Outsourcing Paper – Salient Points
For many US citizens, the word “outsourcing” brings to mind the idea of sending jobs overseas,
frequently to India. Certainly, this is still a hot topic. However, as we found, outsourcing can be a
debated issue – or a necessity – regardless of whether the jobs go to another country, or just across the
street.
Outsourcing, as an industry, has essentially grown up, and new opportunities may need to come from
innovation (Patel, 2010). In fact, outsourcing non-core business has become a ubiquitous and critical
component of some firm’s strategies (Patel, 2010). Despite this fact, there are still a significant
number of companies that have yet to take advantage of outsourcing (Patel, 2010).
The recent financial crisis has led many companies to consider discarding all aspects of their business
except for the ones that give them a core advantage (Patel, 2010). Outsourcing specialists now have
to dig deeper into their client’s processes in order to keep growing (Patel, 2010).
One possible driver behind the current push for outsourcing is the shift to an individual-consumerbased focus, which, when taken from a global perspective, may require efforts from several different
countries – and companies – at once (Patel, 2010). Also, as formerly new industries (such as
technology) mature, former competitive advantages begin to fade, and companies become less
concerned about losing a special process to competitors (Patel, 2010).
Formerly, some firms, particularly in data-sensitive fields such as insurance, avoided outsourcing
over a fear of losing control over information security (Patel, 2010). However, as times change and
security procedures tighten and become more standardized, even these industries have finally turned
to outsourcing in order to divest themselves of less critical functions (Patel, 2010).
Companies that focus on a particular area may find great benefit in turning over routine functions
such as HR and payroll (Patel, 2010). The benefits are many – an increase in the knowledge level
attuned to these functions at a reduced cost, along with the fact that the outsourcers can spread the
costs of many upgrades new process improvements among their clientele, reducing the cost to any
one client (Patel, 2010). By allowing their outsourcers to focus on building expertise, they also gain
the ability to tap those skills as needed in exchange for payment of an invoice – a huge advantage to
firms who do not have incentive to develop their own in-house experts in a given subject matter
(Patel, 2010). Finally, by plugging into a network of experts in non-core functions, a company can
potentially shed the amount of time required to develop and market their products (Patel, 2010).
Clients who outsource can often negotiate scalable contracts, giving them the flexibility to increase or
decrease operations in a certain area without having to worry about maintaining infrastructure – it
becomes the outsourcer’s job to ensure that the service or product will be there whenever the client
needs it (Patel, 2010).
Companies who wish to benefit from outsourcing must first determine which competencies they will
keep, and which they will contract out (Patel, 2010). This could be a critical decision, since the
company must have a good handle on what aspects of its business need to stay in-house.
Offshoring, or the practice of sending certain business functions overseas in order to gain access to
certain competitive advantages (such as inexpensive labor) is often limited in the minds of many
managers to whatever work can be easily documented and explained (Srikanth & Puranam, 2010).
However, this view may be too narrowly focused on up-front communications on how to do a series
of tasks (Srikanth & Puranam, 2010). Companies that instead seek to improve their overall
communications with their outsourcers, even to the level of enabling them to innovate exactly how
tasks will be done, tend to see up to four times the benefits from outsourcing as their counterparts
(Srikanth & Puranam, 2010).
With a greater emphasis on teamwork, companies may also find that they are able to consider sending
even more non-core operations overseas (Srikanth & Puranam, 2010). As emerging nations such as
China gain skill at critical technologies, such an attitude could lead a company to get a jump on
inexpensive and high-quality work (Srikanth & Puranam, 2010).
Companies who currently outsource should ask themselves five questions to determine whether or not
they need to increase collaboration:
1. Is the offshore operation lagging behind expectations?
2. Has the company focused primarily on creating specific instructions for the offshore vendors?
3. Are there noticeable communication barriers in regards to email and spoken conversations?
4. Does the vendor’s education and training levels vary greatly from the main corporation’s?
5. Can the company achieve an advantage by allowing a certain level of intellectual functionality
offshore?
(Srikanth & Puranam, 2010)
If the company answers yes to any of these questions, it might benefit from an increase in overall
collaboration, as opposed to simply refinement of a particular set of instructions (Srikanth &
Puranam, 2010). Generally, it is not knowledge transfer but the quality of teamwork that drives
success in outsourced projects (Srikanth & Puranam, 2010).
This has the greatest benefit when the company is passing along functions that require a certain level
of subjective information (Srikanth & Puranam, 2010). Part of the solution involves simply making it
easier for the two companies to meet via email or phone, although this can have costs associated with
it as well (Srikanth & Puranam, 2010).
As Indian firms find growth rates from outsourcing contracts shrinking, they are attempting to move
even deeper into their client’s infrastructures – and possibly even become the infrastructure (Sharma
& Worthen, 2009). When India still represented an inexpensive solution to one-off problems and the
industry was new, growth rates of 30% were seen. Now, between increased competition and a
worldwide recession, Indian companies have watched their overall margins shrink to around 4 – 7%
(Sharma & Worthen, 2009).
