Business outsourcing is a term that is yet to receive a standard definition. In its simplest understanding, it refers to seeking an external help in running business activities. The services offered to a given firm are paid for in monetary form upon agreed terms and conditions. The development of this business concept in the recent past has seen business organizations outsource for basic asset needs from overseas country through a process referred to as offshore outsourcing. An entire business operation can be outsourced for, given the avenues created by globalization and development of the ICT sector globally. Business management applies the use of transformational outsourcing in order to attain a set strategic purpose in line with the accomplishment of their missions and goals.
Business process outsourcing has its own benefits and implications. The concept has led to cost reduction in running operations of businesses, a feat that has led to re-pricing of goods and services. Small business entities are said to be making about 30% reduction in costs after employing the use of Business Process Outsourcing (BPO), (Marks, 2005). Other benefits include access to cheap labor that is available in less developed country as compared to labor cost in the developed countries where most jobs come from. In addition, the process of outsourcing ensures a firm gets the best of manpower that can possibly be attained especially in the technical fields. It is therefore possible to get best services without necessarily employing an expert and this is a good cost cutting mechanisms that companies can utilize. It this essay we are going to look at the critical analysis of the ideals of business outsourcing in terms of costs and impacts.
The Real Cost of Outsourcing
The concept of business process outsourcing has been blindly adopted and has become popular with majority amid a number of critical costs that are not adequately considered by businessmen. Before realization of the benefits of outsourcing, one needs to document all investments issues at the initial stages before considering business practice as a reflective cost cutting measure. It is in order that businessmen realize that the cost of just selecting an outsourced service ranges from 0.2-2% of the annual cost of services rendered. “These selection costs include documenting requirements, sending out RFPs and evaluating the responses, and negotiating a contract,” (Szatvanyi, 2008). In addition to this, there is still the cost of legal fee that has to be paid. There is also a possibility of outsourcing for a job that can be adequately done by the employed staff of a given organization. The process of outsourcing for service may take longer period than expected, at times a year depending on the kind of relationship between any two partners.
Another cost is incurred when selecting the best outsourcing model that can be of maximum benefit to a firm. A number of business entities consider the cost of outsourcing in the short run rather than looking at the long term benefits that can accrue to a firm should a business process outsourced. The cost of estimate of choosing a vendor entails putting together, distributing, and receiving feedback of RFP/RFQ. Other selection costs include analyzing the best services from a number of potential service providers, due diligence, managerial involvement, and making the final decision on outsourcing. After analyzing the issues therein, a company then has to judge based on the analysis, which model of outsourcing to adopt. The chosen model must address the long term benefits for a firm. Some outsourcing arrangements involve developing transformational relationships and multisourcing especially if it involves technical experts or sourcing for part of a project or an entire project. “Transformation is expensive; it means new computer systems, moving expenses, redundancy payments, training, investments in new products, services, and a whole host of other kinds of cash obligations,” (Linder, 2004). Other outsourcing needs of a firm may include: outsourcing for information technology, outsourcing for managerial needs, outsourcing for a business operation process or business solution.
Selecting a model of outsourcing should be based on ability to tolerate possible risks involved and ability to adjust management procedures in a bid to incorporate the services rendered by outsourcing avenues. A business organization should be able to document all the undertakings involved in outsourcing for a service in terms of resource allocation, costs and intended timeline of services’ hire. This is crucial in developing a coordination of all activities involved in running a process. However, most firms do not focus on the mentioned processes but instead struggle to identify the least priced outsourcing service. This is not always the smartest choice because at times it does not represent the best value for outsourcing.
The third cost of outsourcing is incurred in the transition process which accounts for between 2-3% of the total cost. “The transition period is perhaps the most expensive stage of an offshore endeavor. It takes a range of about three months to a full year to completely hand the work over to an offshore partner,” (Szatvanyi, 2008). Most business organizations’ managements are caught in the notion that outsourcing means savings but in reality, it means spending especially at the transition stage. In real sense, the transitional costs are the main constituent of most outsourcing deals; but, if the process involves a complex and detailed legislations, then proper IT foundations have to be laid at an approximately higher cost than that of labor arbitrage. Setting complex IT foundation has to take into account the overall effect that will be passed to the consumers and should it reflect a burden, it has be considered for contemplation.
