Introduction:
Outsourcing is a cost saving practice in which one company provides different goods and services to another company. It is used by different companies to transfer some portions of work to outside suppliers instead of completing it internally. It describes the strategic use of outside resources to perform organization's internal activities. It help the companies to get more skills and expertise from outside suppliers. Outsourcing is an act of acquiring products or services from an outside company that is known as vendor or supplier. The history of outsourcing is embedded with a history of the growth of modern technology and open trade. In the early 1970s, small and specialized outside firms had delivered some unique and innovative products to other manufacturing companies. Later in the 1980s, the term outsourcing was introduced by the information system trade press. It was early days of IT outsourcing when large companies outsourced its information system to outside suppliers. In the 1990s, the concept of outsourcing was expanded, and many companies started to consider on its core businesses and cost reduction activities. The suppliers or vendors are companies that outsource different goods and services to other companies. The suppliers can fulfill the manufacturing requirements of other companies by transferring different finished goods and semi-finished goods. The outsourcing companies are experts in technology and innovation. They provide different products and services to its clients. The companies had outsourced some portions of work to other companies for the sake of time saving and cost reduction. The companies choose to outsource some time-consuming processes to the external suppliers and focus on major tasks and core processes of the business. On the other hand, some companies do not opt to outsource it due to quality control and confidently. In outsourcing, the company is responsible for the performance management and quality of work and it is difficult to control it. The risk of confidentiality is also involved in outsourcing, and the vendor can view the confidential company data and its client’s data. Outsourcing can also affect the operations and reputations of the company. The paper investigates the role of outsourcing and its importance in the corporate sector. It describes the importance of outsourcing in the world’s economy.
Position of the outsourcing in the global world:
The outsourcing trend has increased in the world, and many buyers and suppliers are meeting their requirements through it. The scope of outsourcing agreement became wider and is considered as low cost practices in the current economy. The companies transfer its employees and assets to other organizations in the world. Many countries in the world have made investment in outsourcing business and established leading business processing outsourcing companies. China has a leading global position in the world and Chinese government invested major capital in the outsourcing business. The IT industry is the leading outsourcing sector in the world. The business process outsourcing industry in India has also increased by more than 50% and has generated revenue up to $1.6 billion during last five years (Vagadia 191).
Types of outsourcing:
Outsourcing includes both domestic and international contracting and the vendors can deliver its goods and services within the country and outside the country. The companies are outsourcing its goods and services in the home country and also internationally.
Domestic outsourcing:
The domestic outsourcing takes place within the same country, and it involves contracting business function to a domestic outsourcing company like contracting accounting services to any third party company that is located in the cheap region of the country. The buying companies need to consider different factors like price, quality of work, and previous work history while obtaining services from other suppliers within the same country. Domestic contractors can be cheap in price as compared to international vendors (Contractor, Kumar and Kundu 58).
International outsourcing
International outsourcing or offshore outsourcing is an act of obtaining goods and services from third party supplier that is located in foreign countries like contracting call center operations to any foreign BPO company. There are some advantages of international outsourcing that includes low cost and companies can get more skills and expertise that are not available in the home country. The companies can get more skilled human resources assets from other developing countries at low wages. Besides some advantages there are certain disadvantages in international outsourcing that includes increased risk of loss of data, quality risk, supply risk, hidden cost (that arise due to cultural and time zone differences), and job loss of domestic employees. It can negatively effect on the country’s economy and increase unemployment in the domestic country. The language difference is also an important factor in global outsourcing the supplier cannot understand the quantity, time factor, contract negotiations, and place due to language and cultural differences. It is difficult to address with a supplier due to time zone difference. It is the difference in operations due to the different time zone in supplier country, and it can affect the supply of goods and services (Handfield and McCormack 36). The fluctuations of currency are one of the major problems in international outsourcing because the money has moved in the home country and a foreign country. Instability of currency is the main problem for the exporter to trade in foreign countries. It may be the communication gap between clients and suppliers due to the difference in languages and customs (Schniederjans, Schniederjans and Schniederjans 21).
Stereotypes of outsourcings:
Stereotypes depend on formulaic and conventional assumption rather than facts. It is associated with outsourcing its negative nature. It shows that IT outsourcing is very cheap as compared to the in-house project. Stereotype describes that the company can handle a project to international suppliers and remains in constant communication, participate in decision-making process, and analysis. It is the collective responsibility of both client and supplier, and the risk is mitigated equally. It shows that outsourcing can solve the problem of the clients and provide various kinds of specialist to perform company’s functions (Asefeso and Ade).