Despite the corresponding drop in profit margins, Indian firms have responded by taking on more and
more work for their clients. This gives them the chance to jump on the cloud computing bandwagon,
which has become increasingly popular (Sharma & Worthen, 2009). In order to manage this, the
firms would have to invest in considerably more hardware and infrastructure, the better to support full
external data centers or full-service solutions (Sharma & Worthen, 2009).
Outsourcing has been good to India – as of 2009, technology services pulled about $58.8 billion into
the country, padding them slightly from the recession (Sharma & Worthen, 2009). India still has not
achieved a reputation of top-quality, however, and may need to change this in order to return to their
days of high growth (Sharma & Worthen, 2009).
India will have to fight harder to maintain its status as a primary tech outpost – even less expensive
solutions have emerged from Vietnam and the Philippines, creating pressure on India to innovate
something different (Sharma & Worthen, 2009). On top of this, firms worldwide are clamping down
in IT spending, increasing the competitiveness of the market (Sharma & Worthen, 2009).
Another challenge to becoming a full-service solution is the need for Indian firms to gain access to
additional expertise, often in areas that have less to do with technology, such as finance,
telecommunications, and pharmaceuticals (Sharma & Worthen, 2009).
Companies in India also will need to move outside their comfort zone when they go from being pureservice organizations to ones that invest heavily in equipment and provide support for any and all
issues (Sharma & Worthen, 2009). This also comes with lowered profit margins and for some, the
need to increase internal knowledge and skills through acquisitions (Sharma & Worthen, 2009).
Worse, even as they increase their reputation as full-service providers, their ability to do so cheaply
may never be recovered (Sharma & Worthen, 2009).
Group notes – in this article (Advice for Outsourcers), there are also some good examples of
success stories.
Success stories are still in the beginning phases – India has yet to see whether or not this shift in
strategy from call centers to full-service will pay off (Sharma & Worthen, 2009).
For hybrid broker-dealers, failing to outsource non-core aspects of their business could even prove
fatal (Coyle, 2010). StillPoint Wealth Management and US Fiduciary came out of the starting gate
strong and early with all systems in-house, but eventually collapsed under their own weight (Coyle,
2010). These companies illustrate the dangers of adding too much expensive infrastructure that
cannot be supported through daily sales (Coyle, 2010). For these investment firms, outsourcing
provides the ability to spread risk to their partners, who can better handle certain types of financing.
Every broker-dealer has certain important offerings that can easily be outsourced (Coyle, 2010).
The area of research and development brings with it special considerations, because some companies
will not want the security risks that come along with sending work to another firm. Generally, there
are four good reasons to outsource one’s R&D:
1. When companies would need to add lots of new knowledge to innovate, such as figuring out how to
work with an unfamiliar chemical compound to make a different line of pharmaceuticals.
2. In the early stages of a project, when there are lots of technical hurdles to be overcome and the
outcome is far from certain.
3. When intellectual property isn't well protected in the industry. In these cases, since new ideas
spread quickly from company to company, it may not be possible to differentiate products with
innovations. So, businesses turn to outsourcing to limit spending.
4. When companies have had lots of experience with outsourcing. Let's say all the factors above are
equal—it's basically a toss-up between working on a project in-house and outsourcing it. In these
cases, companies with a long track record of contracting tend to hand off the job to outsiders—three
times as often, in fact, as businesses with average levels of experience in the practice. The costs and
benefits of outsourcing are more certain for experienced firms, and they can better manage the
situation to produce effective results.
(Stanko, Bohlmann, & Calantone, 2009)
Outsourcing needs to be balanced carefully so that it provides the firm with the greatest amount of
benefit. Excessive outsourcing can actually be more costly than internal development, because it is so
difficult to maintain control over third parties and because some companies may lose control over the
process (Stanko, Bohlmann, & Calantone, 2009). Another problem that comes from losing control is
the danger that a patent winds up as a generic product because of demand by the outsourcer’s other
clients (Stanko, Bohlmann, & Calantone, 2009).
A relatively narrow margin exists for balanced R&D outsourcing. Deviations as small as 1% from
the optimal balance can lead to 11% reductions in patent efficiency (Stanko, Bohlmann, & Calantone,
2009). Timing can be another critical issue – companies that move towards outsourcing too late in
the process may find that vendors spend precious time relearning the process (Stanko, Bohlmann, &
Calantone, 2009).
One major benefit of outsourcing R&D arises from scalability – companies can invest lightly in a
great number of optional technologies (such as the car industry experimenting with alternate fuel
sources) without having to sink too much into any one experiment (Stanko, Bohlmann, & Calantone,
2009).
