Outsourcing:



Outsourcing:

A prototypical model for study

Vinh Tran

Southwestern College

TABLE OF CONTENTS

Abstract 3

Introduction 4

Definition 4

Why Outsourcing 4

Complexities of Outsourcing ..................... ….……………………………………………….5

Advantages ......................................................................……………………………...6

Disadvantages ..................................................................................…….………….7

Factors in Decision-Making ..........…………………………………………………...8

Best Practices .....................……………………………………………………….....8

Impact on Organizational Structure and Employees ............................................9

Conclusion ...........…………………………………………………………………….10

Reference ..........……………………………………………………………………....12

Outsourcing has recently become an emotional hot button cussed and discussed through all levels of the American society. In this paper, I will attempt to show the advantages / disadvantages of outsourcing and various factors that impact the value of outsourcing. I will also attempt to highlight characteristics of outsourcing and hopefully, show “best practices” when it comes to outsourcing in the competitive business world. I admit at the outset that I have some prejudice against outsourcing for the reason that I have seen people lose work due to outsourcing; I feel uneasy about my own job due to the escalation of this practice. I admit my prejudice freely and I strove in this paper to be as objective as possible.

To accomplish my task I will do two things to make the topic comprehensible. First, I will present an outline and dissect the subject into various components in order to examine each section carefully. Second, I fabricated a large manufacturing company, Tran Enterprises, as an company trying to realize a decision; or make/ buy call on their HRD (Human Resource Department) organization and if it is a candidate for outsourcing. The company constructs high tech widgets that are specific to aircraft systems and are extremely expensive.

The outline consists of:

A. Definition

B. Why Outsource?

C. Complexities of outsourcing

D. Advantages

E. Disadvantages

F. Factors in decision-making

G. Best practices

H. Impact on organizational structure and employees

I. Conclusions

Outsourcing can defined as “Transferring work to an external contractor esp. to reduce costs.”1 Or “Turning over an organizational activity to an outside supplier that will perform it on behalf of the local firm.”7 The purpose for transference is usually stated as a cost containment measure, as a way of gaining access to foreign markets, and sometimes flippantly because “everyone else is doing it.”4 The thinking process or philosophy behind outsourcing is 1) That one can focus more on core competencies and leave the indirect costs to companies that are more suitable at that sort of activity. 2) A peripheral cost to the company can be contained. 3) Acquire better quality expertise and not need to bother with extra costs of training5

All of these arguments prima facie make sense and can be alluring to management focused on cost containment. The question is, “Is this a good business decision for all? What are the limitations, pitfalls, and disadvantages plus the advantages to this process?"

Outsourcing has a definite duty in today’s market with the advent of the internet, no one has to be chained to the confine of their working space as others do in their specific job. The case for Training or HRD (Human Resource Development) to be required on-site has been rendered irrelevant. One task that irritates managers is having to pay for a forty hour work week per each instructor, when the instructor is only teaching possibly twelve hours per week.2 Why should a corporation have to pay premium money for twenty – eight hours when nothing is accomplished? Granted the instructor had to learn the material and s/he had to prepare the material, although that could have been done years ago, yet the instructor is still using essentially the same material and the company gets little return on the money put out. Why can the instructor not be paid only for the time in class and not for prep time? Even if the cost is doubled, it would be cheaper for a corporation to pay just for class time and not all the prep and learning time. Enter outsourcing. A training company could charge more for actual class time but the company would only pay for class time; not indirect expenses such as medical vacation and down ‘ prep’ time. Paper work would be simplified and less office space would be needed. The company could also designate learning areas closer to the work area to cut down on travel time as an additional savings. For the HRD entrepreneur, s/he could get the trainer to train at the first company twelve hours, at another company for six hours and possibly another company for fourteen hours for a grand total of billing charges of thirty two hours. The trainer would be making the same equal amount of money the HRD person would be making, the companies would contain their costs and probably pay less for the same amount if not better service. If the HRD person would put the trainer on as an independent contractor the trainer could now write his traveling expenses, part of his house, and office expenses off on his taxes and the HRD person would not have to pay for vacations or medical expenses. It sounds like everyone wins.2

As the old saying goes, the devil is in the details. Assuming the company is moderately technical to advanced i.e. aircraft or manufacturing, complexities will arise that need to be addressed before signing on to this decision. The complexities come in the form of trust, relevance, communications and priorities.3 If the company is moderately technical they probably have proprietary information they do not want shared with its competitors or the general public. With this in mind, safeguards should be in place to protect the company from intellectual theft. Unfortunately, the trainer could easily learn something from one company and transfer the information to other companies either knowingly or unknowingly.2 The situation can lead to serious damage to the company and result in the loss of competitive advantage. The instructor may not be privy to the sensitive information which could blunt his effectiveness and not offer as good a training class as needed. Either way, the company has to resolve the aforementioned issue.