Elements of outsourcing
The good supplier plays a vital role in outsourcing and there are some factors for considering during the searching and selection of an appropriate supplier. The research on suppliers of the competitors should be done to analyze the supplier’s skills and abilities. The direct purchasing from the vendors or manufacturers provides better rates because the profit of whole seller or retailer is not involved in the total price. Each supplier has its policy as some allow direct purchase and some involve third parties in a deal. Purchasing from a large and renowned supplier provides a better range of products and services than small suppliers.
The suppliers can be found by utilizing search engines, social media, trade shows, networking events, magazines, yellow pages, and publications (Reseller Network). The supplier’s company profile and other information regarding its products, services, cost, customer satisfaction, etc. should be gathered for the analysis. The suppliers should have a reputable record of providing genuine products and services in a given time frame. The geographic location of suppliers also creates an impact on business as it reduces the shipment delivery time and costs. The duties imposed by foreign or local authorities may cause in the increased cost of product or service.
The suppliers should have an understanding of the business ethics, and they are not applying any illegal or unethical approach to growing their business. They should have essential licenses and certificates from the concerned authorities to do business. The supplier must establish a clear return and exchange policy that allows the companies to return any damaged or expired product. The trust among companies and suppliers will be developed with the presence of this policy.
Role of sourcing agents
The sourcing agent or purchasing agent is a person who acts as a bridge between supplier and a company. He analyzes the company’s requirement and searches for various local and/or foreigner suppliers. He then forwards the requirements to the suppliers and selects the best option after the evaluation of offers.
The sourcing agent can provide various benefits to the company. They have an edge over a common buyer in the purchasing of products because they are able to get better quotations and efficient delivery. The suppliers also prefer to deal with the sourcing agents instead of a single buyer. The sourcing agent saves company’s valuable time by keeping it far from the hassle of the selection and management of suppliers. He also saves time and money of a company by resolving the issued related to the duties and taxation. The sourcing agent has awareness about the rules, regulations, and import and export policies of different countries that help them to process the shipment in a quick and effective manner.
There are also some disadvantages related to the sourcing agents. The agents have some critical data of a company and leakage of it may cause a threat to the company. The companies are also at risk of bearing hidden additional costs as they are totally relying on the sourcing agents. The agents work with multiple companies that can distract them from focusing on each company.
Role of Direct Sourcing Employer
The direct sourcing helps the employer to reduce the time and cost of employees recruitment. They avoid third parties during the recruitment process and prefer to hire candidates themselves. The companies use social media, job portals, job fairs and other methods of hiring. They also publish jobs on their websites; it helps them to create a database of candidates as they post their resumes by using company’s website.
Role of trade policies
The countries use various trade or commercial policies during the process of import and export. The policies allow them the trading under the guidelines set by the government authorities. The countries made agreements with each other to simplify their trading process. The agreements are based on regional, unilateral, bilateral, and multilateral levels. The countries also make a free trade where they do not impose a tariff on each other. They use both domestic and foreign policies of trading according to the requirements of a shipment.
The commercial policies make a vital impact on the economy as they are improving the methodologies of business and trading among nations. The trading provides the vast range of products to the consumers and also helps in economic growth and people’s lives by creating the job opportunities for them.
There are some barriers attached to trading that are quotas, duties, tariffs, nontariff barriers, etc. The tax imposed on imported goods is known as a tariff, and the quota sets the limit of goods. The nontariff barriers create an indirect impact on business and it consists of the shipping, packing, and state regulations. The countries use various agreements to keep the trading process easier for their people and organizations. The companies prefer to hire a vendor from a country that has Free Trade Agreement (FTA) with their country. The FTA lowers the cost of purchased good or service as it does not impose the burden of tariffs on each side.
There are some trade agreements that allow free trade between specific countries and regions. The North American Free Trade Agreement or NAFTA is a trade agreement between Canada, Mexico, and the United States (Global Affairs Canada). It is known as a largest free trade area of the world. NAFTA set the policies and procedures for investment and trading that removed all the nontariff and tariff barriers between these nations. NAFTA improved the economy by providing benefits to the companies, customers, and other people of these countries. The import and export among these nations have also increased after the implication of NAFTA.
