Outsourcing

Outsourcing is defined as "the process of purchasing goods and services from outside vendors rather than producing the same goods or providing the same services within the organization." Outsourcing does not come without risks, but it also has its benefits as well. Gaining services or products from outside sources can be very beneficial, considering the alternative that the firm will have to produce them themselves. However, on main risk that is incurred when outsourcing is that when a firm does outsource, they leave the supply of that product or service in the hands of someone of whom they cannot control, contrary to controlling their own supply. Ethical issues are at hand here, as well as trust issues. As you will see in this paper, many different opinions about outsourcing are present among different financial investors and financial officers. Management teams and management leaders are the head personnel that weigh the pro's and con's of outsourcing, and this paper will briefly summarize the various opinions, pro's, con's, large benefits, and ethical issues dealing with outsourcing.

Popularity among small businesses has grown in the past years, according to the Journal of Accountancy. "Outsourcing is becoming popular even in small and midsize companies. Nowadays, a small business may not have staff members such as a Human Resources recruiter or a 401(k) specialist in house. As the Internet transforms the way businesses communicate with their clients, vendors, and employees, many of these functions are being handled by outsourcers." They provide many solutions and guidelines in which to follow. Here is a small sample of them:

Decide what's important. If a functionп‚* is not strategic to your business--for instance, payroll services or health insurance needs in a recruiting agency with only ten employees--consider outsourcing it to an expert provider.

Don't go halfway. Don't settleп‚* for half-hearted measures or intermediaries who manage only some aspects of your business when the more efficient solution is to outsource the entire process. For example, if the telemarketing employees of a credit collection company only make calls on your behalf but do not follow up with any necessary customer visits, the collection function may be incomplete.

Beware ofп‚* regulations. Make sure your outsourcing partner understands and complies with all the rules and regulations governing your industry and the workplace.

This popularity is not just among small or medium sized businesses. Large corporations are using outsourcing in many different areas of their business. IBM and Compaq computers are using outsourcing to solve their storage problems. Models of this outsourcing vary, and even with these two computer giants, the same is true. "IBM and Compaq are offering distinctly different models, however. Compaq rents storage hardware and software that are kept on the customers' premises. The service is tailored to IT managers wary about giving up control of their storage," (Lelii).

Our textbook gives a somewhat detailed look at outsourcing. One example that is given is with the Volkswagen Company. "VW has completely outsourced manufacturing to a team of carefully selected supplier-partner in a radical experiment in production operations," (Horngren, Foster, Datar; 386). It goes on to describe the format in which they outsource their manufacturing section of the plant. They are outsourced by seven different companies, that interestingly enough, work together as a "tightly integrated team," (Horngren, Foster, Datar; 386). There is promise to this new idea, in the opinion of the authors, but this new technique is still in its startup mode.

The future of outsourcing is not necessarily in the products, but rather in the services of firms. Looking towards the technology side of industry, IT (Information Technology) is the most talked about service to be outsourced. "Now that departments throughout companies are initiating E-business projects, IT outsourcing isn't always orchestrated by traditional IT managers. Others, such as departmental VPs, are hiring outside contractors as a way to bypass internal bureaucracy and get E-business initiatives finished fast. "VPs can outsource almost everything today," says M. Victor Janulaitis, president of consulting firm Janulaitis Associates Inc. in Santa Monica, Calif.," (Swanson). Swanson goes on to talk about a disadvantage of outsourcing too many things when she says, "The problem with non-IT managers handling this kind of outsourcing is that these executives may get into the habit of looking outside the company before considering what projects are best-suited for management and execution by internal technology resources,"(Swanson). Realizing the possibilities of how outsourcing can become profitable can also lead to the downfall of your firm. If one doesn't look at his/her own firm for the services it provides, it can lead to a complete abandonment of good services.

This caution that is referred to by Swanson is affirmed by Tony Scouller. "Outsourcing should be approached with caution. If you find that something can be done a great deal cheaper outside, ask why. Consider your methods anew. The law insists on redundancy payments for the people doing the job. If a fraction of that cost were invested in new methods, costs might fall out of the business," (Scouller).

Regardless of these warnings, businesses almost have to outsource in order to turn a profit. Most believe, and rightly so, that to make every piece of their product is not just impossible, but unfathomable. Imagine the cellular phone. Nokia Inc. would have to manufacture their own plastic, circuit boards, chips, fluorescent lighting, speakers, and microphones. They would then have to build the manufacturing plant to assemble them, then finally do what they do best, which is advertising by the way, and get their product out on the market. This is ludicrous and most businesses that need outsourcing know this. As I have mentioned, IT outsourcing has been the newest "fad." Not only is it just new, but it is becoming more and more valuable. "A number of factors have contributed to the solid growth in IT outsourcing in recent years: year 2000 preparations, E-business opportunities via the Internet, the IT worker shortage, and the rapid pace of technology change. In a recent InformationWeek Research survey of 228 IT professionals, 42% report that their companies have become more reliant on outside IT services during the past year. Thirty-three percent report no change, 18% are less reliant, and 7% say they don't outsource," (Ruber, 2). Looking at this statistic