Globalization and Outsourcing

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Introduction

In the modern contemporary world, global outsourcing has resulted into increased business and provides millions of people with employment opportunities all over the globe.

Both large and small scale organizations are embracing global outsourcing as a pathway to financially equip themselves better as equal competitors in their respective markets, (Tholon’s 2009, Para. 4). Gradually, outsourcing is being looked at as the ultimate gateway for modern businesses to realize their optimum growth by taking advantage of improved technology and research services available all over the world.

Further, it is an opportunity to utilizing the cheap and readily available labour in some countries such as China and India, so as to cut down on production costs back at home. The most outsourced item is technological services with the number of international organization outsourcing rising from 10% in 2002 to 70% in 2008( Oppenheiner Equity Research 2009, Para.2).

With Global outsourcing, organizations are adopting various strategies so as to be able to adapt to the new trends globally and so they can be able to compete effectively with other organizations on the same level. This essay discusses how the current global trends are impacting on organizations and forcing them to adopt organizational strategies to enable them to conform to the contemporary business trends.

It has also discussed the various factors attracting firms and forcing them to start business in other countries and the various reactions of individuals on that move. It also talks about the various items that are being outsourced globally as well as the challenges that outsourcing firms are experiencing in the conduct of their business.

Why Organizations are increasingly off-shoring

Global outsourcing has existed for the longest time possible. But recently, there has been a rapid increase in this area. This is because organizations are finding it increasingly efficient to conduct business abroad as compared to doing the same at home. Some of the factors attracting business organizations to take business abroad include:

Efficient and Cost-Effective Production

Organizations want to carry out business where they will minimize the costs for the same unit of production at home. Their main reasons for expanding operations and investing in different locations to take advantage of cheaper factors of production (Moffet 2005, Ch. 16).

Some of these factors include low cost labor, easily available raw materials and natural resources, technological developments and informational services. They are working towards mixing of different factors to yield maximum results. Although low wages, skills and education of workforce are some of the main driving powers, the purchasing power of the specific market is also a contributing factor to off shoring, (Globerman 2004, P. 14).

Most of the multinational companies have invaded Asian regions to reap benefits of the low labor costs and more liberalized economies, (Sethi et al 2003, P. 325)). Countries have realized this and they are taking a step forward to ensure that their countries offer enough attractive bargains to such global investors so as to increase their FDI (Ibid 2007, P. 167).

Market size and Growth prospects

The infrastructural development In the host company, taxation regime, political stability, are some of the major factors being considered before taking the ultimate decision (Ibid 2007, P. 3-4)). Also, the freedom of the host country in conducting international trade will determine.

Organizations tend to favor countries whose international trade is freer. For example, most organizations are taking their business in China to take advantage of the increased demographics. Countries like Brazil, Mexico and Indonesia have earned increased FDI inflows resulting from their rich natural resources, large markets, and relatively growing economy, (UNCTAD 2007, P. 8).

Legal Mechanisms

The legal framework of a country also attracts global off shoring. Most countries have enacted various legal measures with the sole reasons of attracting global investors. An example includes the Special Economic Areas established by the Chinese government and the Maquiladoras in Mexico.

The governments of these countries undertook initiatives to attract global investors into their countries so as to reap the benefits associated with growth of outsourcing. Most countries are also offering tax incentives, increased privatization, reduced custom duties, reduced utility costs and administrative procedures to attract FDI, (Amirahmadi, et al 1994, P. 183).

Most Outsourced Goods and Services

Legal Process Outsourcing

This has resulted to because law businesses are going for it to influence their expenses. Several types of outsourcing experience in the legal arena are being adopted making this a complicated business. It has been shown to be the second fastest-growing sector of the Business Processing Outsourcing and it is expected to rise from $80 million in 2006 to reach $4 billion by 2010, (ASSOCHAM India 2008, Para.6 ).

Animation and Gaming

There is increased need to create global supply chains due to global markets. This is expected to reach $76 billion by the end of the year averaging an annual growth rate of 8%, (NASSCOM 2008, Para.2).

