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In modern times, business entities have resorted to offshore outsourcing. This is in an attempt to carry out many activities that improve service and product delivery at reduced costs. In addition, it enhances leaner production processes, and general managerial effectiveness. Corporations seem to be emphasizing on narrow and crucial business activities while contracting supply firms to carry out other duties. The emerging trend is rapidly gaining popularity among not only international corporations but also local firms. Nonetheless, Gilley et al., (2004) assert that, “Despite the trend toward outsourcing, evidence of its performance effects is scarce. Appealing arguments have made the case both for and against outsourcing as a means of achieving long-run competitive advantage”. It is suggested that through offshore outsourcing, business entities are in a position to concentrate on value addition activities in order to maximize full potentials this strategy.
It is significant to find a balance between internal performance of a firm, also known as in-house knowledge development, and offshore outsourcing. In order to find this balance, this research paper attempts to strike a formidable relationship between the two aspects via testing the empirical relationship. “If a firm decides to perform business functions internally, it can do so domestically (in- house) or it may decide to relocate its business processes to another country, especially to those emerging markets that offer location advantages,” (Javalgi et al., 2009, p. 157). In addition, this paper finds out implications of balancing offshore outsourcing with in-house knowledge development.
Transformational outsourcing model mainly applies to firms whose main goal is to sustain their competitiveness. According to Javalgi et al., (2009) “Transformational outsourcing enables the firm to retain control, build sustainable competitive advantage, and generate the highest value for an organization”. The model focuses on outsourcing for value-adding business processes and up-to-date innovations in the IT field. Transformational offshore outsourcing requires high-level engagement in strategic planning, and as a result, it has higher risk of adoption than conventional model.
Outsourcing is a diverse strategy in business operation as it details a range of factors that determine its success. Some of the variables are business strategy theories, in-house variables, and cultural differences. Kotabe et al. as quoted by Javalgi et al., (2009) note, “globalization of service industries and their sourcing activities are similar to those for manufacturing: labor cost differentials, market access, capital mobility, and intellectual resources”. The figure below represents transformational outsourcing model.
Tactical model primarily acts as a cost cutting measure as it reduces operation costs and the model lowers firms’ involvement with offshore service providers. The model is a conventional way of outsourcing as its parameters involve cost-cutting measures based on service comparison between in-house knowledge and offshore outsourcing. It also measures costs of offshore outsourcing services between two different suppliers. The ideals of this model are best captured via the application of transaction cost economics, (TCE) framework using make-or-buy analysis. “According to TCE, clients are limited in their rational thinking and decision-making ability, and thus it prevents them from fostering long-term strategic relationships with their providers”.
Strategic model emphasizes on ways on sustaining competitive advantages through outsourcing of relevant resources. It involves redefinition of business operations framework and applied resources in a bid to free management system and puts emphasis on core issues affecting business. The importance of values of any business organization with regard to resource allocation lies on its main premises. Values help in development of a firm’s strategic direction and a leeway to competitiveness, hence, boosting performance. Strategic model is a brainstorming model where management and other relevant stakeholders source within business environment, for competitiveness. It uses the result-based view, (RBV) framework to identify uniqueness, value, unrivalled sustainability, and inimitability in resource mobilization. Kedia and Lahiri as quoted by Javalgi et al., (2009) note, “Therefore, from an outsourcing perspective, to sustain competitive pressure arising in the borderless economy, clients need to benefit from the assets and capabilities possessed by their providers, who are perceived as experts in their operations”.
In-house development is crucial, because not every business operation can be outsourced. In addition, offshore outsourcing brings in technological changes; hence, it is important to offer continuous in-house training.
Any business organization has the role of establishing a working process that manipulates resources and workmanship in a way that leads to realization of fundamental goals and objectives. The main work of organizational management is to focus on five main principles: duty delegation and authority, ability to adjust, homogeneous production, span of control, and a well-laid command system. The five principles require an effective organization learning, and according to Medina, (2006) an effective organizational management needs leaders with relevant skills and experience in business practice. These principles aim at determining tasks accomplishment procedures that utilize resources for optimal service provision and positive book values.
Quick learning is vital in ensuring that a firm remains relevant in its operations. Despite technological advancement, that makes the learning process quicker; many firms still face organizational challenges. Serrat, (2009) therefore identifies four key drivers, (knowledge, organization, people, and technology) that make organization learning sustainable. In sum, Haibo et al., (2006) affirm that, “Organization learning should be the integration of human, knowledge and the organization system.” The drivers lead to realization of principles for effective organization management.