First, the trust could be broached by someone promising certain training to be done and is discovered that the training was not done or done haphazardly.2 The result of the situation can lead to poorer performance and possible safety. Due to a negligence law suit, the situation can and would be very ugly.

Second, the company has to develop safeguards to ensure they are receiving quality training and all applicable certifications are met. If there is any falsification of records, who would be responsible?2

Relevance is the next issue to be considered. Everyone knows that change is the only constant in any business. Processes, materials, customer’s needs, equipment and regulations change frequently. The company is assuming the instructors will keep abreast of any and all changes in their respective fields so they maintain current knowledge in their area of expertise. Managers of HRD companies are not equipped to know all things about all subjects and must rely on their instructors to have the most current information about their subject. If instructors are lax in their diligence, they may fall behind in their knowledge of the subject matter. Another factor is the company itself may develop a new process or the utilization of new materials and not declare the change with the HRD company. Thus, the instructor may be operating in good faith not knowing that a change has been made resulting in the unintentional teaching of outdated material. Also, there may be a change in governmental regulations which the manufacturing company would assume the HRD company would be aware of but the information was never conveyed to them.2

Equipment may also be a factor because many times a machine will make obsolete an old process or way of doing business and if that information is not passed along, then the HRD company will be teaching unnecessary information that wastes time and money. In all cases, not only does the instructor have to change his/her material, but tests, handouts, certification tests and other material needs to be changed. It needs to be stated clearly who is responsible for these changes and ultimately who is going to pay for them. Will the instructor now have to make the changes on his own dime or will the HRD company pay for those changes? Will the cost then be transferred to the manufacturing company? Will the instructor absorb the cost? If the instructor is offered a better job and takes all his knowledge with him, who is going to pay for establishing the new instructor and his/her materials and do we now have to redevelop the trust all over again?3

The communications issue also has to be addressed. Some companies attack this problem by appointing an ombudsman or liaison between the manufacturing company and the HRD company. The liaison is responsible to ensure both quality and competence of the instructors and to make sure things run smoothly. This is a good practice on a smaller scale but could be a problem on larger scales.6

Communications always seems so simple but I believe it is a lot harder than it appears. If the company is a manufacturing company using technical type of people, they are generally known as engineers and are not recognized as the best communicators in the world. A liaison also should be developed to act as conduit for all communications. The conduit may be highly competent in passing along information if given information that will not be hampered with significantly. If training has already been outsourced, the thinking very easily could be that passing on relevant, vital information to the HRD is no longer a priority. Information could be assigned to the lower levels and thus data may not be given. Classes could be running at less than capacity causing more classes to be scheduled, data may not be maintained which could put the company out of compliance with safety regulations, or new data may not be implemented again resulting in irrelevant teaching material. If there is a rift between the liaison and the HRD company, both sides could be damaged. It is also assumed that the ombudsman would have enough knowledge to know what is and is not quality education. If the person does not know, then s/he will have to go off trust and word of mouth of the people taking the classes. If there is a change happening in a new process being taught, then how will the liaison know about this change and how it impacts the training? It would be easy to overwhelm a person with all the stuff they would need to know; especially if they are not technically oriented at the outset. The liaison may feel the urge to become involved with the HRD’s internal workings but that could be a mistake. The HRD company may need some information from the company and may have to get involved with some of the company’s internal workings and that too could be a mistake. How to keep each side separated yet involved would be a challenge.4

Finally, the issue of priorities should be addressed. If the manufacturing company has an urgent need for training because, as an example, they were found deficient in an area and face being fined by OSHA, their need for training would be great. If the HRD company has already committed all their instructors to do other tasks and may have a clause in the contract that they should have two week’s notice before a training class is to be implemented, then the manufacturing company may have little leverage in getting their training accomplished in a timely manner. Costs would rise and a possible shut down of the manufacturing process could be looming.2 If the manufacturing company is not the biggest or near the biggest customer for the HRD company, again their priority may not be seen as important as another. In other words, when the manufacturing company gives away the work to others, they no longer have direct control over the process. This could be the case for several different outsourced areas; not just HRD. Does the advantages outweigh the disadvantages to outsourcing? At first glance, it does seem so for some tasks. Cost containment is a very high inducement and should not be dismissed without examination. Another benefit would be developing the ability to bring aboard quality people during the peak cycles of work than reduce the workforce by first eliminating outsourced workers. This gives the company the advantage of being flexible to meet peak demands without incurring hiring, training, and reduction of work force costs.5

Another advantage would be the use of people with a more varied background may see the problems from a different vantage point and possibly find a solution that is not part of the organization’s culture.7 Fresh eyes can see a lot differently than ones who have seen the same problem day after day.5

Finally, the greatest advantage is believed to be in the opening of other markets to foreign countries. Most companies and countries of any size that are involved in any large amount of business wants to expand. If the Tran company from the earlier example wants to become introduced to the Chinese market, the Chinese may very well say that you can have a very large contract with them on the condition the Tran company will give some sub-contract work to one of the Chinese companies also looking for contracts. It’s call quid pro quo and is found in all countries and businesses.3

The Tran company now has an issue to resolve. Should the company outsource some of its manufacturing processes to a foreign power and thereby gain access to a new foreign market, but also possibly give away some of its proprietary information or should they not, very possibly defaulting the foreign country to their competitor but maintaining their competitive advantage? Should the long term or the short term gain prevail in the decision-making process? This is a tough question that cannot be answered justly by the small scope this paper.