E-Learning

Long distance learning is increasingly becoming popular. This is because new methods of carrying out business are required. Further, most organizations are going for the on job training and with globalized business, e-learning cannot afford to lag behind. It has experienced a 10% growth since 2000 reaching up to $20, billion internationally and it is still expected to climb to $52.6 billion come 2010. Online tutoring has been increasing at a rapid rate of 10-15 % annually and it is currently at $ 4 billion, ( The Financial Express, 2008).

Offshore engineering

Businesses are in constant need of improved technology every now and again making it the most sought after item of outsourcing. Technology is developing at an alarming rate. The projected growth is from $150 billion now to $ 225 billion by 2020. Telecommunications is also one of the fastest growing economic sector and constitutes 30% of the outsourced market (Hamilton 2008, P.12).

Pharmaceutical R&D

This sector experienced a growth rate of 41$ in 2009 increasing from $21 billion in 2008, (Thomson 2008, P. 19). Outsourcing in this sector has demanded a third of it spending.

Strategies of Off-Shoring

Outsourcing multinationals are becoming smarter day after day on how to benefit maximally on global outsourcing that is now becoming an important part of the business world.

Production Process

The production process is being fragmented and is one of the major features of contemporary off shoring by multinationals. This is creation of several phases of manufacturing processes so as to achieve high intra-product specialization. Businesses are taking advantage of the improved technology to fragment their production processes and carry them out at locations where it is cost-effective to do so.

Not only are the multinationals using this strategy but infect, they are facing acute competition from small and medium size business enterprises who are increasing being successful by utilizing these global production networks. These global production networks require that organizations do business in various countries offering conducive environment to practice the same. Production fragmentation resulted to an increased FDI for the North-South.

Production fragmentation has been facilitated by increased innovations in technology, creation of new and investment-friendly legal measures by various countries, liberalizes trade in services. across borders, and increased democracy. These factors have contributed to reduced coordination costs thus providing new channels for fragmentation in different countries.

This is because with this kind of production, producers do not have to formulate the whole production chain and arrange them within a single framework. With this, national economies are becoming interdependent since production process is being shared.

Many organizations are also transferring their production businesses from their home country to another one where production in that other country will be done at a lower cost than in the home country. The transfer may be done wholly or partly for example transferring the production line only and retaining the other lines.

These producer are then re-importing these cheaply produced goods back at home and sell them at a higher cost. Some of them are contracting those relocated production processes to foreign subcontractors instead. This is more so especially to emerging countries that have embarked on the initiative of realizing speedy local growth by offering incentives to investors. Labor costs are the major motivating factor to such relocations.

Comparative Advantage

Organizations are focusing on what they can do best and contracting with foreign subcontractors to produce such other products when doing so will be cheaper. This could be in relation to materials being used for production being obtained from countries that will produce them at a low cost. Some of the industries adopting this strategy include textile-clothing industry in Italy, (Balcet & Vitali 2001, P.24). The sports industry has also indicated this kind of trend, (Andreff, 2006), such as Puma, Adidas, Fila and others.

Nike is one of those global organizations which have been very successful in this area. It utilizes its comparative advantage of creating design and formulating marketing strategies and leaving manufacturing process to other firms who will do it more efficiently, (Jones & Kierzkowski 2001, P. 31). Nike’s production process is the most fragmentized one internationally, where management is distinct from production, (Price 2001, P. 9).

Its production process is performed by other subcontractors while it put its efforts to coming up with new footwear designs to cater for the next generation, (Price 2001, P.10). As a result, it has managed to reduce its labor costs to 4% by utilizing low costs per unit of labor in Pakistan and China where most of its production occurs, and then utilizing comparative advantage at home for low marketing, advertising and distribution costs at home since these are high in these countries, (Andreff 2006, P. 37).

For contemporary global businesses, competition is the key to their success. Businesses are engaging in increased innovation and so as to produce highly differentiated goods and be able to obtain a higher price for their goods. In order to enhance their competitive capabilities, they are performing cost improvements to their products as well as re-designing the supply chains all around the globe and improving their technology. They are establishing diverse and cost effective value chains by reducing costs and increasing efficiency

Several sources of outsourcing

Organizations are being strategic about where to outsource, what and when. There is need to make better decisions in respect of labour, technological improvements, favorable legal measure, economic and political stability both in the present and in the future, future developmental capabilities, research and intellectual growth levels and so on.

