyers the best customer service possible. Their core competency was not IT. I believe that it was within their best interest to outsource IT because it was not a core competency. Cathay felt that they could not offer the best IT solutions inhouse so they outsourced to reduce costs and gain efficiencies.
ReplyDeleteIn terms of BP, they outsourced but did not put in proper regulations to ensure safety. If a company outsources then they have to uphold the same regulations as if they were designed by the company itself. An IT decision has to agree and be concise with the core values and mission of the company. So anything that is outsourced should uphold the core values of the company
I agree with Andrew and Kevin. It all depends on whether each process meets the requirements we mentioned in class: gaining cost efficiencies, intensive processes, or below average in-house performance. Obviously, there needs to be some form of strategy and system to analyze whether or not a process needs to be outsourced and that is where many companies go wrong. You can't look at outsourcing as the new trend. It has to be pursued in the hopes of bettering the company overall.
ReplyDeleteIn the case of BP, they will continue to do their type of outsourcing. Even though it bit them in the butt once, their image will recover and they will continue to outsource to other "Deepwater Horizon"s. Hopefully, they will be more aware of who they are working with, but there is no doubt in my mind that they will continue.
On that thought, where do you draw the lines with too much outsourcing?
The various reasons I have observed why companies outsource is because:
ReplyDelete1. As a company grows it becomes redundant, cost inefficient and cumbersome to have in-house built in functions such as medical care, payroll to name a few. Instead of investing time & money into building a strong competency in this, they prefer out-sourcing it which would not only reduces cost but also leads to getting best services.
2. Also, when companies grow globally it would be illogical to fit in their culture into the local markets. This means they need to hire and train local employees with the added overhead of seeing though the economical, political, legal and social environment prevalent. The other easy and convenient option would be to outsource it to local organizations in those countries. In addition the diversity added through this would help the organization in the long run.
Outsourcing is obviously a great idea...sometimes. It wouldn't exist if it didn't fit certain situations, but it's necessary to fit the overall organization's strategy and not serve an agenda that's strictly for cost-cutting or the like. In Andrew's example, outsourcing isn't necessary and doesn't fit the overall strategy for his small business but in Lexi's current start-up it does. I think the lessons we can learn from the 2 cases presented in class is to recognize the benefits of outsourcing as it relates to each individual firm and situation, but also to be prepared to manage that relationship in a way that benefits the firm while simultaneously mitigating risks.
ReplyDeleteAs per my experience from past organization, we had to upgrade the system since the existing system that we were using was getting obsolete. We outsourced the whole proces from an Indian company based in Bagalore, India. It took more than a month for the entire process - from purchase to implementation to traning the staffs. This is just one of the examples of when an organization needs to outsource. We could not do the up-gradation of the system in-house, hence, we had to outsource it.
ReplyDeleteI believe there is a fine line to be drawn when outsourcing in your company. True, there are many advantages such as utilizing your own staff more efficiently. Managing your staff and utilizing their skills in the most efficient manner are very important. A good example of this was told to me by my parents. They both work for the government at a Federal Prison. At one time in order to save money and the overwork of regular staff they outsourced the guarding of inmates in local hospitals and town trips to the doctor. In theory, this was a great idea because they payed these staff a lot less than the overtime they would have paid the regular prison workers. This also saved the government because they did not burn out their workers so quickly. On the opposite of this arguement was the fact that the cheaper workers were not so well trained in security measures and were not used to working with inmates. This made a very unsecure environment in the hospitals. The important issue here is to ensure that your outsourcing does not cost your company in the long run. Short term rewards do not always outweigh your long term problems from outsourcing.
ReplyDeleteI think a company should outsource a function the moment it realizes that it is spending way too much money on a process that can be done for less by an outside company.
ReplyDeleteI do have to disagree a little with outsourcing because it is not a core competency. As we discussed in class, competitive advantages can be gained by retaining certain processes in house as they provide an edge in the marketplace. It would be a shame to have a contractor repackage and sell a product you came up with to competitors when you could have kept it in house.
What is Outsourcing?
ReplyDeleteWikipedia defines outsourcing as the contracting out of a business function - commonly one previously performed in-house - to an external provider.
Now that we know what outsourcing is, ask yourself is outsourcing good or bad?
In my opinion, it depends on what angle you look at it from: the business/customer side or as an American citizen.
As a business, outsourcing can be considered beneficial in many ways. A business can reduce their labor cost by outsourcing certain aspects of the business to a country where the minimum wage requirement is lower than the United States. This in turn will ultimately cut cost incurred for a business and saves money for the consumer in the short-run. Also, outsourcing allows a business to outsource certain aspects of their business they do not perform well in. This allows a business to focus 100% on their core competences that set them apart from their competitors. Overall, outsourcing can be advantageous for a business to consider implementing into their strategic plan.
