Outsourcing – Pros and cons
Outsourcing is utilized to reduce cost, Increase quality, fulfill staffing resources, reduce fixed costs, and Increase profit margins. Any of the aforementioned reasons or combinations offers organizations variable costs (Noreen, Brewer, & Garrison, 2011). Outsourcing has become necessary for many organizations, The economy has changed drastically over the past few years Influencing more organizations to analyze the financial advantages or disadvantages of producing products and services in- house or outsourcing. Numerous components and variances contribute to the cost of doing business.
The cost structure is the primary components of organizations. Some cost structures are fixed, variable, or mixed indicating a combination of fixed and variable. Variable cost is cost associated with activity, if activity increases variable cost increases. Variable cost warrant organizations to modify their business model. Some changes decrease expenses and increase return on investment (ROI). Profits are materialized when investments and expenses are maximized to Increase consistent residual Income. Residual Income “encourage managers to make Investment profitable for the entire company’ (Noreen, Brewer, ; Garrison, 0111.
The Investment of equipment, faculties, and labor Is related to fixed cost. Labor can be classified as fixed or variable, depending on the country in which the labor occurred. In other words, the flexibility of the management dictates the decision on whether labor is fixed or variable. Mixed cost components would be the monthly rent of a facility, labor, the overtime of production and services, and the increase in productivity (Noreen, Brewer, ; Garrison, 2011). The assignment and paper revolves around outsourcing of production or services.
The article regarding outsourcing opens the mind to real life situation. Ford outsourced a portion of their productivity requirement to Visited because of Eviction’s expertise. Eviction’s client base was limited and may cause shareholders concern If his or her primary revenue was lost. Ford’s agreement with Visited equates to 80% of Eviction’s revenue stream (Higher, 2003). Organizations cannot depend on excellent revenue to continue generating the same amount of ROI or long-term client base. Materials, labor, fixed costs, and technological advancements, and taxes increase over time.
The cost of tit geographic changes caused by wars, acts of God, the unemployment rate, and various other elements beyond control. The need to outsource Ford’s business and capture new revenue became apparent. Therefore, Visited contracted with International Business Machines Corporation (MM) to relieve liability of potential revenue loss. IBM has changed directions and narrowed their scope of business. IBM started out manufacturing and selling hardware, mainframes, computers, typewriters, printers, and peripherals. Technology and economics have shaped the direction of most industries.
IBM helped technology evolve and transform changes within industries. Additionally, automation found in many organizations was started with IBM technology created more enhancements leading to rapidly deployed product or service offerings. The numerous changes forced industries and organizations to squeeze every area possible to shrink the cost structure. Profits keep the doors open and shareholders investing more money. Diversification is one way to generate revenue and profits. During the diversification process labor and material change organizations mixed cost.
The variable cost elements are scrutinized and fluctuate until an organization solidifies direction. Sometimes diversifying includes outsourcing pieces of the business model. The outsourcing pieces vary, depending on the product or service the organization provides. The major focus in diversification relies on labor, materials, and sourcing (Noreen, Brewer, & Garrison, 2011). Labor for all industries have a wide range of wages based on Job descriptions and numerous other elements. The same Job at another organization or location in the same industry may provide different wages.
Labor is an expense requiring considerable analysis. Materials are another area similar to labor expense requiring exploratory analysis. Material and labor are key components to cost structure of organizations. Materials maintain fluctuating costs with location or source influencing the cost delivery timeshare, and expense of delivery. Each country, region, or states adds to the cost structure. Some countries have tax advantages and some have disadvantages depending on location (Eunuchs, Wallace, Wilson, Smith, 2004). Sourcing is an essential part of management duties and location of facilities.
The task of developing and maintaining budgets contribute to the performance of an organization. Management’s ability to carry out his or her Job duties in the best interest of the organization reflects on budgeting and management skills (Noreen, Brewer, ; Garrison, 2011). When outsourcing is under consideration an organizations core competencies determine the strength of their business model. Some companies have different opinions of a company’s strengths. An exercise used in mapping out strengths, weaknesses, opportunities, and threats (SOOT) is useful to identify areas warranting attention.
A representative from all management levels and business units should meet to form a consensus on all four fundamentals of SOOT (Mullions & Walker, 2010). SOOT will add validity to areas vulnerable, missing talent, merit outside engagement, and will benefit from cost adjustments. However, in this case generalities will establish objectives and mind shaping ideas. The strength of an organization is the people, which enhance the core competencies needed to succeed. The employee’s skills are prepared to handle the workload.
The gaps in delivering a product or service compose the preliminary area a third party vendor s the lack of skilled labor and gaps in deliverables to supply the product or service at a cost-effective rate. The labor and materials provided by a third party will increase profits without compromising quality. Opportunities will enhance an organization. The enhancements will deliver new revenue streams. The opportunities may open numerous situations resulting in potential profits. The opposite appears in threats. Threats Jeopardize the organization. Competition is the leading agent in extracting revenue.
The operating expenses exceeding ROI, labor, and material can push expenses out of control. However, taking control of expenses by contracting out portions of the business to third parties will off-set expenses stopping the threats and potentially saving the organization from closure or bankruptcy. The decision to in-house or contract to a third party a portion of an organizations product or service depends on the financial outcome. The bottom line for any organization should influence management’s decision. The areas of an organization requiring employees with skills and expertise demand higher wages.
