Problems of offshore Outsourcing

Abstract:

Offshore outsourcing is one of the hot topics influencing the global environment, politically, economically, and socially. While offshore outsourcing is associated with several benefits, these ventures also pose many risks. In this report, I am going to discuss various factors affecting the offshore outsourcing, including risks involved, the challenges faced by managers in these collaboration initiatives, and solutions that may aid in overcoming those challenges.

Executive Summary

The report outlines the prevailing trends of offshore outsourcing in a global perspective. The purpose of the report is to provide members of the Executive Board Committee, Educational Testing Service with the information essential for considering offshore outsourcing as a strategic decision. It also highlights the risks, challenges, and potential solutions of offshore outsourcing. Despite its widespread diffusion over the years, management of offshore outsourcing projects continues to challenge organizations. Competitive advantages, such as lower cost, technical knowledge, etc., are key factors to search for external solutions. While offshore outsourcing is associated with several important benefits, it also entails number of risk factors. In order to manage outsourcing decision, it is important to have a clear understanding of various risks posed in collaboration initiatives, challenges faced by managers, and solutions that may allow overcoming some of these issues to succeed in these ventures.

Introduction

Offshore outsourcing or outsourcing for short is the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) in a country other than the one where the product or service will be sold or consumed (Herath & Kishore, 2009). External vendors can range from local to global, utilizing technologies like phones, fax, internet etc. Some of the services that can be out sourced can include information technology, human resources, facilities, real estate, and accounting. While outsourcing can improve company's profits with the ability to utilize the know-how of other organizations, focus on distinctive core competencies which will help yield long term benefits, anticipate future costs through proper bidding process by the external vendors, and some times utilizing the less than par currency conversions; the most important factor driving the decision of companies to outsource some of their data processing operations is cost savings (Controller's Report, 2003). Many firms have adopted offshore outsourcing as a means to manage their non-core operations. Global outsourcing creates strategic advantages for firms in terms of access to highly skilled labor at low cost and potential market opportunities. Organizations outsource operations to achieve major benefits such as reduced costs, increased flexibility, higher quality of services, and access to new technology, as well as to enable staff to focus their efforts on higher value work, thus improving output. The economies of other developing countries will grow through outsourcing, also resulting in maintaining good relationships between the countries (Wikipedia).

This paper helps offshore outsourcing managers find the best way to manage outsourcing decisions by gaining a deeper understanding of the variety of risks and challenges they may face in offshore outsourcing contexts and solutions that have been successfully used in the past. It also highlights the considerations for a firm to choose whether outsourcing is worth pursuing as a strategic decision.

Risks, Challenges, and Implications

Undesirable outcomes, such as unexpected escalated costs, disputes and litigations, lock-ins, and loss of organizational competencies are resulted from a wide range of risks in outsourcing. These risks results from factors, such as degree of expertise in outsourcing operations on both client and vendor side; transaction related risk factors; asset specificity issues, including investments on vendor side, as well as client side investments on contracts or contractual amendments; uncertainty; interdependence of systems and processes that are outsourced; measurement problems; loss of institutional knowledge; and loss of control over outsourced functions (Herath & Kishore, 2009). These particular offshoring risks, and their fallout, are clearly evident in the case of Dell. Computer maker Dell called off its Indian technical support service operations, when some U.S. customers faced communication problems with the Indian technical service representatives.

In outsourcing there may also be security problems because the