Outsourcings Benefits in Management

Table of Contents Introduction Overview of Outsourcing Reasons for Outsourcing Levels of Outsourcing The Benefits of Outsourcing Conclusion Reference List Introduction Outsourcing is the act of transferring some of an organization’s recurring internal activities and decision rights to outside providers, as set forth in a contract. Because the activities are recurring and a contract is used, outsourcing goes beyond the use of consultants. In other words, outsourcing can be defined as the process of shifting tasks and services previously performed in-house to outside vendors. As a matter of practice, not only are the activities transferred, but the factors of production and decision rights often are, too.Advertising We will write a custom research paper sample on Outsourcing’s Benefits in Management specifically for you for only $16.05 $11/page Learn More Factors of production are the resources that make the activities occur and include p eople, facilities, equipment, technology, and other assets. On the other hand, decision rights are the responsibilities for making decisions over certain elements of the activities transferred. This paper looks at the reasons why most organizations outsource and the growth of outsourcing from the tradition to modern organizations. It also looks at the different levels of outsourcing and concludes by giving some of the benefits of outsourcing. Overview of Outsourcing Outsourcing is a management practice that has been going on for many centuries. However, it has gained popularity in the recent past and organizations are attempting to think about it as a new practice. It has certainly changed in shape and has taken a different form, although the concept remains the same. Although primitive prehistoric villagers would not have understood some terms like core competencies, outsourcing, and increase in productivity, the benefits were real and it is these that lie at the heart of many of t he modern arguments referring to outsourcing. Modern organizations are nurtured by the outgrowth in division of labor meaning that organizations employ different individuals with different skills, competencies, and attributes. These individuals are hired to perform specific functions in the organization (Manning et al 2008). In the last century, few organizations had attempted to do everything themselves. There were always some products and services that came from outside suppliers and were never made in-house, and the boundaries between the two were flexible. Many diverse firms engage in intensive outsourcing. As outsourcing continues to grow in importance, its nature and focus is evolving. In the past, it is only the manufacturing industries that engaged in outsourcing but it has now been accepted in almost all industries including the service industry. It has also become a cross-national and global concept; for instance, it is estimated that about 40% of the entire automobile pro duced in North America came from the US, and much of this offshore supply is outsourced (Brown Wilson, 2005). The nature of outsourcing is diverse. Some firms now outsource core production activities so extensively that they no longer engage in production, as traditionally understood.Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Inbound and outbound logistics are being extensively outsourced also. Some firms are extensively outsourcing secondary value-chain activities such as information technology, accounting systems, distribution, and aspects of human resources. Despite its increasing importance, many firms do not have a clear understanding of the benefits and costs part of its destiny in the hands of other firms that are seeking to maximize their profits. Thus, while outsourcing is often described as an alliance, the contracting parties inevitably have conflicting interests. The strategic objectives of outsourcing that decision makers should seek are to maximize the net benefits of outsourcing relative to the in-house provision of value-chain activities. In practice, this can often be simplified to minimizing the total costs of any given quantity and quality of outsourced good or activity. However, costs must be viewed comprehensively. Costs consist of expenditures for the good itself and the costs associated with governing the outsourced transaction. This raises a number of fundamental questions relating to governance costs (Noreen et al 2011). Reasons for Outsourcing There are many reasons why organizations choose to outsource other than rely on the resources available within them. One of such reasons is to enhance effectiveness by focusing on what one can do best. Other organizations outsource in order to increase flexibility so as to meet changing business conditions, demand for products or services, and advanced technologies. Other reasons include but are not limited to the following: Transform the organization Customer satisfaction and increasing the value of products as well as of the shareholders Improve management and control (Barrar Gervais, 2006). Acquire innovative ideas Improvement of operations Reduce investments in assets Gain market access and business opportunities through the provider’s network Expand production capacity and sales volume Reduce costs and increase benefits (Noreen et al 2011). Employee career development Increase commitment and energy in non-core areas Levels of Outsourcing There are different levels of outsourcing which occurs in different levels of activities. Most of the common levels are individual, functional, and process. Individual outsourcing involves moving specific positions out of the organization. This could be the management position of a poorly performing function or a technical position, such as, an intelligent analyst or an auditor. These positions are difficult to fill when turnover occurs and therefore it is advisable to outsource before an organization is able to find the appropriate person to fill such as a post. Individual outsourcing occurs when a person fails to perform the activities assigned to him at the desired performance level, or according to the organization’s expectation (Manning et al 2008). Almost