A number of factors constitute the cost of transition that begins with transition of management obligations. Also, transitional costs entail the cost of hiring a third oversight body to verify and validate the need for outsourcing. Other costs are incurred in communication systems: cost of writing resources, running the information system, and cost of advertising the transition deal to the public. Legislative costs also fall under this category. Alongside these costs, there are other hidden costs of transition that can be incurred in outsourcing for business processes. The hidden costs include cost of retrenchment of employees when the services of outsourcing commence. Retained workers may also work without full commitment due to fear that they may soon be sucked. “Expect to pay an extra 3% to 5% on lay offs and related costs,” (Szatvanyi, 2008).
The forth cost incurred during outsourcing is valuation of cultural costs. The greatest and most adverse effect of outsourcing is productivity. It is difficult to replace one worker with an offshore worker and expect the same rate of output. The mutual relationship developed between a local worker and a given institution leads to openness and this cannot be achieved with utilizing the services of an outsourced worker. Moreover, there is still communication barrier that can ensue with an externally sourced worker or expert. There is also high turnover costs associated with outsourcing, with attrition rates able to climb to even higher percentages. Finally, the final cost of outsourcing is incurred in managing and maintaining the contract between a firm and the outsourced services. Outsourcing involves a lot of paper work in preparing invoices and carrying out internal auditing to properly account for costs of services rendered via outsourcing. Another vital inclusion to the cost of management in outsourcing is recording time most appropriately. Whenever a management runs an outsourcing project time sheets have to be audited against a vendor, and its effects reflected in the overall financial books of the institution. “The company gets a cash infusion as well as lower recurring costs-for immediate positive impact on both its balance sheet and its income statement,” (Linder, 2004).
Critical Analysis of the Cost of Business Outsourcing in America
There is real impact of outsourcing jobs in the economic dispensation of America. Job outsourcing mean offering professional jobs offshore at the expense of the American citizens. These jobs range from running of basic business duties to the more professional and technical fields that include financial analysis. The biggest question that can thus be posed is whether the effect of job outsourcing is a concern in the prosperity of the United States. Unemployment rates have steadily risen in most major cities in the US; for example, New York. This occurs at a time when it has been reported that more jobs have been created (that is not a common knowledge). Jobs have not been created in our major cities but they have been taken in overseas countries through BPO. “The National Association of Software and Service Companies (Nasscom), an association of software and IT-enabled services companies estimate that India’s IT-enabled services industry grew by 70% during 2001-2002,” (Yasgur, 2003).
The main reason for the above mentioned problem is adoption of business process outsourcing across borders. The effects of business outsourcing is a concern for Americans as the trend keeps growing with suggestions that millions of office jobs are leaving the American territory due to lower costs of overseas vendors. The demand of economic growth in the US decades ago led to exportation of industrial production duties. Due to this, the government resorted to investment in education so that local citizens could carry out high skilled office jobs that are well paying and of higher value.
The process of attaining high skilled jobs and the need to be well acquainted with information economy made people invest energy and resources in developing their careers. Within short period colleges sprung out to meet the ever increasing demand of education. These efforts ensured that the skilled manpower remained relevant to the new job security brought about by technological advances. After investing in education, the common American citizen remains the victim of the same technology that has now brought BPO and is working against our perceived interests. The education infrastructure is still coined to offer the kind of formal education needed in information economy whereas there are no job opportunities after completion of academic training, the main reason being jobs shipped abroad. This statement is supported by Yasgur and Nounou who report that, “While the job preparation infrastructure still performs key function, the kinds of jobs that it is readying people for are increasingly being exported overseas, (Yasgur and Nounou, 2003).
The time is ripe for the government to protect the interest of American citizens by reshaping the economy; more so, after the economic recession that followed the 9/11 tragedy. The economy is ill following the after-effects of labor market. The trend of job competition resulting from outsourcing would still continue to rise and the administration needs to develop policies that will restructure our domestic economy. It is only through such efforts that unemployment issue will be adequately addressed. The administration is obliged with the responsibility of restoring back the US national economy to its lost glory by addressing the plight of workers. Policy realignment is the key to attaining this noble cause; for instance, doing away with the ineffective payroll tax and overhauling our healthcare sector to benefit the unemployed. Other policies that are good enough to help in turning the tide of enormous number of jobs leaving the country for the benefit of US citizens are welcomed.
The repercussions of BPO are so adverse that it cannot be compared with the exportation of manufacturing jobs three decade ago. This is so because the jobs leaving the American territory now are more lucrative than used to be the case of exportation of manufacturing jobs. Another serious problem that BPO has is the systems’ inability to limit the number of jobs lost via the concept of outsourcing.