The other vital agreements are the Trans-Pacific Partnership (TPP) and Central American Free Trade Agreement regions (CAFTA). TPP involves the twelve countries that are Peru, Mexico, New Zealand, Brunei, Vietnam, Japan, United States, Malaysia, Singapore, Australia, Canada, and Chile. CAFTA is a trade agreement between America and the developing economies. The seven members of CAFTA are the United States, Honduras, El Salvador, Costa Rica, Nicaragua, Guatemala, and the Dominican Republic. The objectives of CAFTA are to reduce the traditional trade barriers and to increase the investment in the expansion and diversity of trade in multiple countries (Stenzel).
Agreements with suppliers:
The agreement or contract is required, and both clients and suppliers need to sign it. The outsourcing contract should include all terms and conditions, the purpose of the contract, services provided, price, and time duration. The company should define the security requirements in the outsourcing service contract, and vendor must sign a non-disclosure agreement to protect confidential data of the company. Trade agreements and policies are contracting between clients and vendors to trade internationally and exchange goods and services according to rules and regulations of the country’s international trade. The companies can get goods and services from foreign suppliers according to international trade policies of domestic countries. Each country can apply taxes and subsidies on export and import of goods and services. The trade agreements must be signed between clients and suppliers when goods and services are exchanged between them.
Payment methods:
The suppliers and buyers should fix the payment methods while the trade contract is negotiated. The clients need to make payment through different methods that include free on board (FOB), cost insurance and freight (CIF), and delivery duty paid (DDP). The free on board payment method shows that suppliers pay the shipping cost and insurance cost to a specified destination chosen by the buyer when goods are delivered at FOB shipping point than buyer pay the transportation and insurance cost. Cost insurance and freight contract of goods that are delivered by sea. It shows that the supplier must pay the costs and freight to a port of destination and when it is delivered to the port of destination the buyer has to pay the cost of goods with insurance cost. Delivery duty paid is a payment contract in which the supplier is responsible for dealing with all functions involved in the delivery of goods from suppliers’ location to clients’ door. The seller has to pay all charges, taxes, and duties for shipping the goods to the client location. The risks are transferred from suppliers to clients when goods are delivered, and buyers need to bear all the charges occurred during shipment. The supplier needs to choose the right trade methods and reduce the risk of loss. The banks play an important role in import and export business of different countries. A letter of credit is one of the security documents from the issuing bank that assures that the seller has received the payment from the client for the total amount on the due date. The bank guarantee is also used that ensures that the liabilities of suppliers have been received, and if the debtor is unable to make payment, the bank will cover the outstanding amount. Some other banking procedures for trade are documentary collection, opening an account, and payment for consignment (Cook 29).
Sustainability and supplier compliance
The companies face challenges of ensuring the sustainability standards of supply chains. The sustainable issues in outsourcing business are complex and require many actors to find the solutions. The client should contract with reliable supplier and ensure that reputed materials are used in finished goods.
Role of companies and vendors:
The client needs to focus on quality control and supply conditions of products that are delivered by the supplier. It should be noted that goods are properly inspected and designed as per the client’s demand. The goods are manufactured, tested, packed, and delivered in the best condition. However, the supplier is also responsible for maintaining the quality and price of products (Jenster, Pedersen, and Plackett). The supplier should understand the corporate responsibility and produce goods in a proper condition. The quality assurance department should maintain the quality of products and manufacture it in favorable conditions. The vendor should consider the client’s demands and manufacture its product accordingly. The supply of goods should be easily and timely as per contract with buyers. The companies need to focus on vendor’s performance and its last performance with other companies. The vendor’s honesty, reliability, quality, price, and market reputation should be considered before making a contract. It helps the companies in maintaining a good relationship with suppliers and continuously communicates at different stages. The firm needs to monitor suppliers’ performance and establishes performance indicators for future business (Taipala 102).
Conclusion:
The scope of outsourcing has increased in the world, and it creates opportunities for poor countries to develop its economy. Outsourcing is a cost saving act that helps companies to reduce staff and choose the outstanding vendor that performed the outsource functions more efficiently in the market. The companies are outsourcing those functions in which it had no internal competency and faced barriers in achieving better results. The companies transfer many functions to vendors like payroll processing, billing, accounting services, human resources, auditing, word processing, and other functions. The companies reduced the operational and labor cost through outsourcing. It helps firms to reduce the risk and get the benefits of reengineering through modern technology in the world. The trend of outsourcing is increasing in the world, and many small organizations are performing it as a major part of operations with the help from outside suppliers.
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