Business process outsourcing is a process, which the product or services is provided by a company, for the support of achieve the goal of main business in another firm, such a way that the process is economically efficient and effectively protect the quality and the cost. That can be divided into two categories. Those are;
1. In -shore outsourcing
2. Offshore outsourcing
This is an outsourcing process, which produce service or goods for the company by different manufactures in different locations within the same country. As an example, vehicle bearings for the Toyota Company are producing by Koyo bearing Company. Both the companies are situated in Japan. However, Toyota specialized in vehicle manufacturing not in bearing manufacturing and Koyo specialized in bearing production and designing. Both the companies are getting benefit from producing exceptional ultimate product at competitive price. Airline industry is also one of the best examples for this. They sell travel tickets for some destinations, which they do not fly. As an example, British Airways normally do not fly to Sri Lanka, as it is not a profitable destination for them. However, they sell tickets to Sri Lankan destinations link with the Cathy Pacific airways. By doing this they do satisfy the customer and at the same time they are making the profit. In this business process, both British Airways and Cathy Pacific get win-win situation and reciprocally beneficial the business culture.
Simplest meaning of the offshore is “Any country other than your own country”. In offshore outsourcing companies in developed countries export, IT related work from developing countries, which are politically stabilized, and has the lower labour cost. This type of outsourcing has become a reality because of the globalization.
Nowadays most of the organizations are using offshore outsourcing as a weapon to compete with their competitors. Competition among the business firms are growing rapidly day-by-day and therefore reducing the cost of the products and services and improving the efficiency makes the organisations to satisfy their customers and remain strong in the business environment. At the same time, host country is benefited from this, as they do not want to spend huge sum of money in training staff and motivation staff. In short, they can cut the high level of labour cost.
On the other hand, offshore outsourcing helps organizations to give more attention on their core process such as, merges & acquisitions, sales, business expansions and quality of the products. When the firms are having enough resources and time, they can achieve their targets without putting much effort on it.
Offshore outsourcing has become a necessity of the banking sector within Asia and Gulf region. Software outsourcing and call centres have become more popular during the last decade. Ever since the term offshore outsourcing has come into the topic, it shows the continuous growth in both value and volume.
Call Centres and its effect to the host country
Call centres are essential components of many large businesses. While some firms choose to create internal call centres, many now purchase call centre support services from other firms. In a typical outsourcing arrangement, a firm (the client) hires a call centre specialist (the vendor) to provide sufficient technology and staff to serve the client’s customers. The client specifies the quality of service and the financial terms in a detailed contract, which may include queuing performance criteria (e.g. 80% of callers wait less than 20 sec.), customer satisfaction requirements(as measured by surveys or observed by monitoring calls), and financial rewards and penalties. Motivated by contracts used by one large vendor, then how the terms of real world call centre outsourcing contracts affect the capacity investment decisions of the vendor as well as the financial performance of the client, vendor, and the system as a whole.
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Global business environment is very competitive and volatile. Business organisations cannot be survived without reducing the cost of product or service. Because of that reason, it is natural that, most of the business organizations are tend to minimise the cost and do optimization of the resource allocations. World of business is consists of many large as well as medium and small scale of business firms. All the industries are looking forward to grow faster with the reduction of the cost. In order to done the quality work by the low cost of them are using off shore outsourcing centres. However, not only the costs but also there are many other factors, which have the influence of becoming this concept a more popular. The major reasons for the outsourcing of low cost locations can be explained as follows.
The main reason is it reduces the production cost of goods and services. Second one is, it can be increase the capacity of the production, by putting the same effort because it can be high benefit within the own company. However, outsourcing can produce more products with lower cost. This means using same cost, we can produce more products. Third one is it is low risk and low investment for the launching of new product or developing existing product. The other reason is that, it helps to expand the business without encumber of high investment or less cost of capital. It can create the dominant in the market with competitive prices and regardless of the high price pressure and without gaining heavy losses.
Off shore locations are the most common business process outsourcing (commonly known as BPO) practice in most business organizations situated in the developed countries like United States, European Economic Countries (EEC), Canada and Japan. Their call centres are located in most developing countries like Maxico, India, China and Thailand.
