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Strategic Plan Outsourcing Essay

1849 words - 7 pages

Over the last decade it has become increasingly important for the strategy in the overall firm's operations to include or at least evaluate outsourcing options. Companies in the U.S. pay about $68 billion every year to other companies for outsourced services and although a major part of these contracts succeed, there is an increasing concern due to recent broken deals. A recent study shows that 80% of companies that outsource their customer based functions are failing to meet their cost savings targets. Usually companies fail to budget hidden outsourcing costs such as customer dissatisfaction that can eventually jeopardize the future of the firm. In the information and white papers on outsourcing evaluation matrix includes four main points of value influencing the success of outsourcing strategies: the firm's Comparative Advantage, Employees, Suppliers and Customers. Every year in the United States, companies pay about $68 billion to other companies for key services or products that help them focus on their core business and delegate other functions (Thurm, 2007). The value of IT Outsourcing contracts worldwide was $119 billion in 2004 (Pai, 2007). Without a doubt, outsourcing is a major part of the business strategy that drives organizations to success. Whether at its simplest version of buying raw materials from a large supplier to its most complex variation of offshoring services, outsourcing is present in all business strategies.However, outsourcing strategies are not always successful; therefore it is crucial to understand the factors that influence a firm's outsourcing strategy. In 2004, J.P Morgan Chase & Co. took its main technology functions to be in-house again abandoning a $5 billion agreement and Electronic Data Systems Inc. backed down from a $1 billion deal (Thurm, 2007). Although a few years ago outsourcing was used by some manages as another mean to cut costs, the main reasons for outsourcing have evolved to become more strategy oriented (Pai, 2007).The basis of outsourcing is the same one as the trade theory where two or more parties benefit from the exchange of goods or services. Outsourcing and trade are beneficial for many reasons including cost savings and increase in wealth, but the main reason companies incorporate outsourcing into their business strategy can be explained in terms of comparative advantage.There are three types of functions a business can be divided into: core functions, tactical non-core functions and strategic non-core functions (Pai, 2007). Core functions are the ones that dictate the comparative advantage of the firm; they are the specialized task that makes the business unique and successful. Tactical non-core functions are most commonly outsourced. They are the functions that are necessary components of the core business but do not have a direct impact on the core functions. These are functions like payroll, accounts receivable, accounting, call centers and recruitment.It is important to...

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