Outsourcing and Insourcing, Research Paper Example

Abstract

Outsourcing is a concept in business that has over time been implemented by organizations to save on costs as it enables the company to focus on its competencies by assigning its non-core functions to outside providers. Normally, outsourcing providers may be residents of another country, and this has been attributed to cause loss of jobs. On the other hand, insourcing is a modern concept in organizational management that is considered a better option than outsourcing. This is because it is seen as a better choice in management control and job creation as compared to outsourcing. It is utilized mostly in manufacturing industries where labor and services are hired from outside organizations with intent of lowering tax and cost. Insourcing is predominantly employed by companies that are discontented with outsourcing.

This option is viable where organizations fill positions of employees for a short period of time on a temporary agreement. The purpose of this paper is to analyze an IT service component that was outsourced by Volvo Car Corporation. It will further seek to evaluate the strategic rationale that led to the informed decision to outsource the service. The paper will again analyze IT leader role in IT service component, analyze methods through which IT leaders can bridge the communication gap between the executive and the role they play in outsourcing and insourcing. It will further asses the state of the organization based on the number, experiences of personnel and financial analysis, and finally evaluate change management response level.

Introduction

It is important for organizations to choose sourcing aspects after a careful and informed analysis of their aims and objectives; otherwise, the option chosen may not serve any good to the organization in question. For instance, a poorly defined objective may result into a wrong selection of sourcing and the consequent loss in gains. The main aim of any business is to make profits through cost reduction and increased economies of scale, it is therefore paramount to look at the advantages and disadvantages of outsourcing and in sourcing so as to enable organizations make informed decisions. However, Insourcing may be seen as a simple option, but it is a complex option to implement. This is particularly the case with multinational organizations such as Volvo Car Corporation. It only works best where investments are temporary.

However, if insourcing is carefully implemented it can create a strong team of a skilled workforce over time. It can as well help small business enterprises that may not have the ability to outsource. On the other hand, outsourcing is an option where a business requires cost cutting and at the same time maintain or obtain qualified and experienced personnel to run the affairs of the organization. In addition, outsourcing eases access to skilled personnel, sets of resources and systems that may not be availed by the insourcing option. It is worth noting that whatever option an organization chooses to go for, the overriding rule before an agreement is reached is a careful assessment of the provider to ensure that only quality providers are employed for the service.

Body

Volvo Car Corporation encountered extra costs after a decision that saw the company outsource its entire IT component (Dibbern, 2004). The study into what informed this step is conducted in an explanatory manner by exploring elements and means of qualitative approach analysis. Before the final analysis of empirical findings is explored, theories related to outsourcing and the challenges that saw the reversal of outsourcing is decision investigated. The development of information technology (IT) has seen rapid growth in the global related services.

Large companies operating in the developing world today are able to access global information and enjoy offshore services. Services that emerged with IT services such as electronic payroll systems and research services are receiving tremendous recognition due to their contribution to the corporate world. In addition, offshore outsourcing was driven by companies’ desire to remain competitive in a dynamic world market (Gereffi et al. 2009; Johns et al. 2006; Kakabadse & Kakabadse, 2002). This means that the emerging trends come with interlinked concepts such as business process outsourcing. It is imperative to note that most outsourced projects have failed to yield the expected results in the aspect of cost reduction. In fact, the cost after outsourcing might increase instead of reducing.

This is because most companies fail to achieve their targeted cost savings by failing to include additional costs incurred in the contract. Additionally, the major issues pertaining to outsourcing services is that the supplier or vendor and the client are from different nations if not continents; therefore, factors such as distance, culture and language disparities affect the project that is outsourced. This consequently affects the financial gains of the offshore projects. It is important to note that Business Process Outsourcing is a vital step to take if a company has to achieve a competitive advantage. Cost reduction is a key idea to any outsourcing venture. Based on the study of Volvo Car Corporation as one of the multinational companies that first opted for an outsourcing strategy and then shifted to insourcing strategy, something must have gone terribly wrong with the first strategy. Furthermore, looking at their history of outsourcing, it is evident that such decisions have been reached by the corporation severally since 2008. This may be attributed to the financial crisis that rocked the corporation in 2008, and this becomes our centre of interest and a reason to investigate.

Volvo Car Corporation is a multinational company that was founded in 1927. The corporation was then sold to Ford Motor Company in 1999 and later acquired by Greely Automobile, which is the current owner. When Volvo Car Corporation was acquired by Ford in 1999, Volvo lost its IT service provider. The service was outsourced from East Asia, which forms the basis for our discussion. The initiative of outsourcing began in 2008 at the start of automobile crisis that rocked the company.

