American Outsourcing: Case Study Analysis
Nowadays businesses are cutting back on operations to focus on the core business, reorganizing their business norms through downsizing, restructuring or reengineering, as well as contracting out various functions and tasks. Commonly known as outsourcing, this particular business trend had started in the retail business in the early 1980s, mainly as a means of cutting back staff and savings on wages.
Krajewski and Ritzman (2002) define outsourcing as the allotment of work to suppliers and distributors to provide needed services and materials to perform those processes that the organizations do not perform themselves. To put it simply, outsourcing means going outside your organization to get a job done. While such a definition is easy to comprehend, knowing when and how to outsource is much more complex. Outsourcing probably is one of the most influential phenomenons of the millennium. Its impact worldwide has been tremendous, and perhaps, maybe even contagious.
Companies from all over have integrated outsourcing into various business operations. Indeed, many studies and published documents have noted significant aspects on the real meaning of outsourcing, how companies can apply it and why they should apply it. Alternatively, many critics have pointed out the downsides of outsourcing. Due to opposing points it is difficult to gauge how efficient outsourcing is. An in depth discussion of the matter perhaps will help in determining whether companies are better or better off with outsourcing. To make the discussion more interesting, an actual view and application of outsourcing may make the comprehension of the topic easier (Greco, 1997).
Like any other companies, one of the companies that have used outsourcing as part of their business strategy is General Electric. General Electric is known as a diversified industrial company which product ranges consists of power generation equipment, jet engines, financial services, plastics and medical imaging. Primarily, GE operates in the United States and in Europe with more than 300,000 employees. The company has been considered to be one of the largest industries in this field, however, with the issue of terrorist attacks and economic downturn, growth of the company has seen downturn and fallback as well. In this regards, the new CEO Immelt, is faced with the challenges left by the former CEO, Jack Welch.
Based on the given case, outsourcing has different impact on general electric. One of the major impacts of outsourcing to General electric is in terms of having global reach and international expansion. Through their strategy, GE has been able to spread their work in manufacturing and services throughout the world. The company has been able to provide employment from different countries and continents from America to Asia and Europe. The NASSCOM-McKinsey report (2002) cited at Sharma (2002) found that General Electric (GE), one of the pioneers of outsourcing service operations to India, had achieved an annual savings of 0 million per year from its Indian operations, now seven years old. Even if these numbers are inflated, the savings are remarkable, and accrue directly to the firm’s profitability.
Outsourcing human resources and other business needs have enabled GE to sustain their competitive advantage and establish plants on over 100 countries in the global market. According to Irwin (1995) outsourcing strategies provides different impact and advantages for General Electric. These advantages that can be gained in outsourcing are that activity can be performed better or more cheaply by outside specialist, like what GE has been done throughout the years.
One of the major impacts of outsourcing approach to GE is cost savings and quality. Because of the intense competition in the business world, most management are left with no other choice but to lay off employees so as to reduce costs. Even the most established companies find ways on how to compete along with new entrants while reducing company expenditures. In outsourcing, GE has been able to save costs primarily by conducting businesses in places where cheap labor market are at stake like in India, America and Mexico. These human resources has become third party members have a much tighter regulation of fringe benefits as well as able to run leaner overhead structures. These countries are known to be more aggressive in using low-cost labour pools. In addition, outsourcing also move data centres to areas of low cost through the help of modern telecommunications. Furthermore, with the use of outsourcing, GE are able to apply world class standards to the firm’s available employees or human resources, in which all of whom have to re-qualify for appointment at outsourcing time. In addition, this also helps GE to reduce costs as they can utilize more effective bulk leasing and purchasing arrangements for all their information technology needs and have more control management as they often are better informed negotiators. Also, outside vendors encounter certain contractual pressures; hence, they are obligated to meet deadlines.
Aside from this, another impact of outsourcing to GE is the ability of the management to become more flexible. Through the use of business functions from outsourcing, businesses must be able to adapt well in the constantly changing business environment so as to quickly respond to changing trends and demands. Thus, flexibility is essential to the business. Herein, a country where GE outsources has the ability to tap a wide array of skills, resources, and capacities, while the internal information technology staffs have limited abilities.
Another impact for GE is it allows job security for regular employees. Through outsourcing, GE has been able to hire staff knowing that they will be hired for a limited period. Hence, they can easily drop or add employees into the workforce without putting the reputation of the company as a stable employer in danger. Further, outsourced employees buffers regular workers from changes in demand as well as enable the firm to create a more established relationship with its regular employees than would otherwise be plausible.
By and large it can be said that outsourcing approach, enables General electric to expand their market portfolio and gain competitive advantage by having low costs labour market and quality products through their outsource labor pools. These help the company to become one of the most competitive industries in the world.
There are many reasons for outsourcing in a company or an organization. The decision of businesses to outsource is mainly based on cost, set-up time and the availability of the expertise. The most common reasons for outsourcing are the needs for expertise, that is due to lack of learning curve and re-creating; manpower, for having not enough staff; time requirements, because of the limited time available to accomplish the job; needed for economics, owing an overall cost savings; shifting of responsibility as for deniability; and removing of stumbling blocks in keeping the work for flowing. One of the countries that enjoy the advantages of outsourcing is the United States of America.