According to one of the examples published in the industry magazine, an American business firms could be save up to ten percent by attending to the domestic US Spanish-speaking market, it outsourcing its call centres to Latin American countries like Mexico instead of inside the United States. On the other hand, it could be save up to twenty percent to forty Percent if its situated in India, Philippines and South Africa. (Call Centre Magazine 2009 Sept). Because of this reason, most business organizations tend to locate their call centres in off shore countries.
Average Annual Salaries of Call Centre Operator
According to the data which have been gathered from the Gartner in the year 2007 (Gartner is one of the largest Information Technology research and analysis firms in the United States) most of the information technology related business organizations will either be investigating the possibility to outsourcing their part of business or have already outsourced some work overseas through call centres. It is nearly 60% of the whole information technology business in the United States alone.
HSBC (Hong Kong and Shanghai Bank Corporation Limited) call centres get time difference advantage for their customers. HSBC is facilitated their banking service to all the customers in 24 hours in 365 days. Their calling centres situated in low cost locations like India, Sri Lanka, Argentina, Poland, Peru, Egypt and Mexico. HSBC can provide exceptional banking service all the time in all over the world. As an example in London customer wants to transfer money to another account or any banking service at early morning five a clock it can operate from the call centre in Sri Lanka. The call automatically connects to the appropriate call centre and for doing customer request within short time. Using this kind of service business organizations can provide better customer service and customer satisfaction while spending less money and improving the image of the business. By providing the best service at all the time throughout the year more number of customers will attract towards the company and at the same time existing customers will not go for any alternatives as they are happy with the service they are getting.
Most of the business organizations tend to formulate strategic outsourcing plans to assessing the relative and risks of making or buying, companies can leverage their skills and resources for increased profitability. By making strategic plans, organizations are willing to make use of their resources to have better rewards.
According to the James Brian et. al “There are two main strategies of outsourcing approaches can be seen in the present business environment. When properly combined those, allow managers to leverage their companies’ skills and resources well beyond levels available with other strategies:
Concentrate the firm’s own resources on a set of “core competencies” where it can achieve definable pre eminence and provide unique value for customers
Strategically outsource other activities – including many traditionally considered integral to any company – for which the firm has neither a critical strategic need nor special capabilities.
As an example, two different Australian and United States companies can be illustrated in this point of view:
Nike, Inc. is the largest supplier of athletic shoes in the world and it outsourcers 100 percent of its shoe production and manufactures only key technical components of its Nike Air system. Athletic footwear is technology- and fashion-intensive, requiring high flexibility at both the production and marketing levels. Nike creates maximum value by concentrating on pre production (research and development) and post-production activities (marketing, distribution, and sales), linked together by perhaps the best marketing information system in the industry. Using a carefully developed, on-site “expatriate” program to coordinate its foreign-based suppliers, Nike even outsourced the advertising component of its marketing program to Wieden & Kennedy, whose creative efforts drove Nike to the top of the product recognition scale. Nike grew at a compounded 2O percent growth rate and earned a 31 percent ROE for its shareholders through most of the past decade.
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Knowing it could not be the best at making chips, boxes, monitors, cables, keyboards, and the like for its explosively successful Apple II, Apple Computer outsourced 70 percent of its manufacturing costs and components. Instead of building internal bureaucracies where it had no unique skills, Apple outsourced critical items like design (to Frog design), printers (to Tokyo Electric) and even key elements of marketing (to Regis McKenna, which achieved a “$100 million image” for Apple when it had only a few employees and about $1 million to spend). Apple focused its internal resources on its own Apple DOS (Disk Operating System) and the supporting macro software to give Apple products their unique look and feel. Its open architecture policy stimulated independent developers to write the much-needed software that gave the Apple II’s customers uniquely high functionality. Apple thus avoided unnecessary investments, benefited from its vendors R&D and technical expertise kept itself flexible to adopt new technologies as they became available, and leveraged its limited capital resources to a huge extent. Operating with an extremely flat organization, Apple enjoyed three times the capital turnover and the highest market value versus fixed investment ratio among major computer producers throughout the 1980s.