Transition Stage

The service manager responsible for ensuring that the outsourcing team offered the services as per the standards set per Volvo Car Corporation was mandated to give direction to the executive. Under the mandate bestowed upon him, the manager in charge had to appoint and assign an IT specialist (pilot) to educate the East Asian team on the workings of the system. Company resources were assigned to facilitate the training of the East Asian team about the business processes. After a careful analysis of the system, the IT system that was used at Volvo Cars Corporation was transferred and installed at the offshore target. The two parties communicated with ease using English, so there was no language barrier. Both the client and the vendor comprehended the language used.

Operating Stage

In an attempt to control the East Asian teams’ efficient capabilities as per the requirement of Volvo, the manger held control of weekly data. The team was interviewed to test their efficient capabilities. Resources were invested to facilitate communication and weekly interviews with the vendors. Every detail of the system was explained to the East Asians, as they wanted to ensure that the developed system was up to the expected standards typical of what was desired by Volvo Cars. Though cultural differences became a hindrance, the managers managed to control the operations. Nevertheless, a stunning reality about the Asians as admitted by the manager is that they were too humble and were unable to take their own initiatives to come up with propositions for improvement. It was also noted that the geographical location between Sweden and East Asia, which is the location of the system, has a difference in time zones of up to 7 hour. It therefore became complicated to hold video conferences with the vendors, as they could only communicate during specific times of the day. The only reliable methods of communication were through emails or face-to-face communication with our agent during visits to East Asia.

Several departments that were interviewed gave evidence that Volvo Car Corporation encountered immense challenges in terms of knowledge transfer costs. These costs are time, effort and resources. The extra costs incurred can be viewed as having been spent on web-based design cost and face-to-face costs. The decision by Volvo to revert back to insourcing as opposed to outsourcing that they had adopted can be attributed to matters related to costs. First, Volvo faced additional costs of educating or knowledge transfer through staff education when the revenue caused loss of implicit information. The turnover occurred as a result of external events. However, the employees who had the opportunity to gain tacit knowledge became reluctant to accept an invitation to share it with other employees resulting in the need for the corporation to conduct more training and consequentially increase the cost of education. This main reason behind this employee behavior was the fear of losing competitive advantage over others. Accelerated expenditure was also realized due to the difference in the geographical location of East Asia and Sweden. While educating the vendors, the company had to travel to far flung locations leading to the need to allocate more resources to conduct the training. This cost could have been avoided had the vendors been located in close proximity. In addition, problems that occurred during training that are related to distance could have avoided, hence training could have taken a relatively shorter time. Since problems related to IT transit over a long distance proved impractical, educators had to shift to face-to-face communication. This way, education costs aggravated to an unmanageable level necessitating a shift from outsourcing to insourcing.

Apart from education costs, Volvo experienced a high-level demand in terms of system specification requirements. In addition, their dominant collectivist culture influenced their way of thinking, which affected the working processes by slowing down the pace of development. Their demand for high-level detailed specifications showed that indeed Asians have a high level of uncertainty evasion. In some cases, these Asian vendors did not acknowledge the fact that there were problems during the implementation process. In fact, they tried to avoid confrontations caused by Volvo Car managers in way that they evaded conflicts. The costs incurred for purposes of reassurance were immense. Throughout the project, the East Asians failed to openly say “no” when they really meant so. Whenever prompted to respond to the supplied data, they would always say yes due to their cultural standing and beliefs. This cultural weakness gave Volvo managers a hard time to understand them. It is worth noting that managers at Volvo were able to a small extent express opinions on how to make the process efficient.

Other costs incurred include costs on communication spent on other dimensions such as directional costs, relationship costs; inter linkage costs, administrative costs, coordination costs just to mention a few.

Conclusion

Cost reduction is an important aspect in outsourcing without which such ventures should be avoided. Specific challenges of outsourcing should be viewed as potential challenges that can easily bring down companies. IT leaders therefore, need to create a good rapport with the executive in order to bridge communication gaps and misunderstandings of the possible implications in outsourcing options. It is therefore paramount to note that there was a possible failure by the IT department to inform the management at Volvo Cars Corporation of the possible expenses. As a matter of fact, expenses incurred in communication, education and training of experts in addition to the time wasted in the implementation process are all mistakes that would have been avoided if the management had thoroughly researched on the implications of outsourcing from East Asia. Finally, if success is to be realized, the units that are outsourced such as IT in this case should be a combination of focus on core competences and cost efficient purposes, as well as high commitment in the outsourcing process. In addition, if it is involved in the total company strategy, then more decisions that are more profitable should be made for both the main and the outsourced unit.

References

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Hira, R., & Hira, A. (2008). Outsourcing America: What’s behind our national crisis and how we  can reclaim American jobs. New York: AMACOM.

Schumann, M. (2007). Insourcing – Outsourcing. Mu?nchen: GRIN Verlag GmbH.

Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2007). Outsourcing  Management information systems. Hershey: Idea Group.

Van Haren Publishing. (2009). IT Outsourcing: An Introduction. Van Haren Pub.