Outsourcing is simply the farming-out of services to a third party. Offshore outsourcing is majorly used in IT related task for which internet plays a vital role along with work related to sales & marketing, finance, human resource & administration, etc. Quality and effective risk management are two integral parts of offshore outsourcing services. Offshore outsourcing allows businesses to reduce costs, gain staffing flexibility and increase revenue, gain competitive advantage, decrease cycle time, increase shareholder value, improve customer loyalty and ultimately allows a business to focus on its core competencies. An example of offshore outsourcing is the very well known clothing based company called Gap Inc. which outsources its production from Indonesia to reduce its cost & to gain an advantage in the global market.
Brands like Armani, Polo, Nike, GAP etc. have their manufacturing unit in emerging markets like India, China, Thailand, etc. Cost reduction is one of the major reasons for western companies from U.S.A., U.K, France, countries to opt for outsourcing. Outsourcing of activities incurring high indirect costs generate cost reductions. Costs incurred for recruiting, motivating and training of staff is reduced due to the difference in value of currency. One such company is Louis Vuitton, a French brand outsourcing its processes from emerging countries like India & China. The time difference between the companies enables the production to be carried 24/7. Outsourcing enables redistributing resources to the core areas within the company that have direct impact on profitability. Countries where the taxation & government regulations are unfavourable, explore to other countries where the same are favourable thus, the companies also explore new markets. Therefore, better predictability, quality & risk management can be facilitated. Furthermore, the company achieves better standardized processes.
Outsourcing is not always driven by cost reduction; there are also other considerations to outsource such as better quality or access to technological capabilities which are unavailable internally. There is a risk associated of misuse of the firm’s intellectual properties by the external company. There can also be trouble in coordination due to the distance between the firms.
Other reasons for lack of coordination can be due to difference of ideologies, mindsets and working patterns. A company’s unique selling point can be based on specific knowledge and certain competences which provide competitive advantages and high return on investments to the firm. By outsourcing these firms provide specific competences to an external provider who is relatively unknown, through which competitiveness can be at stake copied. What if the supplier takes advantages from it by copying? This was studied in the case of Louis Vuitton whose products were copied by China & India & sold at other countries at a relatively cheaper...