For example, if the major object of outsourcing is labor, most multinationals would go for China which has the lowest wage levels. The development of market information has become one of the major things that attract businesses. Further, governmental systems are a great incentive to investors with governments offering subsidies and an enabling legal framework receiving more investors as compared to others.

Therefore, for optimum business growth, organizations are combining various locations both close and far from home (Vashistha 2009, Para. 5), which are offering diverse advantages and taking advantage of them all at once. One example of an organization that has greatly used this strategy is the General Enterprise Inc, (GE) which has spread its business in various countries such as China, India, Mexico and many others.

Some other countries that are important locations of outsourcing include Philippines, Brazil, Ukraine and Malaysia. India is the most viable option for most organizations but other businesses are substituting India with a mixture of two or more of the others.

China also is known to offer competitive financial services, high demographic factors and a viable business environment, (Kearney 2007, Para. 7). Some of the countries with favorable technological services include Australia, Singapore, and Pakistan as are some infant markets such as Morocco, Egypt and Panama, (Gartner 2009, Para. 4).

Each of these countries offers its own benefits and shortcomings. For example, Malaysia will provide a good infrastructure, political stability, and financial expertise and Vietnam will offer improved technology, (Tholon’s 2009, Para. 3).

India on the other hand will be preferred for its mature systems and its fresh graduates and dynamic youth as well as its cheap labor as compared to other labour markets such as the U.S. since a single market will not offer all the benefits that an organization needs to operate efficiently and effectively, the contemporary businesses will measure every market according to the advantages it has and combine it with another market offering a different set of benefits and ensure the two work together to produce maximum benefits.

Cost saving

To survive in the global economy, businesses are exploring on ways to cut operation costs and realize increased efficiency. This is being achieved by partnering with several service providers all over the globe. They are using the global outsourcing to their advantage by benefiting from the wide geographical areas to obtain a range of service providers that are more efficient than their counterparts back home. Countries such as India are providing very low costs for such things as intellectual talent.

This is not only reducing the cost of production but also the quality produced is high and durable. There are increased white-collar jobs due to increased migration to India. This make sourcing of services from the country more advantageous than using labour from domestic countries such as the U.S. Business people in their increased search for methods of increasing efficiency in their global operations, they are using the network production in low wage level countries.

Organizations are turning to taking business abroad to take advantage of the easily available raw materials and natural resources which are not available in their home country and which come at a reduced price. This is more so for developing countries such as India with natural resources like oil. This allows organizations to benefit from the easily available resources that are very scarce in their country. The easy acquisition of resources reduces their operation costs thus cutting on production costs.

Organizations are taking their products to foreign markets and seeking to gain a market share from such markets. They are doing this by increasing their units of production in such countries and penetrating the foreign markets.

They are therefore targeting markets with high demographics such as China, and producing goods specific to those markets so as to compete effectively with other global companies in the area. They are also substituting the exports that they would normally have to make and bringing goods closer to consumers reducing in shipping costs.

The process of production adopted is more flexible and easily adjusted to global demands. For example, Japan’s motor industry experienced immense developmental growth rates arising from the adoption of a lean production process, (Ozawa 1997, P. 129).

The system being adopted is just in time in its delivery service, on the job training through job rotation and in-process quality control. Firms are gradually moving away from the traditional method of production referred to as fordism and embracing the modern production which has been known to result to growth.

The modern production is aimed at satisfying the diverse needs of a growing market. The increased technology has also facilitated greatly to the growth of this method with online shopping allowing one to choose exactly what they want to buy without having to go to the shop first. Multinationals are also investing more on research and development especially on designs and IT services. This sees the quality go up in the sourcing country but with reduced costs.

Distribution networks

Global organizations are moving towards a more entrenched connection between the suppliers and the consumers of their products. They establish relations that not only ensure increased flow of information but also to integrate business processes as well as the organizational structure to create a highly developed and enhanced value chain. This has helped in adopting better management decisions though such collaboration with suppliers and which results in reduced value chain costs.

By obtaining, the necessary equipments required and with increased business processes and established organizational structures, the integral stakeholders in the value chain are endowed with more information to support their decision making processes on important business decisions. This was recently evidenced by the coming up of Sales and Operation Planning systems which incorporates all the participants in the value chain.