The opportunity by business organizations to outsource for overseas labor should be regulated by imposition of legislations that will keep this ever increasing phenomenon in check. “It is well documented that the American worker is working longer and harder just to maintain his/her standard of living,” (Yasgur and Nounou, 2003). This means that such an individual will be working just to sustain him/herself with no possibility of future investment. What role can the corporate sector play in combating the effects of BPO? Well, there is one avenue that they can exhaust. The corporate sector should ensure that shareholders reap abundantly from profit made from business activities. That is the role that corporate managers can play given that the needs of outsourcing are unavoidable in the world of business today.
The pinch of business process outsourcing is mainly felt by American workers at the moment that jobs cross overseas borders. The impact of BPO to the economy then spreads to states level and finally to the national level. The work of developing strategies to curb the negative effects of BPO; therefore starts with states’ legislation before federal government develops its own that will look into the possible national policies constituted by looking at the various state laws.
Business outsourcing is a complex problem that no single solution will be able to address. Therefore development of step-by-step legislative policies will be most effective measure of improving the state of an American worker. Policy development should not however be seen as a barrier to free trade but it should rather be seen as a protective measure geared towards serving the interests of the people. This is a very sensitive action and ultimate care should be taken to ensure the international trade rules and regulations are not interfered with. The motive of legislation is to protect the interest of local citizens who are the employers of government officials.
Recommendations for the Government in Curbing the Effects of BPO
The administration has to reduce payroll tax to American citizens to enable them compete effectively with labor that is outsourced. Payroll tax constitutes the biggest percentage of tax burden carried by workers. Reduction of payroll tax is therefore bound to significantly give labor incentive to workers than income tax. “Lowering it would enable the American worker to decrease the 30% to 50% cost gap between hiring domestic and overseas workers, helping to achieve the strategic policy objective of securing quality American jobs,” (Yasgur and Nounou, 2003). The effect of reducing payroll tax is also more significant than cutting tax on dividends because of three main reasons. To begin with, reducing tax on corporate dividends is bound to benefit mainly the middle and high class Americans at the expense of most workers; hence, its overall result will not stimulate the economy.
Secondly, the reduction of payroll tax as opposed to tax on corporate dividends will target the US economy and this will make tax benefits accruing from tax reduction remain with American citizens and benefit US economy. On the other hand, the benefit of tax reduction on corporate dividend will end in the hands of rich people and the corporate set up who may opt to let the benefit flow out of US territory. Finally, reduction in payroll taxes can be catered for by adjusting the upper limit of the affected taxes. This measure will not only help in improving the welfare of the workers but it is also among the best tax policies in the land.
The second recommendation to combat effects of BPO falls in the healthcare insurance docket. American health insurance is paid by employers. When an individual loses his/her job to overseas vendors, health insurance is lost. On the part of a company, services of overseas vendors are relatively cheaper as compared to hiring a local worker due to incurred cost of healthcare insurance. It will therefore be a positive move if healthcare insurance is delinked from employment so that an American worker can be left to device his/her own way of insuring his/her healthcare plan.
In summary, having looked at the impacts of outsourcing and the state of affairs in the US labor force, the notion of job creation is in the land will still remain a challenge to the US administration. To achieve meaningful employment rates, we need to approach the issues of BPO with a lot of sobriety in regard to policy development and other measures that can be taken to combat the negative effects of BPO. All stakeholders; therefore, have to join hands in restoring the health of an American worker even if it means developing progressive policies given that in the United States 90% of all business organizations are currently outsourcing for overseas vendors, (Marks, 2005).
BPO is a modern concept of doing business in the world today. BPO has many benefits; more so, in relation to cost cutting and increasing competitiveness. Having looked at the costs and impacts of outsourcing for a business process, it will be in order that legislations are set to cushion the public from adverse effects resulting from the concept. In this way we will ensure that our businesses are run effectively and the society does not fall victims of the BPO.
Linder, J.C., (2004). Outsourcing for radical change: a bold approach to enterprise transformation. New York, NY: AMACOM Div American Mgmt Assn
Szatvanyi, G., (2008). The real cost of outsourcing. Web.
Marks, G., (2005). “The complete idiot’s guide to successful outsourcing.” The complete idiot’s guide. Michigan: Alpha.
Yasgur, S., & Nounou, E. (2003). E-Journal: The Impact of Outsourcing on the American Worker. Web.