The call centres are the foreign direct investment (FDI) of the host country. It is very interested study effects of foreign direct investment (FDI) in the empirical literature on host country. Multinationals are larger and strong financial and tactical organisations, which have the capable of conducting more research and development, use advanced technology, and maintain higher standard and the pay higher wages than the domestic country. When the call centres establish in the host country, automatically all these benefits transfer to them. For an instance, Vodaphone is one of the largest multinational mobile telecommunication companies. It is the second largest mobile company in the UK but their customer care call centres located in India and other developing countries. They had done off shore outsourcing with their customer care call centres. The host country India gets many benefits. As they can reduce the unemployment and increase, the Per capita income and Gross Domestic Product (GDP) and they can increase the aggregate productivity even without spending a single penny. These call centres buy equipment, and accessories from the domestic market. It indirectly increases the production of local companies. The host country employees receive advanced training and career development programme in international level. These are prominent advantages, which robotically gain from the mother company. Even though host country receives these benefits, sometime a risk of job loss in acquisitions of existing local call centres by new foreign company is there. Sometimes business activities of these call centres can be affect the performance of the domestic business organizations. After considering a result of a survey, Görg and Greenaway (2004) concluded that, “However, the direct effect which foreign entry has of bringing about a change in the composition of firms in the host country is less studied. As foreign firms tend to be larger and more productive than domestic firms”
In the process of offshore outsourcing both business organizations obtain remarkable benefit which one organization achieve cheap labour cost, skilled labour and quality product than the produce in their own country. On the other hand, host country gain employment, foreign exchange and technology. Most of the multinational business organization establishes their call centres in offshore locations shows remarkable less absenteeism and employee turnover than in the own country. Because of these reason most of the multinational companies in the United Kingdom, United States and European countries, do not have to worry about retaining their employees by paying very high salaries, attractive incentives and lucrative benefit packages. And even if the salaries are higher than the standard rate of the local country it is much lower than the United kingdom, United States and European countries, because of this reason most of the larger organizations tend to outsourcing their service to increase the profit margin through the downsizing the cost.
On the other hand, it can obtained benefit of different languages speaking environment. As an example most telecommunication companies in the United Kingdom, call centres are placed in India. Their customers, who cannot speak English properly, can speak their own Indian language. This is beneficial for the both customer satisfaction and the business point of view. In other example according to the Dave article on “The outsourcing Low cost line” shows some project not receive, expected benefit from the project and it take more time and the cost than shown in original project report. Meanwhile the article of Grog Hogler and Aoife Hanley in economic and Social Review journal says that the remarkable increase of profit can be shown in production industry.
However, some disadvantages and negative effects can also see in the business process outsourcing. Those are common in global business environment. As there can be some disadvantages many countries, make political agreement to prevent business organization and their customers. One of the main barriers in outsourcing in low cost locations is that, difficulty of time correction or spot correction. At the same time, delivery time and payments also can be a problem. In addition to that, if it is off shore outsourcing it can be undergoes to import tax and regulations, cultural difference and business ethics and at the same time, the time difference and the logistical complications should be expected.
The second example is the telemarketing doing by using the call centres. Most of the multinational food and perfume companies are doing their promotions, marketing and selling by using call centres. Some of the companies have their own satellite to improve communication effectively, efficiently and cheaply between them and their customers. For an example super market, giant Wall Mart has their own satellite to operate better communication between them and their customers. This plays negative impact to the host country or domestic business firms, multinational business organisations can sell their product very low price while cannot compete the domestic firms. Because of these reason local business organizations cannot be survive and the local business may be suffer from the international call centres.
Production of goods and the hiring the service from the low cost locations has become an important source of investment and development in many emerging economies. At the same time, most of the multinational and medium scale companies have already paid their attention to use of their services from low cost off shore outsourcing. There is a sharp increscent in establishing offshore call centres throughout the world in last few years. Especially in developing countries like, India and Sri Lanka as they do have very cheap labour cost. (Not only the labour cost is low but also in these countries, they do have skilful, unemployed people those who are willing to work these kinds of call centres.)According to the Tomiura Eiichi, most of the companies are getting benefits from the lower cost and the exceptional product performance.
However, according to Holger Görg, all of the off shoring outsourcers activities not acquiesce the predictable results. Then the choice of where to locate offshore facilities is an important and complex one that has substantial implication for both the investing firm and the host country. The multinational companies select their host country using Data Envelopment Analysis (DEA). According to the research done by Amiti, Mary and Shang-Jin Wei, they found that India, China, Pakistan, Slovakia, Mexico, Ireland, Netherland, Spain, Sweden and the United Kingdom are attractive locations for services outsourcing. These countries use their resources or input most efficiently in order to produce output that makes them attractive for service out sourcing. Most of these host counties have at least one core-efficiency for creating core competency among the key inputs of wages, education and infrastructure.
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