all organizations are structured on a basis of functional cost with specialized knowledge and key responsibilities. Processes can be defined as the flow of products or services within an organization. A single process is generated by linking similar activities to create an output that satisfies a customer’s needs.Advertising We will write a custom research paper sample on Outsourcing’s Benefits in Management specifically for you for only $16.05 $11/page Learn More Processes defer from one organization to the other and it is upon each organization to determine its own processes. There are many contractors in the world who earn their income through outsourcing. IBM is one of these contractors that have been doing well in the business of outsourcing. In 2003 IBM decided to outsource its expertise to Visteon an auto parts manufacturer. This contract was estimated to earn the company over two billion dollars in a period of ten years (Hechlinger, 2003). The Benefits of Outsourcing Some of the benefits expected from outsourcing by investors include the following: 1. Creation of value for shareholders 2. Reduction of production costs by taking advantage of external supplier’s lower costs 3. Improvement of the quality of input by purchasing some superior capability from external supplier If a firm could easily imitate the cost or capability advantage of outside suppliers, it could produce the activity in-house. The acquisition of superior capabilities can also be thought of in cost-saving terms. However, it is usual in the business strategy literature to analyze each activity on the value chain in terms of the firm’s ability to lower cost or to improve quality. The contractor or supplier also benefits from outsourcing in terms of increased revenue, which he can use to diversify his activities. For instance, in the case of IBM and Visteon contract, IBM was expected to make large sums of money and also become a widely known contractor (Hechlinger, 2003).Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More To ensure that outsourcing is a cost-effective strategy, the costs of outsourcing must be compared to the costs of internal production of the activity. Production costs are those directly generated by the opportunity costs of the resources used to produce the good. There are a number of production cost rationales for outsourcing. The most basic is that internal production of the activity entails production at levels that are too low to be efficient, that is, to achieve minimum efficient scale. Many goods and services for which the organization has low unit demand exhibit significant cost lumpiness (Barrar Gervais, 2006). Just as a supplier can bring services to a locale within ones country, it can also bring one to new markets on other continents because of its global locations. The more places in the world a company can provide such presence the more opportunities one has to grow his global customer base. When considering a potential outsourcing in hopes of advancing into new mark ets, one has to make to determine the cost benefits of such endeavors. An estimate of potential revenue that would be received in the new capabilities has to be made and such estimate has to be reasonable. The estimated revenue has to be compared to the prices from suppliers in order to determine whether the new capabilities are cost effective. If a particular company is interested in going global, it has to look for suppliers who have the capabilities to take the company there. In order for the company to compete in the global market, it has to be available globally. Some facility labor relations conditions permit the use of in-house mechanics that are not bound by trade or craft union jurisdictional lines in performing operations and maintenance work. Contractors by and large, follow trade and craft union jurisdictional lines, hired by contractors are not better than those recruited for the facility’s in-house workforce. They lack the specific experience that the regular em ployees acquire in time at the facility, but they often compensate for this by bringing a greater breadth of experience to the job (Noreen et al 2011). Conclusion This paper has given a brief overview of outsourcing; what is meant by the term outsourcing, its growth, and how modern organizations are relying on outsourcing for most of their operations. It has also looked at the different levels of outsourcing and the good about this process to both the organization and the contractor. Outsourcing can deliver significant economies of scale by using standardized procedures and leading edge technology. Suppliers can perform finance and administration functions far more cheaply and efficiently than companies working on their own. This could include reduction in working capital, improvements in tax efficiency, and avoidance of capital expenditure. The services are also provided at an agreed cost which should also lead to a more accurate prediction of costs, and therefore more accurate bud getary control. A specialist provider can bring best practice and new investment in resources. Outsourcing financial operations can encourage business to be more innovative and focused on value creation. Reference List Barrar, P. Gervais, R. (2006). Global Outsourcing Strategies: An International Reference on Effective Outsourcing Relationships. Burlington: Gower Publishing Ltd. Brown D. Wilson S. (2005). The Black Book of Outsourcing: How to Manage The Changes, Challenges, And Opportunities. New Jersey: John Wiley and Sons Hechlinger, J. (2003, February 12). IBM Gets $2 Billion Outsourcing Job — Most Computer Operations Of Visteon To Be Taken Over As It Diversifies From Ford. The Wall Street Journal (Eastern Edition), B3. Manning et al. (2008). A Dynamic Perspective on Next-Generation Off shoring: The Global Sourcing of Science and Engineering Talent Academy of Management Perspectives 22.3: 35-54. Noreen, E. W., Brewer, P. B., Garrison R. H. (2011). Managerial Accounting f or Managers (2nd ed.). New York, NY: McGraw Hill. This research paper on Outsourcing’s Benefits in Management was written and submitted by user Artur0 to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.