A business entity should have a structured leadership framework to ease duty delegation. According to Serrat, (2009), “The leadership of a learning organization is committed to the importance of learning and clearly communicates that learning is critical to organizational success. The leadership recognizes the importance of providing the motive, means, and opportunity for learning”. The main obstacle to effective organization learning is channel of communication, especially in a structured and hierarchical learning process. Organization learning requires resource allocation and a motivated workforce to encourage innovativeness in form of emergent and planned learning. Cieri, (2006) conforms to this opinion by stating that it is important to lay down a strategic HRM that blends performance, resources, and people. Emergent learning is a speculative method of learning that encourages competency and a positive learning culture.
Chain of command creates avenue for delegation of authority from top management to junior staffs in a defined relationship and interdependence. Organizational structure should delegate authority via a chain of command, which delegates responsibilities from top to bottom and vice versa. Authority comes from CEOs to vice leaders who, in turn give orders to departmental heads. Departmental heads pass on information to staffs in lower ranks. Both the employees and managers, to ensure quick response to abrupt operation needs, should adhere to this chain of command. Traditionally, corporate bodies have used centralized structure in decision making where top authority make influential decision without taking views of junior/subordinate staffs.
Organization learning also requires a motivated workforce that is eager to learn and reevaluate its work experience. Reflective learning practice boosts psychological safety of an individual whereas negative criticism undermines organization learning. A genuine organization learning for a given workforce calls for teamwork. Developing leadership skills for all employees is an important obligation of organization learning and in involves managerial efficiency and top-quality training sessions. Serrat, (2009) adds that, “Leadership is viewed as a valuable skill that is based on the possession of expertise and knowledge, not simply positional status”.
Specialization in the workplace is a challenging activity to take in organization learning although it increases service output. This is because performing same duties for a long duration leads to boredom burn out. Boredom may leads to resignation and early retirement, which increase turnovers. Effective management calls for clear monitoring of situations at hand to decide on whether to use wide span of control or a narrow span of control depending on number of employees undertaking a task.
Learning at corporate level can be either an individual process or a collective effort initiated by the management. Knowledge gained is a product of organization learning and more knowledge is gained in a diverse social environment that brings different people working at one place. This cultural diversity is a critical positioning tool that bestows consumer loyalty and oils economic mantle. Following a company’s expansion to foreign market, there could be many cross-cultural challenges that face firm’s employees. To counter cultural complexities, management needs to initiate support services through training. “Support services include anything that a firm can provide in addition to the main product that adds value to that product for the customer”.
Modern day business operations rely on information and communication technology, ICT. Organization learning should therefore harness ICT as a resource for driving strategic management. Online social networking industry has undergone transformation for over 80 years following scientific and theoretical frameworks via which business community and clients interact. Business leaders should consider ways through which they can add value and make more profit by analyzing the relationships between buyers and sellers. Organization learning should recognize the power of online social networking industry in enhancing information sharing and expanding market avenues. Hartley, observes that, “Facebook and MySpace are the dominant consumer social networking tools used by more than 400 million members.” This is a significant number to target.
In-house training is a human resource, (HR) value-addition organization strategy that increases productivity, reduces operation costs, and improved returns on investment, (ROI). Whereas a number of studies conclude that in-house training improves performances, scanty information, if any, addresses the relevance of outsourced training activities. Therefore, before drawing a line between in-house training and outsourced training, there is need to find out if results would be either same or different. Potential positive result of outsourced training is reduced cost of training. This is because overhead costs payable to training staff (fixed cost), are eliminated through an outsourced training facility. Furthermore, outsourcing for training services is likely to draw highly skilled service from specialized supplier. An outsourced training is likely to bring on board, a highly innovative work force since well-trained personnel have a wide knowledge base, which is essential in process improvement and output delivery.
Payroll activities are transactional human resource, (HR) functions and unlike the relational HR activities, they are not strategic. Nonetheless, the activities ought to be performed more accurately as any disparity would demoralize workers. As a result, there is need to make the process more cost effective and this calls for offshore outsourcing from payroll service providers like Paychex and Pro Pay. Other than payroll activities, firms should also engage in workforce development, which helps in balancing in-house knowledge with the process.
