BUS630: Managerial Accounting
Professor Oscar Lewis
April 16, 2012
Outsourcing is used very extensively in today’s world. Organizations use all kinds of outsourcing in their ever day activities to improve products and services that they provide to customers. Outsourcing is used to free both capital and brainpower for investment, research, and development. More than 90 percent of companies view outsourcing as an important part of their business strategy.
For the past fifteen or so years, decisions regarding outsourcing have been relatively straightforward. It allows companies to cut costs, make better use of their resources, and focus on growth. “During the past 18 months, however, the business landscape has changed, the old realities o longer hold true and the future is no longer about rapid growth; the risks of outsourcing are now more obvious and its financial advantages far less clear.” (Cordon, 2011, pg. 1) Some companies now see big opportunities in in-sourcing and near-shoring. Many businesses have to rethink their business models.
To the United States and other Western economies, outsourcing is critical to both growth and success. “Harvard Business Review lists it as one of the most important new management ideas and practices of the 20th century.” (Corbett, 2004, pg. 3.) Many of the worlds most successful companies are also the world’s top providers of outsourcing services. Outsourcing became an important part of business strategy in the early 1990’s. This was a time when the U.S. economy was in a severe recession and businesses were struggling to be competitive.
The world that we live in today can be described as hyper-competitive. “Globalization is inextricably linking the world’s major economies.” (Corbett, 2004, pg. 4) The standard of excellence over the years has risen enormously. Today’s standard is not just best in its class but best in the world. In the global world that we live in today, every company must compete against customers coming from all over the world. There are fewer barriers to the market place making new competitors easier to locate, all that is needed is a computer.
The most visible result of this hyper-competitive environment is rapid commoditization. The power that producers once had has been shifting quickly to give the consumers the ability to be in control. “A company’s ability to command a higher price for the unique value it offers lasts only for a fleeting moment.” (Corbett, 2004, pg. 5) The pressure on businesses has also risen during this time. Growth and profitability are expected while increased shareholder value is demanded.
In response to the hyper-competitive atmosphere, organizations are focusing on being more specialized. They have to evaluate each of their activities to determine whether or not it provides a competitive advantage. When an activity proves itself to be an advantage, it will receive increased internal investments. Outsourcing is generally a market-driven process. There are different factors that work together to shift the balance of the value equation toward the “buy” side, more and more every day. A large factor is the continuous increase in the capabilities of outsourcing service providers. There is outsourcing for every kind of task that a business will need to operate. Another factor is technology. “Technology makes much of the work of the modern organization placeless.” (Corbett, 2004, pg. 7) The last factor is competitive pressure. In order for an organization to continue to perform internally, it has to be better than both its direct competitors and the best outsourcing providers that its competitors can hire.
Outsourcing improves the performance of areas of the business that do not provide a unique competitive differentiation. It also reduces both direct and opportunity costs. At an organizational level, outsourcing represents a basic restructuring away from the industrial age and...