Better Deals from the Suppliers

The buyer organizations are seeking to obtain lower rates of legal impositions from the host governments and conditions of doing business in such countries. Since there is increased competition in suppliers, it is becoming increasingly possible to obtain even better deals so as to provide your services within such countries especially if they are still developing.

They are being offered not only reduced legal tariffs but also increased innovation and technological expertise from the vendors. Further, increased research services and highly developed infrastructure are some of the enticements being received (Tholon’s 2009, Para. 5).

Challenges Encountered

In their endeavor to globalize and increase benefits of outsourcing, organizations are facing various challenges. Some of this challenges include;

Currency Dynamics

Currency fluctuations are a major problems to outsourcing and global business in general. In 2007, this was the case and even now, the value of the Indian rupee keeps changing frequently against the dollar. This causes organizations to experience losses since income in a place like India will be less as compared to expenses being expended in U.S especially when both currencies are being used. further, the purchasing power of the consumers remains the same. But hopefully, since consumers are agreeing to accept bills in INR, things will be better. Also, competition from other countries is causing the rupee is finally appreciating.

Reduced Government Incentives

Some of the legal incentives being offered are decreasing as more and more organizations are accepting them. Further, the more the company continues to operate in that country the more the incentives reduces. In India, the income tax holiday period recently expired while other competing countries such as Chinese and Philippines the tax holidays have a limited time span of 10 years and thus will end with time. This results to reduced profitability for firms operating in such countries.

Arising Crisis

Unforeseen crisis keep arising in such countries causing organizations to increase the cost of production costs. An example is the recent Subprime crisis in the US which “affected the Indian Software development outsourcing and BPO industry to a very great extent,” (Anonymous 2008, Para. 4).

The profits experienced were decreased and the volumes being outsourced. Another unforeseen happening was the financial crisis rocking the world in 2001 which caused global organizations to undergo a huge financial loss. Also, the Tsunami that Japan experienced in March 2011 was another challenge that global organizations had to bear.

Conclusion

Outsourcing is one of the major ways of carrying global business all over the world. Many organizations are adopting various strategies so as to remain competitive in the global market. Many scholars are complaining on the adverse effects of globalization and outsourcing. Some of these effects include reduced employment opportunities for local people.

This is because all businesses are being conducted outside the local countries. This in turn results to poor conditions of living and reduced purchasing power of individuals back at home as other countries continue to flourish with increased standards of living. Most argue that the creativity and innovation cultivated by business persons should benefit the citizens of original countries instead of being shipped to benefit foreigners.

Further, scholars are arguing that it results to increased brain drain whereby highly skilled manpower is moving from the developed countries to the developing countries depriving of the home country of the production that such individuals are capable of bringing to the country. Further, the fact that new and improved products are being marketed in other countries is depriving of the consumers back at home a chance to enjoy these products while foreign consumers are having it all.

Further, these products are being exported back to the home country as imports rather than being exports for such countries causing deficits in balance of trades in home countries. Besides, the taxes that the government is supposed to obtain from such organizations when they are carrying on business at home are not obtained and instead are being reaped by other countries. So most people are against increased globalization and outsourcing.

But despite these arguments, there are various advantages and benefits accruing from these industry of globalized outsourcing. Firms are able to produce their products at a lower cost thus reducing their cost per unit of production resulting to increased profits and organizational growth.

This is because they are able to obtain low wages from their workers in countries like India and Pakistan as compared to such places as US where unit of labor is so high. Further, they are able to obtain a large market and distribution chain for their products in the host countries due to increased demographics unlike their own countries. There are also increased technological advancements across the globe allowing these firms to use the latest technology in their host countries.

The technology is allowing innovation to be more effective leading to more quality goods being produced. Producers and the markets are also well provided with informational needs required to carry out business effectively. Further, raw materials are easily accessible with no extra costs of shipment and some scarce natural resources such as oil are now being obtained easily in the host countries.

This therefore shows that, however much scholars are arguing, globalization and outsourcing for business organizations can be optimally utilized to result to increased results not just for the organizations concerned but also for the host and home country as well as the world globally. We should all work towards enhancing this thriving industry rather than bring it down before we even realize how much we can benefit from it.

References

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