Having discussed the complexities, advantages and disadvantages of outsourcing, I believe the there is a role for outsourcing that should be addressed prudently or negative effects/problems/difficulties will arise. Kavcic and Tavcar, in their article “Planning Successful Partnerships in the Process of Outsourcing,” state that “44 percent of companies have thought about the possibility that the supplier will “let them down.”3 What are some best practices practiced by successful companies that allow outsourcing to work and benefit all concerned?

Some factors in the decision-making process are not only cost, which is compelling, but long term versus short term gain, the compatibility of the cultures between the two companies, the capacity of work being outsourced, and the competence of the employees who will be doing the work. The complexity of the work being assigned along with the need for timeliness and prioritizing should be taken into account. Finally, good communications between all concerned should be considered in the decision-making process.

Simmonds and Carson in their article, “A Model for Outsourcing,”2 lay out four specific criteria that need to be met in order for outsourcing to work. They are:

1) Prioritize—Decide what should be outsourced, ensuring that areas of strength and core competencies are kept in-house

2) Select – Determine clear criteria for selection when choosing providers, paying special attention to the match between values and philosophies.

3) Trust – Build trust through communication, clarity and commitment on both sides of the relationship.

4) Monitor – Ensure evaluation measures are in place to monitor the success of the outsourced function.

I agree with this evaluation but I also think that ( this ties back into the first “best practice”) is the complexity of the task. It is far easier to outsource security for example than highly technical expertise driven process because security does not have the same level of complexity as engineering. Customer Service Representatives who answer the phones daily and printing functions may be able to be outsourced easier than the technical tasks at a far greater savings. Areas of higher complexity and expertise open the company to issues of safeguarding their core competencies and proprietary information. Maintenance and housekeeping are other areas that would probably benefit from outsourcing. Being able to deal with highs and lows in capacity on an as-needed basis could also benefit.

Finally, there is a human cost that I have yet to discuss. After writing this paper I believe outsourcing has a place, but it does have some affects in human behavior. Corporations must generate revenue or they do not survive. Outsourcing can provide an attractive alternative to some peripheral work done by companies but for reasons already cited in this paper, there are concerns and issues that should be considered before the decision is made to or not to outsource. I believe it is a good cost cutting alternative on not too complex of tasks and companies need to protect themselves from both losing corporate identity and proprietary information and processes. People who lose work because of outsourcing should be considered and possibly given a choice to work for the outsourced company. Every consideration should be made to deal with people that lose their livelihood to outsourcing and should be given opportunities to learn a new career or be placed in a position where they can keep on working for the parent company.6

Another factor to consider is the survival of those who were not directly involved without sourcing but look upon outsourcing only as a matter of time before their work to is taken away by the practice. Sometimes they develop a “survivor mentality” in the sense that they were saved but the others did not. Were they somehow guilty of the demise of their friends or were they just lucky? When is the hammer going to fall on them? Issues of moral decisions should be addressed after the outsourcing is accomplished.6

Having discussed the pros and cons of outsourcing along with some of its complexity and reasons for doing it, I have also discussed the pitfalls and certain information to consider when making this crucial decision. I now believe outsourcing does have its place but should be considered carefully. I also believe that if the decision to outsource is made, then the human costs should be considered and dealt with in a humane and responsible manner.

Sources

1) Webster’s New International Dictionary (2008)

2) Simmonds, David; Gibson,Rebecca(2008) A Model for Outsourcing HRD ( Electronic version) Journal of European Industrial Training v32 p4 -18

3) Klemen, Kavic; Tavcar, Mitja I (2008) Planning Successful Partnership in the Process of Outsourcing ( Electronic Version) Kybernetes V 37Issue 2 Pgs. 241-249

4) Delmotte, Jeroen; Sels, Luc (2008) HR outsourcing: threat or opportunity? (Electronic version) Personnel Review v 37 No5 pp. 543 -563

5) Weidenbaum, Murray (2005) Outsourcing: Pros and Cons (Electronic Version) Business Horizons v48 July-August, 2005pp. 311-315

6) Quelin, B and Duhamel F. (2003) “Bringing together strategic outsourcing and corporate strategy: outsourcing motives and risks” European Management Journal vol. 21 no.5

7) Peng, M. W. (2009). Global Business 2009, Update. Mason, OH: South-Western College Pub.

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