Moreover, since payroll activities involve transactions without need for social interaction, performance of the duties would lead to value addition. Gilley et al., (2004) add that, “They also have low task and social interaction requirements and can be performed in relative isolation from other organizational activities with only limited amounts of information and coordination from other organizational units,”. The service providers of payroll activities enjoy economy of scales, expertise, and innovative technologies for ultimate service; hence, they are better placed to offer more superior services than in-house workforce does.
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In-house training, payroll activities, and offshore outsourcing cannot uniformly apply to all firm sizes. To find a balance, business strategists need to analyze all the characteristics of a particular firm in order to gauge performance possible outcomes. Gilley et al., (2004) quote Miller and Droge, “For example, firm size has been shown to affect the influence that a CEO can have on the firm, the level of organizational formalization, and the relationship between internal and external successors and firm performance”.
Moderator of the three aspects in the aforementioned statement, in-house training, outsourced training, and payroll services, is firm size. Transaction cost theory ideals disclose that offshore outsourcing for training and payroll activities for small corporations can lower operation costs used in in-house training. This is because small firms are not able to offer more efficient services than specialized service providers are. Moreover, resource-based theory supports the statement since small firms are capable of acquiring costly resources from outside at a lower cost. Small business entities can therefore improve their competitive edge through vendors. Therefore, small firms have greater potential to benefit from the competitive international market through offshore outsourcing than big firms do.
Large corporations on the other hand have the necessary resources to implement technical in-house training activities and innovative payroll mechanisms. This is because they have ability to invest in research and development, (R&D), which identifies relevant strategies to adopt at the workplace. Big firms enjoy economy of scale and through this, they can afford to hire and equip specialized training facilities and staffs to train employees. Thus, big firms are less likely to benefit from offshore outsourcing than small firms are.
This paper has established that size of firm and type of company make them benefit differently from offshore outsourcing. According to Shepherd, (1999), “Stakeholder theory suggests that by incorporating the instrumental and normative needs of key stakeholders into business-to-business relationships, outcomes can be improved.” The research by Shepherd is in line with the position of this paper as the author agrees that different business environments call for different needs for offshore outsourcing. For a transitional change from internal business operation to outsourcing, there should be proper integration of in-house activities with priorities and actions of potential suppliers.
Firms must iron out and integrate their managerial implications that affect in-house knowledge development before considering offshore outsourcing. This integration is a procedural program that begins with identifying main stakeholders and their needs. “An important managerial finding from this study is that organizations should anticipate special issues when domestic outsourcing is moved offshore”. Employees ought to be taught the significance of taking care of stakeholders’ interests. In addition, they must possess expertise knowledge on outsourced service and general knowledge of potential service providers. This is achieved through in-house training, knowledge development, and recruiting a skilled workforce.
Outsourcing across borders brings in cultural diversity that may be a nuisance to a given workforce. There are different mechanisms for identifying, studying, and managing offshore suppliers. Most companies employ consultancy services in the management of offshore suppliers while others; mainly big firms, prefer supplementary training of an existing workforce.
Offshore outsourcing is more expensive than domestic outsourcing and as Shepherd, (1999) denotes, “offshore outsourcing requires a strong commitment and investment in the offshore supplier, to a greater extent than domestic outsourcing”. Investment helps in retention of suppliers’ workforce, maintenance of superior service delivery, and as a cost cutting measure. On the other hand, commitments ensure that there are minimum cultural conflicts between two firms engaged in exchange of a business process. The offshore outsourcing environment dictates that corporations that buy services should engage both management and employees of supplying firms in their activities. On the other hand, service providers should find it meaningful to understand offshore outsourcing processes and cultural tenets of other suppliers in order to provide better services across borders. “Thus, the buyer has to focus not only on those stakeholders it is serving and those it employs but also on the suppliers’ employees as the stakeholder group performing the job”.
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During offshore outsourcing, a firm that buys services should balance tight specifications that are conventional and more flexibly when there is uncertainty. This ensures that suppliers maximize services of their expertise. It is also a vital approach, as it will ensure an improved relationship between two firms. Relationship should move from being transactional to a more important one with well-laid strategies. Managing flexible relationships calls for adjustable contract terms. Another vital aspect of managing contract relationship between two firms is either by rewarding good performances or by imposing penalties on routine violation. These have to be made formal prior to signing an engagement contract.
