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Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company. A subcontractor is an individual or in many cases a Business that signs a Contract to perform part or all of the obligations of another's contract Manufacturing (from Latin manu factura, "making by hand" is the use of tools and labor to make things for use or sale [1] The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of labor, capital, technology and resources. Costs redirects here For costs related to economics and accounting see Cost. Core competency is something that a firm can do well and that meets the following three conditions It provides consumer benefits It is not easy for competitors to imitate A business (also called firm or an enterprise) is a legally recognized organizational entity designed to provide goods and/or services to In Economics, capital or capital Goods or real capital refers to items of extensive value Technology is a broad concept that deals with a Species ' usage and knowledge of Tools and Crafts and how it affects a species' ability to control and adapt In economic theory factors of production (or productive inputs) are the resources employed to produce goods and services Outsourcing became part of the business lexicon during the 1980s.

Contents

Overview

Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider. [2] The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities, real estate management, and accounting. Information technology ( IT) as defined by the Information Technology Association of America (ITAA is "the study design development implementation support In Business, facility management (or facilities management is the Management of building estates which encompasses both building fabric and services Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom Accountancy or accounting is the measurement statement or provision of assurance about financial information primarily used by Lenders managers, Many companies also outsource customer support and call center functions like telemarketing, customer service, market research, manufacturing, designing, web development, content writing, ghostwriting and engineering. Technical support (also tech support) is a range of services providing assistance with technology products such as mobile phones televisions Computers A call centre or call center (see spelling differences) is a centralized office used for the purpose of receiving and transmitting a large volume of requests by Telemarketing is a method of Direct marketing in which a Salesperson solicits to prospective Customers to buy products or services, Customer service (also known as Client Service) is the provision of service to customers before during and after a purchase Market research is the process of systematically gathering recording and analyzing data and information about Customers, Competitors and the Market Manufacturing (from Latin manu factura, "making by hand" is the use of tools and labor to make things for use or sale Design is used both as a Noun and a Verb. The term is often tied to the various Applied arts and Engineering (See design disciplines Web development is a broad term for any activity related to developing a Web site for the World Wide Web or an Intranet. A ghostwriter is a professional Writer who is paid to write books articles stories reports or other content which are officially credited to another person Engineering is the Discipline and Profession of applying technical and scientific Knowledge and

Outsourcing and offshoring are used interchangeably in public discourse despite important technical differences. Offshore may refer to oil and Natural gas production at sea see Oil platform. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company[3][4].

With increasing globalization of outsourcing companies, the distinction between outsourcing and offshoring will become less clear over time. This is evident in the increasing presence of Indian outsourcing companies in the US and UK. The globalization of outsourcing operating models has resulted in new terms such as nearshoring, noshoring, and rightshoring that reflect the changing mix of locations. Nearshoring means Sourcing service activities to a foreign lower-wage country that is relatively close in distance or time zone (or both This is seen in the opening of offices and operations centers by Indian companies in the U. S. and UK. [5]. [6]

Multisourcing refers to large (predominantly IT) outsourcing agreements. [7] Multisourcing is a framework to enable different parts of the client business to be sourced from different suppliers. This requires a governance model that communicates strategy, clearly defines responsibility and has end-to-end integration. Governance relates to decisions that define expectations, grant power, or verify performance. A Strategy is a long term plan of action designed to achieve a particular goal, most often "winning [8]

Process of outsourcing

Deciding to outsource

The decision to outsource is taken at a strategic level and normally requires board approval. Outsourcing is the divestiture of a business function involving the transfer of people and the sale of assets to the supplier. In Finance and Economics, divestment or divestiture is the reduction of some kind of Asset for either financial goals or ethical objectives The process begins with the client identifying what is to be outsourced and building a business case to justify the decision. Only once a high level business case has been established for the scope of services will a search begin to choose an outsourcing partner.

Supplier proposals

A Request for Proposal (RFP) is issued to the shortlist suppliers requesting a proposal and a price. For other meanings see RFP (disambiguation. For information about Wikipedia proposals see WikipediaVillage pump (proposals.

Supplier competition

A competition is held where the client marks and scores the supplier proposals. This may involve a number of face-to-face meetings to clarify the client requirements and the supplier response. The suppliers will be qualified out until only a few remain. This is known as down select in the industry. It is normal to go into the due diligence stage with two suppliers to maintain the competition. Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person or the performance of an act with a certain Standard Following due diligence the suppliers submit a "best and final offer" (BAFO) for the client to make the final down select decision to one supplier. It is not unusual for two suppliers to go into competitive negotiations.

