This paper aims to explore how true is the position of firms pertaining to keeping core competencies while outsourcing everything else to suppliers. The growing trend about outsourcing and off-shoring caused by globalisation trends allows managers to look at this new direction. Significant global changes brought about by technology and globalisation have been occurring recently, causing firms to consider other means of restructuring and reorganising. Friedman (2005) presents this scenario in a metaphorical way, describing the world as flat in terms of commerce and competition, in which all competitors are of equal opportunity and footing. A similar shift of perception is required from firms if they opt to become competitive in a global market where regional, historical, and geographical divisions are increasingly becoming irrelevant. Outsourcing is one of these shifts, in which a firm decides to outsource non-core functions to an outsourcing partner.
Outsourcing as a New Market Trend
This paper agrees with the position that core competencies should be kept in-house by firms while everything else can be outsourced to suppliers. Outsourcing, which means, “certain tasks go elsewhere,” allows companies to split their services and manufacturing activities into components, each of which working in the most efficient and cost-effective manner (Friedman, 2005). White and Tastle (2006) describe outsourcing as “the use of resources outside an organization, which generally delegates non-core activities to an external identity.” The outsourcing concept has been around for quite sometime, even during the American Revolution where Hessian mercenaries were hired to fight for them. This paper believes that in the firm’s point of view, much work may be tremendously accomplished if it would focus its resources and attention on its core competencies and unload itself with non-core functions that may be undertaken for it by suppliers. At present, outsourcing continues to change the way companies operate around the world, seeing through a new wave considered somewhat different, with IT jobs making up the first major wave of outsourced labor. More companies are sending jobs abroad indicating the flow of business process outsourcing, such as payroll jobs, secretarial jobs, and other jobs of “back end office” nature considered non-core functions (Grover 1996, p. 89). The Ross Perot is a living example of a firm that outsources its payroll generation, management, and reporting to an outside organisation so that it may focus its full resources and attention on core activities alone (ibid). At present, the attempt by organisations to manage their resources effectively create an option in which they may outsource at least parts of their functions, such as security services and custodial services which may be outsourced to a local outsourcing company. The concept of outsourcing involves the transfer of a non-core task from one company to another with an objective that such activity will be performed more effectively and efficiently. It may be inferred that the viability of outsourcing is so effective that not only big corporations resort to it, but individuals as well (Arnold 2000, p. 23).
Through outsourcing, firms can maintain core competencies while everything else can be delegated to an outsource organisation, thereby making the loads of work lighter. It may be inferred that non-core functions, although important in themselves, are considered unnecessary functions which the firm can delegate to a specialised outsourcing partner. Aside from focusing on resources that deal with core competencies, cost cutting had been one of the major benefits that this set-up has generated. Preponderance of jobs is another good benefit of the outsourcing trend, exemplified by the flocking of American companies in India and the Philippines for technology support, as well as in Singapore, China, Korea, and Vietnam for industrial workers (White and Tastle, 2006). The practical benefits of outsourcing for firms include reducing and controlling operating costs, improving company focus, gaining access to world-class capabilities, accelerating reengineering benefits, risk sharing, and cash infusion (Outsourcing Institute, 1998). Factors for successful outsourcing need to be recognised by firms in order to maximise its usage. These factors include management support, alignment to business strategy, culture, infrastructure, contracts, strategic partnership, governance, and economics (Fjermestad and Saitta 2005 in White and Tastle, 2006).
This paper posits that the era of globalisation has created significant roles for foreign and intra-firm outsourcing for tasks that used to be managed by mother organisations. Several firms have been attracted to low-cost foreign outsourcing that act as a multinational enterprise or as an independent company (Bardhan and Jaffee, 2004). The process of outsourcing is not only within the domain of allowing firms to focus solely on its core competencies but also involves the dissolution of geographical, regional, and historical barriers into cooperating bodies toward participatory business (Friedman 2005). With the global market now requiring people and nations to function in leverage, a flattened arena of market availability and functioning is shared by different countries regardless of economic status, regional origin, and culture. It is apparent that outsourcing involves an eventual necessity in the market development of the globalised market, and riding on this so-called bandwagon would allow a firm to be more competitive as it is able to manage its core resources more efficiently.
It was already implied that companies opting to outsource non-core functions seek to realize benefits and address the issues of cost savings, cost restructuring, quality improvement, knowledge, contract, operational expertise, capacity management, risk management, and focus and core competency (Norwood, et al., 2006). It is a general rule that all companies aim for profit, and one effective way to ensure this is by decreasing the labor costs of a product by employing low-wage workers, which may be done through outsourcing. Many U.S. firms are now contracting out in developing countries in which workers there may be paid lower than their American counterpart. Despite the rather lower remuneration that those from outsourced companies receive a view that supports the process holds that more people benefit from it through employment.