On the flip side, outsourcing is detrimental for the American economy. When companies outsource to other countries, they are reducing the number of jobs available to Americans citizens in America. The counter argument that Americans do not want the jobs that are being outsourced can be misleading. Economic recessions and depressions go hand and hand with the increasing unemployment rate. Currently, American cannot find jobs that would allow them to put food on the table for themselves or their families. If these outsourced jobs were not outsourced would American take them to feed their families? I certainly would for my family. As of August, the number of unemployed persons in America is 14.9 million and the unemployment rate 9.6 percent. News flash, these numbers aren’t going down anytime soon. Qualified or over qualified Americans want and need these jobs being outsourced to other countries. Is saving a little bit of money as a consumer really worth it in the short-run? I do not think so, because in the long run we as Americans end up paying more in our taxes to support the Americans who are unemployed and our national debit is higher.
Where do organizational boundaries end?
As we discussed in class over the first half of the semester, the technological advancements in technology have aided us in breaking down the global boundaries be that of the distance in doing business abroad. In my opinion, on a broad level there are no boundaries that limit organizations possibilities in outsourcing.
However, it is my opinion outsourcing is necessary to stay ahead in this ever changing economy. However, as an American citizen I strongly believe that outsourcing is bad for our nation’s welfare and national security then it has ever been in the history of the United States.
From what the media portrays it seems that the only reason that companies outsource is because of the cheap labor overseas. Essentially the media portrays all corporations as focused on their bottom line even though this may not be the case. Some companies may be outsourcing to become more focused on their core business process where they have a competitive advantage.
ReplyDeleteI am a firm believer in the outsourcing world because if you can produce something at a more efficient rate and astronomically cheaper then there is no question in what to do. On the other hand the complete control that you will have over certain situations will not be in your hands and be completely up to the outsourced company, but the competitive advantage of outsourcing to a cheaper option is extremely hard to pass up. I feel that if someone can find an outsourcing company that will keep a positive relationship with the company then I think that is an equation for success.
ReplyDeleteI have seen from my own work experience that the main reason we outsourced was to be able to focus more time on our core functions. We would outsource sometimes not even to save money, but to allow us more time in the day to do the things that brought the most revenue into the company.
ReplyDeleteCompanies definitely should outsouce if oursoucing can help it to save money, to improve customer service and to gain access to larger pool of workers and expertise. The success of an outsourcing depends on three factors: support from the executives in the client organizaiton, good communication to affected employees and the client's ability to manage its service providers.
ReplyDeleteI also feel that processes and departments should only be outsourced if they are not a part of the company's core competences. When you outsource your core competences, you are losing your competitive advantage. In my own experience, the bank that I previously worked for outsourced a large portion of its IT department. It did not make sense for us to devote a lot of resources to IT, because it would significantly decrease our bottom line. Therefore we outsourced our ATM maintenance, system updates, and system maintenance.
ReplyDeleteThe customer and company image are important to keep in mind when outsourcing. If it is significantly chaper or more efficient to outsource, it is going to be received by your customers in a certain way. Some may view you as more efficient, though others may see you as taking jobs away from local employees and investing elsewhere. I think this is where the organizational boundaries exist. You have to do what makes your company more profitable, but you have to be sure the outsource will be to your benefit, as was not the case with BP.
ReplyDeleteOrganizational boundaries are becoming ever so vague and there is nothing you can do to stop it. Evolution of business is calling for an intermingled chain of networks and businesses. Outsourcing fosters this evolution and this is the reason why businesses who find and excel at their competency and then outsource areas where they suck are growing the fastest.
ReplyDeleteSo many factors go into outsourcing, and I would have to agree with others who have mentioned the trust issue as a major concern and it is often overlooked. Company Branding is important as we've seen with the downfall of the BP image. Core Competencies shouldn't be outsourced but instead capitalized by each company. Any function being outsourced should provide an overall cost benefit to the company and open doors for more innovative ideas. HR jobs are often outsourced because there are outside companies that specialize in certain functions of HR that LSU's HRM system doesn't have the expertise in. This would be a good case of outsourcing also
ReplyDeleteMy company did outsourcing since the agency could provide the professional service with the cheaper price. Also the company should cut the headcount and make the balance sheet more beautiful. We outsource our IT department and tickets office which help us book the airtickets. In my opinion, the company do this due to the economical rationale.
ReplyDeleteAs we have learnt in the class, the whole purpose of Outsourcing is to reduce costs and allow companies to concentrate on their core competencies. Looking at BP's case, Outsourcing served their basic purposes but has also contributed to the disaster which tarnished the world wide image of the company. As the article about BP mentioned, ignoring the not so evident factors such as improving supplier governance, increasing visibility across supply chains have resulted in the catastrophe. Apart from the factors mentioned in the article and the lectures, I really think that when companies look to Outsource their business processes, they have to consider the structure of the company which the process is being outsourced to, their core values and operating terms.
ReplyDeleteWhen companies take the Outsourcing route, they have to make sure all the involved parties understand what they are getting out of the deal and whether there is any flexibility for expansion or to deal with crisis. Outsourcing can really get complicated as the image of the company is tied to the performance of the partners. Sometimes potential risks of Outsourcing outweigh its potential benefits.