Simple Analysis of Financial Outsourcing †Free Samples to Students

Question: Discuss about the Simple Analysis of Financial Outsourcing. Answer: Introduction Outsourcing is a procedure adopted by many organisations to decrease their expenses by transferring parts of their business functions to third party suppliers, instead of performing it internally in the organisation. This strategy is adopted by companies to reduce their operating costs. It is a common procedure performed by technology companies and other industries. Various business functions such as manufacturing parts, human resources, information technology, legal, call centers, bookkeeping, business analysis, and marketing. There are various large companies outsourcing their business to other organisations such as Staples, IBM, Kingston, Hewlett Packard and much more. This report will discuss from the perspective of IBM, regarding the benefits and drawbacks of outsourcing a particular business function to another company. The aim of this report is to understand the benefits and challenges of outsourcing a business function to the third party. IBM prefers to outsource their business to another company because it reduces their cost of operations. But outsourcing a business has its difficulties as well. The company outsourcing its business losses the control of management over such function, they face the risk of a data leak, a decrease in customers satisfaction and other labour issues. The object of this report is to understand both the advantages and disadvantages of the outsourcing through the perspective of IBM. This report will discuss the perspective of IBM and various other companies that have succeeded and failed while outsourcing to understand the topic in depth. Further, it will discuss benefits and drawbacks that a company faced while outsourcing. The outsourcing strategies applied by IBM and other companies, and their ability to succeed will be discussed. This report will analyse different theories of outsourcing given by various market experts to determine its rewards and limitations. Literature Review Outsourcing is a method of transferring business functions to third party organisations, adopted by different companies to reduce the cost of operations and increase the efficiency of the work. It is a significantly popular method for reducing the cost that is used by companies worldwide, especially enterprises of developed companies (Gospel and Sako 2010). IBM is an American international technology organisation, incorporated in 1911. The company operates in computing, cloud programming, and information technology industry. The firm outsourced their IT process to third party companies from Malaysia, India, and Singapore, which allow them to focus on their core values. The organisation has more than 40 data center globally, engaged in providing IT services to their customers. IBM is known for their expertise in technology outsourcing services (Pierce 2011). Outsourcing is transferring of duties, work and authority to an outside organisation. It allows companies to increase their attention to the core business and assist them to gain a competitive advantage by reducing their cost of operations. Organisations have the option to either outsource whole process or just a part of the process. For example, the paper of Dhar (2012) provided that, IBM transfers the process of monitoring the management of an IT system, but they perform end-user support process internally. This help in increasing the on-site support for workers. According to the research of Gorla and Somers (2014), outsourcing strategy of IBM is focused on achieving improved consumer service quality and decreased operation cost. It helps the enterprise in creating permanently or temporary provisions for employment, skilled labour and improved products design. While formulating the strategies for outsourcing, an organisation should evaluate the potential grounds and all the mechanisms to analyse which part or function of business should be outsourced. Following are the popular business functions that an organisation outsourced: Human Resource management Bookkeeping and accounting process Technical process Service management Manufacturing components process Call centres Research facilities Legal procedures Outsourcing a function of a business can significantly benefit the business and help them gain competitive advantage. In modern time, there are a large number of companies that have adopted outsourcing as a key part of their business procedure. There are numerous advantages enjoyed by IBM through outsourcing their business function. IBM reduce several of their operational costs by outsourcing their business function such as employee salary expenses, workplace expenses and other expenses related to providing workplace or manufacturing set-up to the employees. The cost of providing these facilities are way cheaper in outside countries as compare to developed countries. It helps IBM in gaining a cost advantage over its competitors (Mohr, Sengupta and Slater 2011). Attention to Core Business By outsourcing the remaining functions of operations, an organisation can focus on the key elements of their business. The outsourcing allows IBM to implement all their resources in core business activity and help improve their business functions. According to Han and Mithas (2013), the company focus on manufacturing computer hardware in America and transfer their information technology services to third party