Through outsourcing, maximum value may be adopted by organisations by concentrating on pre-production activities that highly involve research and development. Likewise, they may also focus on post-production activities such as marketing, distribution, and sales, which are altogether linked (Quinn and Hillmer, 1995). In ensuring a close link with the outsourced company, a firm develops an on-site expatriate program to coordinate with its foreign-based suppliers and may opt to outsource the advertising component of its marketing program (ibid). This same stance is adopted by Nike, Inc. in its outsourcing strategies, allowing the company to drive up high on top of the recognition scale.
This paper conjectures that a firm’s well-developed core competencies provide formidable barriers against present and future competitors that seek to expand into the company’s area of product interest. This protects the strategic advantages of market share in which the firm is positioned, made possible by making non-core activities not part of its management functions through outsourcing. We may infer that the greatest leverage of outsourcing is the utilization of external suppliers, as well as product innovation, investments, and specialized professional capabilities. Hence, an organisation’s adoption of outsourcing strategies tends to decrease management risks, shortens production cycle, and creates better responsiveness to customer needs, resulting in improved productivity and recognition scale (Grover et al. 1996, p. 91). In this way, a firm is able to leverage its resources; thus supporting the position that the firm should keep its core competences in-house while everything else can be outsourced to suppliers.
In a nutshell, the stance to outsource a firm’s non-core activities enables it to concentrate its resources on a set of core competencies that result in providing unique value for customers and achieving definable preeminence for growth. Several firms have already resorted to outsourcing their non-core activities including several traditionally-considered areas deemed integral to organisational functions for which a special capability or a critical strategic need are viewed as lacking (Lee 2001, p. 324). Apparently, firms who are concerned with developing and maintaining competitive advantage have utilized outsourcing as a basic business activity.
The dissolution of historical, geographical, and cultural divisions caused by globalisation is currently viewed as a process that allows important non-core company tasks to be transferred, such as telephone customer service, human resources management, or settlement of accounts of bank transactions. Outsourcing enables complete reconstruction of organisational structures through reduction of chains of vertical links as both a cause and effect of globalisation (Friedman 2005). This reconstruction of organisational structures is considered in this paper as managing firm boundaries by understanding core competencies and having all else outsourced to suppliers. This position is only congruent to making nations and organisations be leveled in the global market, destroying all barriers, such as race, culture, history, regional affiliation, and geography.
As already mentioned, other beneficial effects of outsourcing non-core activities are improved productivity and profitability, ability to focus on core-resources, improved competitive advantage, and improved market competitiveness. These are undertaken by maximizing revenues, minimizing expenses, obtaining access to specialised skills and services resulting from concentrating more on the core business. The tangible results are seen in saving on money, time, and infrastructure (Grover et al. 1996, p. 91).
Indeed, if managers understand what their core competencies are and maintaining the firm’s focus on these while having non-core activities outsourced, the firm obtains the same services with the same level of quality for a much lower cost. This cost-advantage allows firms to outsource important but non-core tasks, such as call center services, teleradiology, medical billing, and so on. Reaping the benefits of outsourcing as a primary aim of a firm allows it to save up to 60 percent of its total costs (Lee 2001, p. 330).
Thus, outsourcing the non-core tasks leads the firm to see a big increase in its profits, level of quality, productivity, business performance, and business value. All of these are made possible since when a firm outsources, it can save on time, money, effort, infrastructure, and manpower for activities that used to be incorporated in the overall business structure (Lee 2001, p. 332). However, with the core activities being solely handled by the organisation, the unnecessary tasks that may clog the product and/or service delivery may be removed through outsourcing. Thus, managers may not be burdened with unnecessary fixed investments, changing or maintaining infrastructure, investing in expensive software and technologies, and training costs since they need not invest in manpower anymore. While all of these transpire, the firm can in turn obtain expert and skilled services by finding an outsourcing partner who is specialised in such business process and can thus provide more proficient services (Arnold 2000 p. 24). Outsourcing can give managers and firms this advantage since if they perform all these business processes in-house, specialised and skilled services may not be provided proficiently.
Therefore, the organisation will be enabled to concentrate on its core business by outsourcing its non-core functions, and an important aspect of this is that employees can be put to better use and a huge growth in its core business may be seen eventually.
A firm need not burden itself with all the core competencies and non-core functions commonly associated with its operations. Rather, outsourcing is a practical and viable resort to improving competitive advantage while focusing solely on its core business. With his in view, this paper agrees that managers need to understand and keep in-house their core competencies and have the non-core functions of the firm be outsourced to an outsourcing partner. This would mean focusing only on the core functions needed in accelerating productivity. This stance would spell savings, increase in profits, and improvement of the level of quality, productivity, business performance, and business value on the part of the firm, while preponderance of jobs on the part of the outsourced country. Trailing this path of outsourcing strategy is hence beneficial to organisations.