Negotiations

The negotiations take the original RFP, the supplier proposals, BAFO submissions and convert these into the contractual agreement between the client and the supplier. This stage finalizes the documentation and the final pricing structure.

Contract finalization

At the heart of every outsourcing deal is a contractual agreement that defines how the client and the supplier will work together. This is a legally binding document and is core to the governance of the relationship. Governance relates to decisions that define expectations, grant power, or verify performance. There are three significant dates that each party signs up to the contract signature date, the effective date when the contract terms become active and a service commencement date when the supplier will take over the services.

Transition

The transition will begin from the effective date and normally run until four months after service commencement date. This is the process for the staff transfer and the take-on of services.

Transformation

The transformation is the execution of a set of projects to implement the service level agreement (SLA), to reduce the total cost of ownership (TCO) or to implement new services. A service level agreement (frequently abbreviated as SLA) is a part of a service contract where the level of service is formally defined Total cost of ownership (TCO is a financial estimate designed to help consumers and enterprise managers assess direct and indirect costs Emphasis is on 'standardisation' and 'centralisation'.

Ongoing service delivery

This is the execution of the agreement and lasts for the term of the contract.

Termination or renewal

Near the end of the contract term a decision will be made to terminate or renew the contract. Termination may involve taking back services (insourcing) or the transfer of services to another supplier. Insourcing is the opposite of Outsourcing; that is insourcing (or contracting in is often defined as the delegation of operations or jobs from production within a business to

Reasons for outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues: [9][10][11]

Criticisms of outsourcing

Public opinion

There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Offshore may refer to oil and Natural gas production at sea see Oil platform. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (Protection of Employment). The European Union ( EU) is a political and economic union of twenty-seven member states, located primarily in Tupe is also the name of a place in Peru in the "provincia de Yauyos" "departamento de Lima" Labor laws in the United States are not as protective as those in the European Union. The United States of America —commonly referred to as the A study has attempted to show that public controversies about outsourcing in the U. S. have much more to do with class and ethnic tensions within the U. S. itself, than with actual impacts of outsourcing. [16]

Against shareholder views

For a publicly listed company it is the responsibility of the board to run the business for the shareholders. A mutual shareholder or stockholder is an Individual or company (including a Corporation) that legally owns one or more shares of This means taking into consideration the views of the shareholders. Shareholders may be interested in return on investment and/or social responsibility. In Finance, rate of return ( ROR) also known as return on investment ( ROI) rate of profit or sometimes just return, is Social responsibility is an ethical or ideological theory that an Entity whether it is a Government, Corporation, Organization The board may decide that outsourcing is an appropriate strategy for the business. Shareholders have a responsibility to make their views known to the board of directors if they are against outsourcing.

Failure to realize business value

The main business criticism of outsourcing is that it fails to realize the business value that the outsourcer promised the client. In management business value is a meaningless buzzword that includes all forms of value that determine the health and well-being of the firm in the long-run

Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with off-shoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.

There are a number of the public who find the linguistics features such as accents, word use and phraseology different which may make call center agents difficult to understand. Linguistics is the scientific study of Language, encompassing a number of sub-fields In Linguistics, stress is the relative emphasis that may be given to certain Syllables in a word A call centre or call center (see spelling differences) is a centralized office used for the purpose of receiving and transmitting a large volume of requests by The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties. The face-to-face relation refers to a concept in the French Philosopher Emmanuel Lévinas ' thought on human sociality [17]

Social responsibility

Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work.

Quality of service

Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. A service level agreement (frequently abbreviated as SLA) is a part of a service contract where the level of service is formally defined In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price.

There are a number of stakeholders who are affected and there is no single view of quality. A corporate stakeholder is a party who affects or can be affected by the company's actions The CEO may view the lower quality acceptable to meet the business needs at the right price. A chief executive officer ( CEO) or chief executive is typically the highest-ranking corporate officer ( executive) or administrator The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better.

Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of research[18]. This allows quality to be tracked over time and also for corrective action to be identified and taken.

Staff turnover

The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company.

In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center. [19] This inhibits the build-up of employee knowledge and keeps quality at a low level.

Company knowledge

Outsourcing could lead to communication problems with transferred employees. For example before transfer staff have access to broadcast company e-mail informing them of new products, procedures etc. Electronic mail, often abbreviated to e-mail, email, or originally eMail, is a Store-and-forward method of writing sending receiving Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.

Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications. [20]

In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. Engineering is the Discipline and Profession of applying technical and scientific Knowledge and The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual gradates of four-year degrees are United States (137,437) India (112,000) and China (351,537). [21][22]

Work, labour, and economy

Net labour movements

Productivity

Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a third world country using hand tools can appear to be more productive than a U. S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U. S. dollars.

In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making real investments in productivity.

Standpoint of labor

From the standpoint of labor within countries on the negative end of outsourcing this may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization (see Krugman, Paul (2006). Globalization (or globalisation) in its literal sense is the process of transformation of local or regional phenomena into global ones Paul Robin Krugman ( born February 28 1953 is an American Economist, Columnist, Author, and Intellectual. "Feeling No Pain. " New York Times, March 6, 2006). Events 1079 - Omar Khayyám completes the Iranian calendar. 1454 - Thirteen Years' War: Delegates of Year 2006 ( MMVI) was a Common year starting on Sunday of the Gregorian calendar. While the "outsourcing" process may provide benefits to less developed countries or global society as a whole, in some form and to some degree - include rising wages or increasing standards of living - these benefits are not secure. Further, the term outsourcing is also used to describe a process by which an internal department, equipment as well as personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river. "

The U. S.

'Outsourcing' became a popular political issue in the United States during the 2004 U.S. presidential election. The United States presidential election of 2004 was held on Tuesday November 2, 2004, to elect the President of the United States. The political debate centered on outsourcing's consequences for the domestic U. S. workforce. Democratic U. The Democratic Party is one of two major Political parties in the United States, the other being the Republican Party. S. presidential candidate John Kerry criticized U. } John Forbes Kerry (born December 11 1943 is an American Politician who is currently serving his fourth term as the junior United States Senator S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of U. S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations". Benedict Arnold V ( – June 14, 1801) was a General during the American Revolutionary War who originally fought for the American Continental Criticism of outsourcing, from the perspective of U.S. citizens, by-and-large, revolves around the costs associated with transferring control of the labor process to an external entity in another country. Article I section 8 clause 4 of the United States Constitution expressly gives the United States Congress the power to establish a uniform rule of naturalization A Zogby International poll conducted in August 2004 found that 71% of American voters believed that “outsourcing jobs overseas” hurt the economy while another 62% believed that the U. John Zogby (born 1948) is an American political pollster and first senior fellow at The Catholic University of America 's Life Cycle Institute S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource. [23] One given rationale is the extremely high corporate income tax rate in the U. S. relative to other OECD nations [24][25][26], and the peculiar practice of taxing revenues earned outside of U. S. jurisdiction, a very uncommon practice. It is argued that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U. S. ) will alleviate corporate outsourcing and make the U. S. more attractive to foreign companies. Sarbanes-Oxley has also been cited as a factor for corporate flight from U. The Sarbanes-Oxley Act of 2002 ( also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox S. jurisdiction.

Policy solutions to outsourcing are also criticized.

Security

Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no-longer are directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.

Fraud

Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. It can be argued that fraud is more likely when outsourcers are involved. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank is a major international Bank, founded in 1812 as the City Bank of New York, later First National City Bank of New York. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank. [27].