Even the US space program is considering the solution, pursuant to an as-yet-unapproved plan to
outsource the development and launching of space-related equipment to private funders such as
corporations (Pasztor, White House Decides to Outsource NASA Work, 2010). The stated purpose
behind the outsourcing is that by sending this expensive but now routine task outside of NASA, the
US government can focus on more intensive, groundbreaking projects (Pasztor, White House Decides
to Outsource NASA Work, 2010). If it went as planned, the new program would allot billions of
dollars to any company willing to compete, hopefully driving the long-term value up while decreasing
costs (Pasztor, White House Decides to Outsource NASA Work, 2010).
Major opposition can be found within NASA itself. Some complain that the plan carries too much
risk (Pasztor, White House Decides to Outsource NASA Work, 2010). As an illustration of how
insufficient funding can lead to problems, NASA is already having trouble with its Ares 1 rocket,
designed for human space travel, which has already shot past its original budget of $4.3 billion with at
least 2/3 of its development still ahead (Pasztor, White House Decides to Outsource NASA Work,
2010). Not only would the outsourcing proposition threaten the financial health of the Ares 1, but it
might also foretell of even worse budget overruns under private contractors who have little or no
experience planning multi-billion dollar projects (Pasztor, White House Decides to Outsource NASA
Work, 2010).
The NASA example also shows an extreme example of how the decision to outsource nearly always
carries opportunity costs and risk. In order to allocate sufficient funds to third parties, the
government will be forced to close down other, more stable, programs (Pasztor, White House Decides
to Outsource NASA Work, 2010). Safety is another possible reason that the idea may ultimately be
abandoned (Pasztor, Panel Warns NASA About Outsourcing Risks, 2010).
Just Jane’s thoughts: If they do successfully outsource the projects, they might be able to get some
of the outsourcers to eat some of the costs involved. Also, once you have a trained a number of
companies to provide these types of services, efficiencies can evolve, the price is driven down and it
becomes less expensive. This may actually be one of the unstated goals behind the idea – move it
away from a single governmental program, and onto the to-do lists of certain major US corporations.
As soon as prices drop enough, profits become possible, and then NASA can significantly reduce or
eliminate its financial involvement, thus neatly divesting itself of a function where most of the
challenges have been met.
Complaints came quickly from the Aerospace Safety Advisory Panel, an outside safety watchdog for
the National Aeronautics and Space Administration. They are concerned that private companies
might not do enough research into the safety aspects of space travel (Pasztor, Panel Warns NASA
About Outsourcing Risks, 2010). Their recommendation was that the attempt to outsource space
technologies would result in cost inefficiencies, if not danger (Pasztor, Panel Warns NASA About
Outsourcing Risks, 2010).
President Obama is behind the drive to outsource, but so is a former chairman of Lockheed-Martin
(Pasztor, Panel Warns NASA About Outsourcing Risks, 2010). The panel headed by the former chair
suggested that the US would benefit from allowing companies such as the new Space Exploration
Technologies and the established Orbital Sciences Corp the ability to compete. However, the panel
failed to bring specifics into their recommendations (Pasztor, Panel Warns NASA About Outsourcing
Risks, 2010).
Not everybody left at Lockheed Martin or their main aerospace competitor Boeing is thrilled to hear
of the idea. These companies are already being used heavily for various types of governmental
outsourcing, and have been fighting the initiative that could add competition (Pasztor, Panel Warns
NASA About Outsourcing Risks, 2010). Their points include the fact that some of the newer
companies are proposing to use engines and rockets that have yet to emerge from the experimental
stages (Pasztor, Panel Warns NASA About Outsourcing Risks, 2010). In fact, the safety panel
concluded that none of the companies who would stand to benefit from the new proposal are currently
acceptable candidates (Pasztor, Panel Warns NASA About Outsourcing Risks, 2010). Furthermore,
some feel that NASA’s attitude towards the safety of manned spaceflight is too lax for comfort
(Pasztor, Panel Warns NASA About Outsourcing Risks, 2010).
Works Cited
Coyle, T. (2010, March 24). New Firms Say Outsourcing Crucial to Survival. Wall Street Journal .
Pasztor, A. (2010, January 19). Panel Warns NASA About Outsourcing Risks. Wall Street Journal .
Pasztor, A. (2010, January 24). White House Decides to Outsource NASA Work. Wall Street Journal
.
Patel, D. J. (2010, March 30). The Virtualization of Businesses: Controlling More With Less. Wall
Street Journal .
Sharma, A., & Worthen, B. (2009, October 6). Indian Tech Outsourcers Aim to Widen Contracts.
Wall Street Journal .
Srikanth, K., & Puranam, P. (2010, January 25). Advice for Outsourcers: Think Bigger. Wall Street
Jouranl .
Stanko, M. A., Bohlmann, J. D., & Calantone, R. J. (2009, November 30). Outsourcing Innovation.
Wall Street Journal .