Higher waged Jobs absorb a large portion of the operating expenses. Operating expenses are a huge allocation of the financial structure and cash flow. Operating expenses influences an organizations ability to invest and profits. Therefore, organizations must contain expenses and explorer all options to reduce fixed costs. Labor and material are another part of the operating budget. Every aspect of the operating budget demands scrutiny, evaluation, and comparing in-house to outsourced. In most cases in-house expenses are higher because wages, benefits, and fixed costs are extremely high in comparison to third-party.
Wages, benefits, fixed costs, and time enrich an organization adding alee to the mix helps to Justify outsourcing. Value-added components manifest positive results increasing revenue and production. Outsourcing to a third party should add value. A relationship with a third party must create an extension of his or her existing organization. The contract between both parties should set the terms, conditions, and expectations to ensure clarity. Additionally, outsourcing benefits the contract organization as well as the consumer. When products or services are outsourced a reduction of cost benefits all parties.
Many people do not look at the big picture. Jobs are lost in the country outsourcing but in return the country receives a cost savings to consumer purchases (Gorge & Hanley, 2004). Many companies outsource customer service, information technology help desk functions, and manufacturing, or assembly of parts. Labor and materials in low income, less restrictive labor laws, tax credits, and lower liabilities make outsourcing extremely cost-effective. The reduction in labor, materials, and fixed cost entice management to outsource (Gorge & Hanley, 2004).
Outsourcing in many peoples opinion is taking jobs away from one-country and moving them to another. In the United States volumes of research have been conducted with a range of 300,000 to a projected 1. 4 million will be lost to outsourcing. However, the research cannot identify the exact amount of Jobs lost to outsourcing or natural progression and technology advancements (Gorge & Hanley, 2004). A United Kingdom study reveals more than 68% of organizations outsource a portion of products or services offshore. The same study indicates more than 50% of information technological work outsourced was below par.
Additionally, more than 10% of work outsourced hampered production rage businesses. Small businesses will not profit or meet standard criteria for outsourcing Jobs (Gorge & Hanley, 2004). Some of the concerns people have in the United States is India and China will continue to take away more Jobs. The Jobs in information technology currently outsourced primarily require a college education. India and China have an average of six percent attending college between the ages of 18 and 24. Nonetheless, less than one percent of the six percent speak English.
Other things to consider -outsourced IT hardware reduced cost on the average of 10 to 30% 70% of Jobs in the United States cannot be outsourced -outsourcing has added Jobs in the import of products -outsourcing has increased the number of live contact with organizations instead of digitized prompting and automated responses -the United States economy has a projected growth rate of 13% that will increase the products and services currently offered -even though IT support is outsourced installation and repair will require local technicians and management of infrastructures -outsourcing businesses produced more than $50 billion in revenue for 2004 (Gorge & Hanley, 2004)
Outsourcing is an effective way to lower cost and deliver higher quality service at a more affordable cost. Outsourcing provides an increase in operating efficiency, higher return on assets, and increase in profits. Outsourcing can provide new revenue streams with fewer risk and lower collateral investment (Eunuchs, Wallace, Wilson, Smith, 2004). The make or buy analysis is a fast way to determine whether to in-house or outsource. Make or buy decision method can use full costing, incremental analysis, or variable costing. Full and variable costing process occurs when income statements are prepared. Income statements are not quickly prepared. The main goal is to decide if making or purchasing a product or service is cost- effective.
Another aspect of making or purchasing is outsourcing does not incremental revenue. However, it does allow incremental costs, reduction in fixed costs, and potential savings. The potential savings will materialize in direct labor, material costs, and variable overhead costs (Noreen, Brewer, & Garrison, 2011). The savings from fixed and direct material cost would be seen in reduction of employee salaries, smaller facilities, and smaller facilities should equate to lower utilities. Material cost reduction will be observed by making smaller purchases. The reduction of expenses will carry-on to various other organizational expenses (Noreen, Brewer, & Garrison, 2011).
Astray supported more than one-third of the Fortune 500 companies before the financial scandal in 2008. Astray is a company headquartered in India with more than 50,000 employees in 66 countries. The company enjoyed nine percent growth rate until the scandal. Satyr’s financial scandal devastated the family-owned business. Mr.. Raja managed the company and overstated financial. The inflated financial assets, revenue, and ROI amassed fraud o the level of Enron. Astray is among the largest outsourcing organizations based in India. Outsourcing in the information technology sector generated more than $63 billion in revenue for India. Customer service is the second largest revenue stream in India in the area of outsourced labor (Timings, 2009).
India maintains the largest percentage of outsourcing services in the world. The average salary is $10,250, the average income $8,000, and the average unemployment rate is 10%. However, various industries relies on India and China to squeeze out every penny of profit (Timings, 2009). Variable costs peak creating an environment of inconsistent expenses and profits. Consistent revenue enables price hedging for materials and dependable profits. Shareholders and board members manage investment portfolios with higher probability. Revenue steers long and short-term goals with accuracy. The Astray scenario adds to the degree of accuracy in accounting practices.
Astray provided outsourcing services creating added value to clients. Visited and IBM added value to Ford and outsourcing services. Astray, Visited, MM, and Ford contracted portions of products, services, or outsourcing skills to improve profits and apply quality expertise. Revenue projections strengthen analytical analysis shaping future stock predictions improving profits. The pros and cons of outsourcing take time and careful consideration before the answer is realized on the company’s financial statement. The pros and cons have been highlighted and opinions formed. Those opinions have objectivity and a sense of clarity to establish the strategy or mind shaping events.