See also

References

  1. ^ Terms and Definitions. The Business process outsourcing industry in India refers to the Services Outsourcing Industry in India, catering mainly to Western operations of MNCs Business process outsourcing or BPO is an emerging industry in the Philippines. Business process outsourcing ( BPO) contains the transmission of processes along with the associated operational activities and responsibilities to a third party with at least In international trade the principle of comparative advantage refers to the fact that although one country may have an absolute disadvantage with another value can be created for both In the United Kingdom, a compromise agreement is a specific type of Contract, regulated by Statute, between an Employer and its Employee Co-sourcing services are those that are performed in concert with client's existing internal audit department and the scope of work may focus on one or more aspect of the internal audit Crowdsourcing is a Neologism for the act of taking a task traditionally performed by an employee or Contractor, and Outsourcing it to an undefined generally Farmshoring is a term used to describe the shifting of employment from abroad into rural communities across the United States. Homesourcing also known as homeshoring is "the transfer of service industry employment from offices to home-based employees with appropriate telephone and Internet facilities" Hot desking originates from the definition of being the temporary physical occupation of a work station or surface by a particular Employee. Hotelling is a method of supporting unassigned seating in an office environment Information technology consulting ( IT consulting, technology consulting or business and technology services) is a field that focuses on advising businesses Insourcing is the opposite of Outsourcing; that is insourcing (or contracting in is often defined as the delegation of operations or jobs from production within a business to Knowledge process outsourcing (KPO is a form of Outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a Engineering process Outsourcing (EPO for the AEC industry is a vertical domain for the industries of the built environment Legal outsourcing refers to the practice of a Law firm obtaining legal support services from an outside law firm or legal support services company This is a list of articles on general management and strategic management topics Nearshoring means Sourcing service activities to a foreign lower-wage country that is relatively close in distance or time zone (or both Offshore Software R&D is provision of Software development services by an external supplier positioned in a country that is geographically remote from the client enterprise Offshore may refer to oil and Natural gas production at sea see Oil platform. Offshore may refer to oil and Natural gas production at sea see Oil platform. A service level agreement (frequently abbreviated as SLA) is a part of a service contract where the level of service is formally defined Supply chain management (SCM is the process of Planning, implementing and Controlling the operations of the Supply chain as efficiently as possible A supply chain or logistics network is the system of organizations people technology activities information and resources involved in moving a product or service from A telecentre is a public place where people can access Computers, the Internet, and other digital technologies that enable them to gather information create learn Telecommuting, e-commuting, e-work, telework, working at home (WAH, or working from home (WFH is a work arrangement in In Microeconomics and Management, the term vertical integration describes a style of Management control. The Programmers Guild is an American non-profit corporation that advocates against corporate Outsourcing, the H1-B visa program and related topics ventureoutsource. com. Retrieved on 2007-10-05. Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. Events 869 - The Fourth Council of Constantinople is convened to decide about what to do about Patriarch Photius of Constantinople
  2. ^ Overby, S (2007) ABC: An Introduction to Outsourcing. CIO. com.
  3. ^ Norwood et al (2006) Off-Shoring: An Elusive Phenomenon. National Academy of Public Administration
  4. ^ Babu, M. (2005) Myth: All Outsourcing Is Offshoring www. computerworld. com
  5. ^ McCue, A. (2006) Indian outsourcers to launch European invasion www. silicon. com.
  6. ^ Gibson (2006) India 2.0 Aims to Sustain Its Global IT Influence eWeek
  7. ^ (Q4 2006)Mandatory Multisourcing Discipline Business Trends Quarterly
  8. ^ (2006) Mandatory Multisourcing Discipline
  9. ^ Gareiss, R (2002, 18 Nov) Analyzing The Outsourcers. Information Week.
  10. ^ Drezner, D. W. (2004) The Outsourcing Bogeyman www. foreignaffairs. org
  11. ^ Engardio, P. (2006) Outsourcing: Job Killer or Innovation Boost? Business Week
  12. ^ Engardio, P. & Arndt, M. & Foust, D. (2006) The Future Of Outsourcing Business Week
  13. ^ Engardio, P. & Kripalani, M. (2006) The Rise Of India Business Week
  14. ^ Rothman, J. (2003) 11 Steps to Successful Outsourcing: A Contrarian's View www. computerworld. com
  15. ^ Roehrig, P (2006) Bet On Governance To Manage Outsourcing Risk. Business Trends Quarterly
  16. ^ Ganesh, S. (2007). Outsourcing as Symptomatic. Class visibility and ethnic scapegoating in the US IT sector.. Journal of Communication Management, 11. 1: 71-83.
  17. ^ Alster, N (2005) Customer Disservice. www. CFO. com.
  18. ^ Maddock, B. & Warren, C. & Worsley A. (2005) Survey of canteens and food services in Victorian schools
  19. ^ Kobayashi-Hillary, M. (2007) India faces battle for outsourcing news. bbc. co. uk
  20. ^ Stein, R (2005) Hospital Services Performed Overseas. www. washingtonpost. com
  21. ^ Wadhwa, V (2005) About That Engineering Gap. www. businessweek. com
  22. ^ Gereffi, G. & Wadhwa, V. Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India. Duke University.
  23. ^ Zogby International survey results online at zogby.com
  24. ^ Veronique de Rugy on Corporate Flight & Taxes on NRO Financial
  25. ^ The Tax Foundation - U.S. Lagging Behind OECD Corporate Tax Trends
  26. ^ John Tamny on Hillary Clinton Economics on NRO Financial
  27. ^ Ribeiro, J (2005) Indian call center workers charged with Citibank fraud. www. infoworld. com

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Dictionary

outsourcing

-verb

  1. Present participle of outsource.

-noun

  1. The transfer of a business function to an external service provider
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