assignment 8

Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company.[1] The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources
Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider.[2] The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities, real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, CAD drafting, customer service, market research, manufacturing, designing, web development, print-to-mail, content writing, ghostwriting and engineering. Offshoring is the type of outsourcing in which the buyer organization belongs to another country.
Outsourcing and offshoring are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company.[3][4][5]
With increasing globalization of outsourcing companies, the distinction between outsourcing and offshoring will become less clear over time. This is evident in the increasing presence of Indian outsourcing companies in the United States and United Kingdom. The globalization of outsourcing operating models has resulted in new terms such as nearshoring, noshoring, and rightshoring that reflect the changing mix of locations. This is seen in the opening of offices and operations centers by Indian companies in the U.S. and UK. A major job that is being outsourced is accounting. They are able to complete tax returns across seas for people in America.[6][7]
Multisourcing refers to large outsourcing agreements (predominantly IT).[8] Multisourcing is a framework to enable different parts of the client business to be sourced from different suppliers. This requires a governance model that communicates strategy, clearly defines responsibility and has end-to-end integration.[9]
Strategic outsourcing is the organizing arrangement that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a firm’s value chain (see Holcomb & Hitt, 2007). Such an arrangement produces value within firms’ supply chains beyond those benefits achieved through cost economies. Intermediate markets that provide specialized capabilities emerge as different industry conditions intensify the partitioning of production. As a result of greater information standardization and simplified coordination, clear administrative demarcations emerge along a value chain. Partitioning of intermediate markets occurs as the coordination of production across a value chain is simplified and as information becomes standardized, making it easier to transfer activities across boundaries.
Due to the complexity of work definition, codifying requirements, pricing, and legal terms and conditions, clients often utilize the advisory services of outsourcing consultants (see sourcing advisory) or outsourcing intermediaries to assist in scoping, decision making, and vendor evaluation.

Activities for outsourcing

Research & Development

The competitive pressures on firms to bring out new products at an ever rapid pace to meet market needs are increasing. As such, the pressures on the R&D department are increasing. In order to alleviate the pressure, firms have to either increase R&D budgets or find ways to utilize the resources in a more productive way. There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. Reasons why a firm could consider outsourcing are:
• new product design does not work
• project time and cost overruns
• loss of key staff
• competitive response
• problems of quality/yield.
The key drivers for R&D outsourcing are emerging mass markets and availability of expertise in the field. In this context, the two most populous countries in the world, China and India, provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost sourcing countries. Other strategic drivers for outsourcing R&D are access to expertise and intellectual property, filling gaps in the capabilities of the R&D function, managing risk better, reducing the time to market, and focusing on the core competence or activities of the firm.
Reasons for outsourcing
Organizations that outsource are seeking to realize benefits or address the following issues:
• Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.
• Focus on Core Business. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specilaised IT services companies.
• Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
• Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement.
• Knowledge. Access to intellectual property and wider experience and knowledge.
• Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
• Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.
• Access to talent. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
• Capacity management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
• Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
• Enhance capacity for innovation. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.
• Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier.
• Commodification. The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations.
• Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.
• Venture Capital. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.
• Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

Criticisms of outsourcing
Quality Risks
Quality Risk is the propensity for a product or service to be defective, due to operations-related issues. Quality risk in outsourcing is driven by a list of factors. One such factor is opportunism by suppliers due to misaligned incentives between buyer and supplier, information asymmetry, high asset specificity, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability. Two main concepts must be considered when considering observability as it related to quality risks in outsourcing: the concepts of testability and criticality.
Quality fade is the deliberate and secretive reduction in the quality of labor in order to widen profit margins. The downward changes in human capital are subtle but progressive, and usually unnoticeable by the out sourcer/customer. The initial interview meets requirements, however, with subsequent support, more and more of the support team are replaced with novice or less experienced workers. India IT shops will continue to reduce the quality of human capital, under the pressure of drying up labor supply and upward trend of salary, pushing the quality limits. Such practices are hard to detect, as customers may just simply give up seeking help from the help desk. However, the overall customer satisfaction will be reduced greatly over time. Unless the company constantly conducts customer satisfaction surveys, they may eventually be caught in a surprise of customer churn, and when they find out the root cause, it could be too late. In such cases, it can be hard to dispute the legal contract with the India outsourcing company, as their staff are now trained in the process and the original staff made redundant. In the end, the company that outsources is worse off than before it outsourced its workforce to India.

Public opinion

There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (Protection of Employment). Labor laws in the United States are not as protective as those in the European Union. [20] On June 26 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.

Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced[citation needed]. This is exacerbated when outsourcing is combined with off-shoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.
The public generally find linguistic features such as accents, word use and phraseology different which may make call center agents difficult to understand. The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties.[22]

Social responsibility

Outsourcing sends jobs to the lower-income areas where work is being outsourced to, which provides jobs in these areas and has a net equalizing effect on the overall distribution of wealth. Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work. Despite this argument, domestic workers displaced by such equalization are proportionately unable to outsource their own costs of housing, food and transportation.
On the issue of high-skilled labor, such as computer programming, some argue that it is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower. On the other hand, one can argue that paying the higher-rate for local programmers is wasteful, or charity, or simply overpayment. If the end goal of buyers is to pay less for what they buy, and for sellers it is to get a higher price for what they sell, there is nothing automatically unethical about choosing the cheaper of two products, services, or employees.
Social responsibility is also reflected in the costs of benefits provided to workers. Companies outsourcing jobs effectively transfer the cost of retirement and medical benefits to the countries where the services are outsourced. This represents a significant reduction in total cost of labor for the outsourcing company. A side effect of this trend is the reduction in salaries and benefits at home in the occupations most directly impacted by outsourcing.

Quality of service

Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price.
There are a number of stakeholders who are affected and there is no single view of quality. The CEO may view the lower quality acceptable to meet the business needs at the right price. The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better.
Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of research. This allows quality to be tracked over time and also for corrective action to be identified and taken.

Staff turnover

The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company.
In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center. This inhibits the build-up of employee knowledge and keeps quality at a low level.
Company knowledge
Outsourcing could lead to communication problems with transferred employees. For example, before transfer staff have access to broadcast company e-mail informing them of new products, procedures etc. Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.

Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.
In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).

Failure to deliver business transformation

Business transformation has traditionally been promised by outsourcing suppliers, but they have usually failed to deliver. In a commoditised market where any half-decent service provider can do things cheaper and faster, smart vendors have promised a second wave of benefits that will improve the client’s business outcomes. According to Vinay Couto of Booz & Company “Clients always use the service provider’s ability to achieve transformation as a key selection criterion. It’s always in the top three and sometimes number one.” Often vendors have promised transformation on the basis of wider domain expertise that they didn’t really have, though Couto also says that this is often down to client’s unwillingness to invest in transformation once an outsourcing contract is in place.

Work, labour, and economy

Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a developing country using hand tools can appear to be more productive than a U.S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U.S. dollars.
In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making investments in real productivity.

Standpoint of labor

From the standpoint of labor within countries on the negative end of outsourcing this may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization (see Krugman, Paul (2006). "Feeling No Pain." New York Times, March 6, 2006). While the "outsourcing" process may provide benefits to less developed countries or global society as a whole, in some form and to some degree - include rising wages or increasing standards of living - these benefits are not secure. Further, the term outsourcing is also used to describe a process by which an internal department, equipment as well as personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river."


Security

Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no-longer are directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.
Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.

Insourcing is the opposite of outsourcing; that is insourcing (or contracting in) is often defined as the delegation of operations or jobs from production within a business to an internal (but 'stand-alone') entity that specializes in that operation. Insourcing is a business decision that is often made to maintain control of critical production or competencies. An alternate use of the term implies transferring jobs to within the country where the term is used, either by hiring local subcontractors or building a facility.
Insourcing is widely used in an area such as production to reduce costs of taxes, labor (e.g., American labor is often cheaper than European labor), transportation, etc.
Insourcing at United Parcel Service (UPS) was described in the bestselling book The World Is Flat, by Thomas Friedman.
According to PR Web, insourcing was becoming more common by 2006 as businesses had less than satisfactory experiences with outsourcing (including customer support). Many outsourcing proponents responded to a negative consumer opinion backlash resulting from outsourcing their communications management to vendors who rely on overseas operations.

To those who are concerned that nations may be losing a net amount of jobs due to outsourcing, some point out that insourcing also occurs. According to a study by Mary Amiti and Shang-Jin Wei, in the United States, the United Kingdom, and many other industrialized countries more jobs are insourced than outsourced. They found that out of all the countries in the world they studied, the U.S. and the U.K. actually have the largest net trade surpluses in business services. Countries with a net deficit in business services include Indonesia, Germany and Ireland.

Insourcing is loosely referred in call centers who are doing the work of the outsourcing companies. Companies that outsource include Dell, Hewlett Packard, Symantec, and Linksys. The callcenters and technicians that are contracted to handle the outsourced work are usually over-seas. Customers may refer to these countries as "India" technical support if they are hard to understand over telecommunications. These insourcing companies were a great way to save money for the outsourcing of work, but quality varies, and poor performance has sometimes harmed the reputations of companies who provide 24/7 customer/technical support.