Based on the case study, outsourcing has many benefits, including freeing up management resources, sharing costs, creating integrated networks, building new organization structures, training staff, and interfacing with other information systems. Outsourcing offers a company functional specialization and flexibility (Arnold, 2000) which is helping US economy to achieve growth towards outsourcing. On the downside, some of the negatives include difficulties in maintaining confidentiality, retaining control, and confronting transition problems.
White (1996) provides a definition of outsourcing as a “contractual relationship between an external vendor and an enterprise in which the vendor assumes responsibility for one or more business functions of an enterprise”.
Outsourcing has expanded through most every industry since the early 1980s (Bernstein, 1995). The primary reason is to conserve staff in all areas of business. While lower wages may not be the prime motive to outsource, they are sometimes the result. Moreover, as the administration of employee benefit plans becomes more complex, companies are looking to outsourcing as a way to meet this challenge (Burzawa, 1995).
Outsourcing and out-tasking involve the transfer of a valuable amount of management control over the supplier. A relative term for this process is out-tasking: which means turning over a narrowly-defined segment of an industry o-operation to another industry which is usually held annually with agreement or contract or just few months. This typically includes direct or indirect management as well as decision-making by the client of the out-tasking business. Purchasing products from another industry is not considered as outsourcing or out-tasking, because it is only noted as vendor relationship. On one hand, availing the services from a specific provider does not necessarily constitute outsourcing or out-tasking.
The process of outsourcing always includes considerable level of two-way communication and information exchange, co-ordination between two parties, and most especially trust. Industries which deliver services feel may consider that outsourcing needs the turning over of their management obligations for running a segment of business. In theoretical aspects, such business segment must not be mission-critical, but practice often dictates otherwise. Outsourcing business is characterized by expertise not inherent to the core of the client organization which is helping US economy to gain advantage, specifically their multinational corporations like General Electric. As a result, outsourcing strategies have been widely accepted in order to reduce expenses, improve productivity, operations management, and delivery, and concentrate on upgrading the company’s technological expertise. Outsourcing retail is one of vital business and supply chain strategies which are one way companies are revolutionizing business operations to deliver better products faster at lowest cost possible (Domberger, 1998). It is a kind of supply chain collaboration model and strategic alliance approach, which allows the US economy and multinational organisations to concentrate on product development, sales and marketing. It eventually helps multinational companies to gain competitive advantage of increased product availability, reduced inventory; minimized total logistics cost and rapidly introduce their product to market without a significant investment in plans for capital equipment (Arnold, 2000).
It is mentioned that outsourcing enables US economy to create jobs in terms of the US export sector, lowered domestic or local firms costs and provide services to clients at lower prices. . In the American sector, South and Central regions also have strong outsourcing potentials. Of course, Mexico and Canada, as United States neighbors, offer outsourcing options for American companies. Typically, these countries are commonly known as near shore options as opposed to the far shore alternatives.
It can be said that the US economy has three major outsourcing drivers: (a) economic – expense reductions, cost control and containment; (b) strategic – sharing risks, gaining access to new resources, achieving quicker time to market, as well as exploiting internet opportunities; and (c) technical – access to new technology; access to special expertise, coping with increasingly sophisticated risks and keeping up with the increasing complexity and speed of technology changes.
In the American setting, outsourcing has started to flourish along with the economic progress of the country. As the country possesses several potentials of a good outsourcing location, foreign companies have been interested in conducting outsourcing in the some parts of the USA. As seen from the cited sample foreign companies outsourcing in America, these multinationals chose to outsource in the country so as to establish back-offices. Through outsourcing in America, these multinationals where able to obtain company objective as well as various benefits, including increased market, profit gains, enhanced global presence, reduced costs and company flexibility.
Outsourcing system can be considered as one of the most influential phenomenons in the retail industries. Its impact worldwide has been tremendous, and perhaps, maybe even contagious. Companies from all over are trying to integrate the concept of an effective outsourcing as part of their management system and business practice. In conclusion, outsourcing in America has its advantages and downsides. While some companies are hesitant in venturing into outsourcing, the benefits gained by foreign companies in America apparently outweigh the risks involved. Moreover, from the experiences of the sample companies cited, these difficulties are manageable by means of certain risk management strategies and prompt actions.
Reference
Arnold, U 2000, ‘New dimensions of outsourcing: a combination of transaction cost economics and the core competencies concept’, European Journal of Purchasing & Supply Management, vol. 6, pp. 23-29
Bernstein, A. (1995, July 17). Outsourced – And Out of Luck. Business Week 3433 (Industrial/Technology Edition), 60-61.
Burzawa, S. (1995, January). Benefit Plan Administration Challenges Have Employers Looking at Outsourcing, Technology. Employee Benefit Plan Review, 8-11.
Domberger, S 1998, The Contracting Organization: A Strategic Guide to Outsourcing, Oxford University Press, Oxford.
Greco, J. (1997). Outsourcing: The New Partnership. Journal of Business Strategy, 18, 48-54.
Krajewski, L.J., Ritzman, L.P. “Operations Management: Strategy and Analysis.” 3rd Ed., Prentice Hall, 2000.
Ryan, C. (1996). Outsourcing. Journal of Small Business Management, 34.
Sharma, D., et al. “BPO: The strategic Alternative for India.
White, R. & James, B. (1996). The Outsourcing Manual. Gower Publishing Limited England.
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