companies. This allows IBM to enhance the quality and efficiency of their hardware since they are not disrupted by daily activities of IT services. Organisations usually outsourced their business to companies who are specialised in the particular field. The employees of the enterprise have skills, equipments and technical knowledge to perform such task better than outsourcing company. This help company performed their tasks with higher efficiency, less time and better quality. IBM gained the same advantage by outsourcing their IT services to 40 of their data center worldwide. In the research of Zhang and Gu (2013), Tesco rather than teaching their employees regarding the latest technology or hiring new employees, the company outsourced the work to third parties. This helps the enterprise in reducing the time and expenses for the operations and gained them a competitive advantage. The benefit of outsourcing includes a high level of customers satisfaction since the outsourced work is performed by experts. The contract of outsourcing bound the company to perform their task and services with high level of quality. Therefore, if an employee gets sick, the organisation is bound to find a substitute to complete their work. IBM has more than 380,000 employees, and the majority of their employees are in their data centers situated in Malaysia, India, and Singapore. This allows the company to provide 24-hour service to their customers with high expertise. The organisation enjoys a high rate of customers satisfaction due to the support from their data centers. Operational efficiency Outsourcing provides an organisation expertise of third parties that ensure more efficiency in the workplace. This allows faster achievement of tasks while maintaining a high level of quality. The outsourcing of remaining functions allows employees to focus on essential tasks and completing them with efficiency. IBM has implemented an efficient structure in the organisation, which allows them to focus on core objectives, instead of secondary tasks such as daily supervision of data centers. The agreement of outsourcing allows organisations to share their business risk with other organisations. The contract of outsourcing forced the organisation to provide a high quality of services. If they failed to do so, then outsourcing company can charge them for compensation and sue them in court. This allows the organisation to share risks and it compels companies to maintain a quality in their services. IBM implements this policy to ensure high quality of services, and share their risk with other organisations (Hsuan and Mahnke 2011). Along with numerous advantages, there are several disadvantages in the outsourcing process. The popularity of outsourcing has created various new administrative problems that are faced by organisations while outsourcing their business. The strategy of outsourcing is easy to replicate by organisations. One organisation can gain competitive advantage through outsourcing by its competitors can apply the same strategy in their business model. For example, IBM reduced its cost by outsourcing their IT services but its competitor gained the same advantage as well such as Hewlett-Packard and Dell. The outsourcing strategy also introduces new competition for organisations since it is applied by most technology companies (Mourdoukoutas 2011). Forfeiture of Managerial Control After signing the outsourcing agreement, a company transfers its responsibilities, rights, duties, and authority of performing tasks, in a particular division, to the third party. The company owns the division but the managerial control gets transferred to another firm. The outsourcing firm might not work according to the principle of the organisation, or they could have several clients which reduce their focus on organisational tasks. IBM faced the same problems since most of their data centers are situated in Malaysia, India, and Singapore, therefore the application of proper managerial control over them is difficult for the company (Gonzalez, Gasco and Llopis 2010). While outsourcing their business functions, a company deals with rules and regulations of different organisations and countries. The contract of outsourcing specifies the charges of services but the organisation could face various hidden expenses. There could be additional legal charges for verifying the outsourcing agreement. The change in market regulation of India can affect the cost of IBM since they have to follow new rules and implement them in organisational structure (Jain, Hasija and Popescu 2013). The information and data of a company are its essential elements and leakage of data could affect the revenue of a business. According to Sparrow (2012), while outsourcing a business, the company faces a threat on confidentiality of their data. The organisation has to share its data with another company, and their poor regulation can leak the data of a company. IBM faces the same risk since they have to share confidential information of their clients with data centers, to provide their services. Poor regulation of one data center can leak important information of clients which could be detrimental for the organisation. According to Epstein (2012), outsourcing a business could reduce the reputation and standard of quality of an organisation. For example, if a car gets damaged due to a faulty part manufactured by the outsourced organisation, then the car company faced the burden of a damaged