Offshore insourcing offers benefits over outsourcing
By Amit Maheshwari

Recent years have seen a marked increase in offshore operations in lower-cost countries such as India. A growing number of U.S. companies are taking advantage of India's white-collar talent pools, which can cost one-fourth to one-fifth of comparable staff here.
A clear indicator of this trend is that India exported $9.5 billion worth of IT services (mostly to the United States) in 2002-03, a growth of 25 percent over 2001-02. This occurred during the same period in which most U.S. companies registered slow or minimal growth.
Various factors have contributed to the growth in offshore operations. Some include cost-cutting initiatives by American companies, the ability of countries such as India to produce large quantities of skilled resources and the ability for offshore outsourcing companies to demonstrate high-quality processes.
In addition, improvement in international voice and data networks has ushered in a new wave of offshore-based services, focused on a broader array of corporate services. Companies are now using lower-cost countries for technical support, customer service, claims processing and data entry activity.
Traditionally, the way to exploit offshore resources has been through offshore outsourcing providers. Over the years these providers have embraced a two-tier service in which there are U.S.-based consultants who package work for their offshore-based colleagues.
While this model has proved successful for several companies, it has pitfalls. Offshore outsourcing leaves companies with limited control over resources that belong to the outsourcer and creates risks when companies must hand over intellectual property to a third party. In addition, companies looking to exploit offshore outsourcers to gain a competitive advantage may instead harm their value proposition in the marketplace by giving up a core competency. Finally, the cost of offshore outsourcing may be 30 to 40 percent more than required.
An alternative to offshore outsourcing that is gaining popularity is offshore insourcing or "do-it-yourself." An increasing number of U.S. companies are creating their own subsidiary or entity offshore to get the benefits of the offshore model. In this model, the company creates its own global delivery center (GDC) and staffs it with its own offshore employees.

Insourcing has several benefits over the outsourcing approach, such as:
• 30-40 percent additional cost savings over traditional offshore prices
• Greater control over resources because they are direct employees
• Better control over intellectual property
• Higher acceptance of insourcing offshore vs. outsourcing offshore within the company.
Offshore insourcing can work well for companies looking to use offshore resources for long periods of time, working on strategic activities such as product engineering and customer facing services.
Several corporations, including General Electric, American Express, Dell Computers, Texas Instruments, Deloitte and Touche, EDS, IBM, Intel and Oracle have set up their own GDC operations in India.
However, companies attempting to set up their own operations offshore typically face challenges, including:
• Lack of knowledge about which business functions are best to send offshore and how to migrate them
• Lack of expertise and experience setting up the right offshore facilities, infrastructure and team
• Lack of experience with offshore accounting, legal, regulatory, day-to-day operational and human resources issues
• Cultural and communication differences between U.S. employees and offshore employees and vendors
• Capital investment in the facility/infrastructure
• Understanding geopolitical dynamics, their consequences and the proactive remedies.
These and other issues can jeopardize a company's plans to set up a successful GDC within reasonable timeframes and costs.
A four-step risk reduction approach is suggested for companies considering offshore-based insourcing:
1. Assess which business functions are appropriate for offshore outsourcing vs. insourcing.
2. Select a pilot project or process to move or supplement offshore. Find partners who can provide their own facilities to test the program in an incubated manner without making major upfront investments.
3. Retain ownership of operations, employees and delivery. Outsource support services such as accounting, human resources, IT, regulatory filings and vendor management to an offshore vendor.
4. Create and execute change management programs for U.S. and offshore employees including cultural training and cross-country visits.
While third-party offshore outsourcing is a well-accepted model, offshore insourcing is becoming a viable and attractive alternative. However, companies can be exposed to risks that they may not be prepared to manage. Careful planning and partnering can go a long way in reducing the challenges and maximizing returns of offshore operations.
this article, we'll take a brief look at the value, risks and issues of offshore outsourcing for iSeries Java Web development projects. While any project can have challenges, there are some that appear more often with offshore outsourcing projects. We'll look at a new model that can address some of those risks and issues: insourcing.

In-sourcing Benefits

- Reduced Costs
The cost of an In-Source professional could be 75% lower than the total cost for an IT worker in the U.S.
- Increased Professional Resources
- Integrate 3 or 4 In-Source professionals for the total cost of one U.S employee.
- Direct Management
Our clients choose in-sourcing because they prefer hands-on control through the development life cycle of their projects. Instead of relinquishing control to an outsourcing firm who does not understand your business as you do, In-Source allows your knowledge and direction to more effectively impact the development process.
- Turnkey Services
In-Source provides a turnkey solution including facilities, recruitment, human resource management, payroll and benefits administration, tax filings, and communication tools, so you can spend more time focused on your core business.
- Reduced Operational Expenses
We operate a state-of-the-art IT facility in Bangalore, the Silicon Valley of India, at a significantly reduced rate compared to U.S. facilities.
- Extended Productivity Hours
Because of the time difference between the United States and India, your projects could be developed and supported nearly 24/7, including many of the major U.S. holidays, which are not holidays in India. In-Source offers flexible shift times to allow overlap and coordination with your IT professionals.
- Faster Time to Market
Complete projects faster with a larger IT development team.
- Increased Company Profitability
With reduced costs, increased development resources at an affordable price, and faster development periods, In-Source clients can significantly increase profitability.

>>Therefore, i choose insourcing because it lessen costs. With security matters, you can assure that any program is safe and secured with insourcing.


Reference:
http://en.wikipedia.org/wiki/Outsourcing
http://en.wikipedia.org/wiki/Insourcing
http://www.masshightech.com/stories/2003/10/20/focus1-Offshore-insourcing-offers-benefits-over-outsourcing.html
http://www.in-source.com/benefit.html
http://search400.techtarget.com/tip/0,289483,sid3_gci996709,00.html