Irina M. Azu 21F.034 Final Paper OUTSOURCING IN THE UNITED STATES MARKET INTRODUCTION Outsourcing also known as contracting out is a business decision to export some to all of an organization’s non-core production operations to a third-party service provider that specializes in that operation.1 The concept of outsourcing stems from the idea of comparative advantage first postulated by Adam Smith in his book “The Wealth of Nations”. Smith suggested that individuals, firms and nations are better at producing certain goods and services and thus must concentrate on producing those over others. This idea is the root behind current developments in management theory; in particular the concept that each company has a few “core competencies” that it is specialized in.2 Further this theory suggests that managers and key decision makers of a firm, should focus their scarce production time and resources to sharpen and perfect these core competencies, and hire other firms with their own core competencies to perform other tasks. Some of the firms with the required core competencies however can be found in other countries and thus the increased trend of off-shore outsourcing. Offshore outsourcing is the practice of hiring an external organization to perform some or all business functions in a country other than the one where the product or service will be sold or consumed.3 New communications and information technologies with reduced costs and improved quality control capabilities have made it possible and even easier to hire firms outside of the country to perform tasks that are outside the core competencies of an organization. WHY COMPANIES OUTSOURCE The decision to outsource is made because it is favorable to the company in many ways. Some of them are:-  It is economical as it frees up capital resources by allowing the company to save on operating costs. The company can reduce labor costs by hiring high quality labor with specialized skills at a much lower wage rate without sacrificing the quality of its finished product. 1 http://en.wikipedia.org/wiki/Outsource 2 Prahalad, C. K., and Hamel, G. (1990) “The Core Competence of the Corporation.” Harvard Business Review (May/June): 79–91. 3 http://en.wikipedia.org/wiki/Offshore_outsourcing A company that chooses to outsource can save on time by off-loading non-core functions to the third party partner and thus the company can concentrate its scarce resources on core processes like strategic thinking, process reengineering and managing trading partner relationships and thus enhancing its strategic advantages.  Outsourcing allows a company to spread risks and not have to take up the burden of keeping up with developments in Information Technology and still be able to retain control of strategic decision making.  By consolidating and centralizing functions with outsourcing the parent company can improve efficiency providing its customers with the best quality products and services.  Outsourcing also allows the company to establish long term relationships with world class service providers and benefit from their expertise, extensive investments in technology, and time tested methodologies at providing the same kinds of services for other businesses with similar requirements.  On the whole outsourcing benefits the company because technology is changing so fast, it has to be leveraged and used to the maximum to deliver competitive advantage to a company. TYPES OF JOBS THAT ARE OUTSOURCED Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust. The outsourcing firm will need to manage the business relationship, share data, and work out problems as they arise. To able to outsource a certain job or aspect of production, that task should be one that can be easily transferred from the mother company to the out-source centre and vice-versa. This transfer is done through telecommunications lines and the internet. Thus companies choose to out source customer support and call-centre functions. For the mother firm to be able to manage the outsourcing relationship successfully the tasks must be well-defined and easy to set up. Thus it is very convenient to out-source a task if it has to do with data processing or data gathering, such as filling out standard tax forms entering data, and transcribing legal or medical files and thus can be easily repeated. Also the task must be one that does not require direct contact with the consumer, such as answering predictable customer-service calls. It is useful to outsource only when the wage difference between the original country and the off-shore country is very steep.Operations that are usually out-sourced are Information Technology, Human Resources, Facilities and Real Estate Management, Accounting, Customer Support and Call Center functions, and Manufacturing and Engineering. HOW IS THE OUTSOURCE PARTNER SELECTED? For a company that is looking to outsource, they would like to outsource to a company with a vision, competency and infrastructure that match those of the American outsourcing company. To determine a good match for outsourcing companies look at different factors:- ♦ The core competency of the outsourcing partner – Client outsourcers determine the expertise and business strategy of the outsourcing firm by looking to see if the skills the labor force are equivalent to skills that they are particularly interested in. To be able to determine the skill level of the labor force the outsourcing company looks to the International Standardization Organization’s IT assessment criterion4 to see how the outsource partner ranks with respect to this criterion. ♦ The equipment and infrastructure such as hardware, software, telecommunications and networking equipment that the outsource partner currently has invested in is looked at and if it is sufficient for the needs of the outsourcing organization. ♦ The experience this outsource partner has, by examining the accounts that it has previously dealt with. Testimonials from past clients can be looked at and if possible interviews with previous clients would be a good way to determine the experience of the outsource partner. ♦ The, balance sheets of previous years are scrutinized to determine the profits, growth rate and in general viability of the company and to determine if it would be profitable to partner with them. ♦ The