A serene business environment that incorporates offshore outsourcing with in-house knowledge development should undertake three main steps; preparing service level schedules, strategic control, and administrative control. To begin with, maintaining service level schedules for firms dealing with multiple suppliers is hectic because it is hard to identify and carry continuous monitoring of service levels of various suppliers. One way of addressing this issue is via subcontracting more flexibly without compromising the rationale behind maintaining a pool of suppliers. One way of doing this is by incorporation of self-sufficient means of seeking suppliers’ services and using these means as benchmarks for other service providers. Good outsourcing services suffice in a business environment with clear and articulate service level agreements.
Another way of monitoring service level schedule is by annual review of terms of agreements with suppliers. In some instances, outsourcing services receive dissatisfaction if operations results are compared to in-house activities. Some firms also reduce outsourcing costs at the expense of supplier’s services. Failure to make service level schedules a fundamental constituent of negotiations with service providers may yield negative results in offshore outsourcing. In sum, Shepherd, (1999) asserts that, “Contractual specifications proved insufficiently detailed, and the supplier has been unwilling to make improvements without additional payment”. Offshore outsourcing requires effective contract management even if this means recruiting additional staff to handle an increased workload.
Strategic control is a mechanism that ensures that clients have total control of regulating services on offer. The significance of such an action is to ensure that service providers do not make radical decisions that are likely to curtail future changes in technical aspects of business processes between two firms. According to Lacity et al. as quoted by Shepherd, (1999) “Previous research has indicated that it is important to retain strategic control, but this must be done by people who can take a broad view of what is important, rather than getting bogged down by interfering in unnecessary detail”. The success a strategic control, however, depends on the relevance of company ethos and philosophy in outsourcing. In-house development strategies should employ services of technical operators to manage suppliers’ activities and avert potential fallout. Firms should engage service providers in their extensive strategic outsourcing plans. Before making changes in technical operations, corporations should consult their suppliers. Change in technical services is necessitated by constantly improving technologies that are cheaper and efficient.
Strategic control also depends on technology updates, some of which may be expensive at the initial roll out stage. Technology updates as observed by Shepherd, (1999) “are intended to ensure that the supplier keeps the hardware and software that he uses up to date, and shares with the customer any cost savings that result from improved technology”. The workforce should undergo in-house knowledge development to keep pace with frequently updating technology through training as discussed earlier in this paper. The basis of technology updates should be identified and possible financial backups availed in order to minimize chances of post contract exposures. Firms should be weary even if post contract costs are a liability of service providers because contract renewal agreement on exit propositions may pass on the cost to buyers. Control of technology and updates is most relevant in long-term service contracts.
Most strategies aimed at controlling terms of contractual engagement between two firms function best if both firms undertake proactive administrative actions. Administrative control should be streamlined through in-house training since any inhabitance in a business environment limits the chances of a firm taking advantage of negotiated terms of contract. Due to complexity of contractual agreements, ambiguous provisions can compromise relationship between buyers and suppliers. Shepherd, (1999) found out that, of the firms that were investigated,
Most of the organizations had some difficulty in operating the service level agreements with their suppliers. Equally, several admitted that it was virtually impossible to track system changes in sufficient detail to be able to establish whether the savings, which they originally expected to achieve from outsourcing, have actually been maintained in the longer term, or, for that matter, to be able to re-tender the service to an alternative supplier.
The role of firms that seek outsourcing should adopt ethos that concentrate on issues of high administrative concern.
Technology has flattened international market and both small and big firms can now compete on the same platform. Technological inventions make it possible for firms to outsource for services they cannot offer for the reasons illustrated in this paper. Offshore outsourcing is a popular concept that all business organizations are striving to incorporate in their operations. It is however important for firms to realize how complex managing offshore outsourcing is. Sourcing for business processes from outside service providers takes place alongside in-house duties and responsibilities. There should be clear forums to manage both the organization structures to avoid duplication of duties and negligence of crucial business activities. This paper has established that it is possible to find a balance between in-house knowledge development and offshore outsourcing.
Managing a meaningful offshore outsourcing requires separation of duty and identification of business processes that cannot be supplied by service providers. Moreover, since outsourcing involves cross-cultural interaction, management and employee training is vital. The main areas to streamline include managing in-house activities, finding a working relationship between a firm and service providers, and identifying and employing the services of best suppliers. As already been mentioned, identifying a good supplier begins by benchmarking one firm and making comparison with other service providers.