The Pros and Cons of Outsourcing

The Pros and Cons of Outsourcing

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Outsourcing has been around for many years. In this paper I will discuss some of the history of outsourcing, the goods things about outsourcing, and the bad things about outsourcing.

Outsourcing is important because many companies rely on it in order to get many different products and services to their facility on time and in good shape. Outsourcing is a huge part of the business industry today. Any business can be affected by outsourcing. No matter how big or small a business is a business is able to outsource services that they could not do profitable on their own.

Outsourcing is shifting all of the costs-accounting costs, including personnel, plus the risk of failure and the responsibility for action-to the third party. In return for assuming costs, the third party benefits by controlling the operation (Coughlan 167). This is the basic definition of what outsourcing is. Outsourcing has been around from the beginning of time. In the movie, ?It Started With the Greeks,? they talk about how the Ionians found out that they could go around the world and find products that people back in their home town would buy. This essentially started the idea of outsourcing since the people who wanted the product was unable to get it but, they were able to have someone else do it for them. Once people knew that they could get anything that they wanted from around the world it lead into consumerism. So once someone got the idea to start and do this full time as a job they were able to outsource anything that they wanted.

There are many reasons for a company to want to outsource the services or products that they need or want. Six of the biggest reasons for companies to outsource are motivation, specialization, survival of the economically fittest, economies of scale, heavier market coverage, and independence from any single manufacturer.

? Motivation- outside parties have high-powered incentives to do their jobs well because they are independent companies, accepting risk in return for the prospect of rewards. Both positive motivation (profit) and negative motivation (fear of loss) spur the third party to perform. Sales agents, for example are often more willing to prospect for customers. They are more persistent and more inclined to offer a trial close to a negation than are company sales people.

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This is one reason why financial services, such as insurance, are often sold by third parties. An outsider is attracted by entrepreneurial rewards and driven by the fear of loss (Coughlan 170).

? Specialization- Outsiders have this advantage. For wholesalers, distribution is all they do- they have no distractions. This is why Whirlpool has been a pioneer for decades in the outsourcing of logistics. Kenco is a large logistics provider, deeply versed in the intricacies of storage, shipping, and delivery. Outsourcing allows each party (Whirlpool and Kenco) to stick to its specialty. This advantage has always existed. Increasing competition has made firms appreciate it more. A generalized more to identify and strip down to core competencies-only-is behind many decisions to outsource channel flows (Coughlan 170).

? Survival of the Economically Fittest- If specialists fail to do their functions better than their competitors do. They do not survive. Distribution in most sectors has low mobility barriers: The business is easy to enter and easy to exit. Such businesses attract many entrants and readily eliminate the lesser performers among them, because they can exit swiftly. This argument is connected with specialization, because an incompetent marketing channel member cannot stay in business by subsidizing its distribution losses with gains in other sectors, such as production. This is one reason why Whirlpool entrusts all its logistics to Kenco, a long established, large specialist in logistics only (Coughlan 170).

? Economies of Scale- Outside parties pool the demands of multiple manufacturers for marketing channel flows. This allows them to achieve economies of scale by doing a great deal of one thing ( a set of distribution flows) for multiple parties. In turn, these economies of scale enable the outsider to perform flows that would other wise be uneconomical to do at all. By offering many brands in a product category, a distributor can do enough business to amortize the fixed costs of distribution facilities, logistical software, and the like. Similarly a retailer that specializes in a single category of merchandise (such as appliances) pools the demand of many manufacturers for retailing services. The retailer?s deep brand assortment, albeit in a narrow category of products, attracts customers. The customer base in turn justifies the existence of the specialty store or the category killer, which would otherwise be uneconomical (Coughlan 170-171).

? Heavier Market Coverage- Heavy coverage of a market stems from the independent?s ability to call on many customers, including small customers, to call on them often, and to call on them concerning a broad range of their needs. By meeting multiple needs for that customer, the rep can sell multiple brands and products on a single call, converting a small prospect (for a brand) into a large prospect (for the salesperson). Further, by being able to meet many needs at once, the rep can induce time-pressed purchasers, who value one-stop shopping, to meet with them and to spend enough time so that the salesperson can learn a good deal about the customers (Coughlan 171).

? Independence from Any Single Manufacturer- For their customers, diversified outside providers of channel flows can serve as a sort of independent counsel, an impartial source of advice that does not come from a single manufacturer. Further many outside specialists are local entities. Therefore, they are stable with the same personnel serving the same customer set year after year. They have the opportunity to know their customers well, and strong loyalties often result (Coughlan 172) .

These are the major reasons that it is beneficial to a company to outsource some or all of a particular aspect of their business.

Outsourcing of services by companies is in most instances beneficial to the company and the economy as a whole. However, the newest trend in outsourcing here in the United States is to send all of our outsourcing overseas. As it says in the book, ?International Marketing,? by Michael R. Czinkota, ?the outsourcing of lower skilled jobs is an unstoppable trend for developed economies such as the United States? (Czinkota 119). Many of the jobs that are currently being taken overseas are those that are in call centers and some programming jobs. This is great for the countries that these jobs are being sent away too but, back here in the United States there are many people that are losing their jobs since they are being replaced by someone that can do the job for much cheaper.

Another huge impact that is being seen from many of our service jobs being shipped overseas is the fact that all of the knowledge that it takes to do these things are also going along with the outsourcing. In an article on Business Week Online a spokesperson for a plant said that, "Our investor got spooked and walked out, based on what he heard about AM," says Rocci. What upset the potential backer? In large part, it was the sense that not only were the manufacturing and development services based in India, but that the company's most important knowledge -- software and engineering savvy, not to mention its development expertise -- also had departed the U.S. Says Rocci: "All the knowledge about how to do things had moved over to India." The investor's withdrawal scuttled the former employees' proposed deal to acquire AM's products business did so because he saw that outsourcing had essentially stripped the concern of perhaps the most important asset of them all -- its knowledge. If the expertise in order to manage and set-up similar projects in businesses is no longer here. Then it is going to take us going to these foreign companies and have to pay them to come here and set-up these systems.

The next big problem that we run into when it comes to outsourcing is the quality of the information and products that we get back in the United States. In an article in, Industry Week, They talk about the quality of call centers that are in India . Here is what they had to say, ?Now consider the quality of overseas call centers, notably in India. Anyone who has tried to have a meaningful conversation with one of these customer-service representatives knows what I mean. I assume they are highly motivated, intelligent individuals, but so far they aren't giving good service.? Therefore, if it is not possible to get good service from a company that has a call center in India then the fact will be that people will be less apt to by from that company again.

As a personal thought into outsourcing I think that there are many good aspects to make companies want to outsource. Since there are cheaper places to get goods and services made. This is right in line with the American way of life since we want to pay the least possible price for something. However, if we are giving up quality for price I think that I would rather have the good quality rather than pay a little bit less.

There are many pros and cons to outsourcing. In most cases the company that is looking to outsource needs to evaluate if it will be worth the time and effort to give someone else control of a part of their business. However, since outsourcing has been around since the time of the Greeks I do not think that it is going to go away anytime soon.
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