reputation. The company could charge the outsourced company for the expenses but the loss of reputation remains with the car company. Language obstacles According to Zirpoli and Becker (2011), if a company outsourced its business function of the call center to an organisation of different country, then the difference in language barrier could be dissatisfied for the consumer. The customer could get frustrated while dealing with an operator with a strong accent. IBM outsourced its work to Malaysia, India, and Singapore, and many people there have a thick accent which can be frustrating for IBMs clients to understand. The research of Willcocks and Cullen (2013), while outsourcing their business, a company required to dismiss their employees. Unless the company clearly planned their process, the layoffs are unavoidable. This is difficult for the organisation and if not managed properly it could adversely affect other workers. A recent post from Economic times provided that, IBM India may dismiss more than 5,000 employees in next few months (Dayama 2017). A decision like this affects the reputation of the organisation and also affects the productivity of employees. IBM has gained a huge advantage over its competitors through outsourcing their information technology services to third party companies. The organisation is popular of their expertise over the outsourcing process. In 2010, IBM announced, Next-Generation BPO which will provide their customers extended services and resources to make knowledgeable decisions (Miozzo and Grimshaw 2011). IBM conducted research through their scientists over more than 56 companies with 38 non-IBM and 18 IBM clients. The study concluded that there is a relation between outsourcing of IT services and improvement in main business functions for those companies. Outsourcing IT services are a part of effective management strategy, which can be used by the organisation in enhancing their business performance (IBM 2010). According to the research, benefits of outsourcing impacted over following aspects of a business (Figure 1): Selling, General, and Administrative Costs: The companies find a slow growth in rate of selling, general and administrative cost because of outsourcing. The SGA costs of outsourcing organisation were less than 4.2 points compared to their competitors. The rate of Return on Assets: The rate of return on assets of companies has grown rapidly. Their rate was 7.5 points lower than market standards but after implementing outsourcing strategy the rate of return on assets raised 16.1 points. Income before Interest and Taxes: More than two third of researched companies seen a growth in income as compared to their competitors. The outsourcing companies recorded a growth of 11.8 points higher than their competitors, in their income. Future benefits: The length of outsourcing agreement also affect its benefits. A longer outsourcing agreement is more likely to enhance the profits results of an organisation. 54 percent of research companies with less than one year of outsourcing contract did not experience positive income growth, while around 71 percent of organisations with more than one year of agreement seen a positive income rate for more than $100 million. According to Ellyn (2005), the research proved the advantages of outsourcing the IT service function of organisations. IBM has succeeded in the outsourcing business by introducing new technology and strategies. The company keeps updating their policies according to the marketing conditions of countries where they outsourced. The organisation focused on providing a better working environment to its employees, to enhance their productivity. The outsourcing strategy of IBM allows them to provide their customers a high quality of services. The rate of customers satisfaction is significantly high in IBM, as compared to its competitors. The research of Mclvor (2010) provided that, the strategy of outsourcing has been proven to be successful in case of IBM and various other companies as well, such as Accenture, Manulife, and Fluor. The president of Flour, Robert Taylor said that the flexibility provided due to the outsourcing procedure has assisted their company in increasing their ventures sites. Outsourcing is providing more benefits to an organisation than just cost reduction and efficient working. The strategy allows IBM to enhance their capabilities globally and achieves efficiency in business. The outsourcing strategy provides IBM flexibility and effect that help in their sustainable development in the future (Savvas 2012). Conclusion From the above report, it can be concluded that various organisations outsourced different business function of their company. This provides them several advantages such as cost reduction, customer service enhancement, flexibility and expertise over its business function. But companies face different drawbacks such as easy replication, hidden costs, lay-offs, loss of managerial control and quality risk. Various companies such as IBM have successfully implemented an outsourcing strategy in their organisation that allows them to enhance the quality of their customer services and increase their efficiency. Before outsourcing their business functions, a company should establish clear and strong guidelines to assist them in the process of outsourcing. References Dayama, R., 2017. IBM India may sack 5,000 employees over next few quarters. Economic Times. 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