The relationship between outsourcing and technology, outsourcing and the global crisis.

by thuynguyen_195 (student)

University Degree Business and Administrative studies

1) Discuss how the changing technological environment present threats and opportunities to the outsourcing of production from any single country of your choice.

Over the last decades, there have been huge technological changes with hundreds of thousands of innovations being introduced and implemented in our lives. It is unquestionable that this changing environment has had great impacts in the way companies conduct their business worldwide. Outsourcing of production, a very popular business practice in the US, is also under the influence.

Firstly, it seems that the increasing pace of new technology has brought about important opportunities for the growth of production outsourcing of American companies in recent times. Shortening technology life cycle has made companies afraid of investing in obsolete technology, thus stimulating those to increase outsourcing instead of purchasing new machines and producing inputs in-house (Ann Barter et al, 2010). By outsourcing, companies can take advantage of latest technology from suppliers without incurring large amount of sunk costs. Furthermore, it is noteworthy that higher probability of technological change could be indicated by a larger number of patents issued (Jaffe and Trajtenberg, 2002). According to this theory, US has always been a leading market of rapid technological changes with the largest share of patents granted by US Patent and Trademark Office to OECD countries (55-57%) stabilizing from late 1980s (OECD, 2004). Such a highly rapid technological changing environment has induced a large number of US companies to increase their outsourcing activities. A report executed by the Wall Street Journal in 2011 revealed that over the last decade, U.S. multinationals have cut their workforces by 2.9 million people and alternatively outsourcing more than 2.4 million jobs overseas (Zaid Jilani,2011).

In relation to the changing of technological environment, Elisabetta Magnani (2006) found out evidences to back up the conclusion that technological diffusion resulting from R&D spill-over effects is also one of the determinants for the growth of outsourcing activities in the US. US is always characterized as a R&D center of the world and there exists a number of technological clusters such as Silicon Valley (Battelle and R&D Magazine, 2011), which helps to diffuse technology knowledge extensively, making internal and specific skills become general ones overtime. This opens the possibility of outsourcing because companies can rely on specialized workers in outside firms even for complicatedly designed products. These external suppliers, by achieving economies of scale, can provide inputs for their customers with a cheaper price. A very interesting correlation was also pointed out in this research is that when technological diffusion increases 10%, outsourcing will accordingly rise 2.6% to 4.1% depending on the specification (Elisabetta Magnani, 2006).

Nevertheless, technology diffusion could also be regarded as a drawback for the outsourcing of production under the threat of losing know-how. Shifting in-house production to external producers increases the likelihood that US companies will progressively lose their knowledge and skills of being experts in their areas. Outsourcing also means that information sharing to suppliers becomes inevitable; making the concern of technology leakage becomes a hindrance to outsourcing decision of many enterprises with high technology level (Mariagiovanna Baccara, 2004).

Another aspect of technological change which also brings great potential development to outsourcing activities is the great progress in ICT as well as logistics and transportation industry. Advances in the use of multi-modal transportation, improved highway system, port facilities and containerization standards have markedly reduced the shipping time and costs, and simultaneously increased the security and reliability of shipments (Peter Dicken 2011, p.85). It is also difficult to ignore the breakthrough advances in ICT such as computers, mobile devices, email or video conferencing which have made possible the instant communication between partners all around the world. There are also many other modern technologies which tremendously help corporations control their flow of goods more effectively. For example a tool called Electronic Data Interchange (EDI) which facilitates the exchange of business information and the automatic tracking of orders is now used widely in many industries.

These technologies have enabled many textile, automotive or electronics producers in USA to manufacture “global products”, with various components purchased from different parts of the world at the most attractive combination of cost and quality, yet stilled managed to arrive timely with the right quantity. For instance, apparel industry in US has established outsourcing practices for years; they order thousands of garments and accessories from factories in Asia and Central America every year (John Williams, 2005). Regarding electronics industry, a small example of Apple’s Iphone mobile with its various components such as flash chips, video processors or touch sensitive modules are actually outsourced to 30 companies on 3 continents (Texyt Staff, 2007).

However, it is of critical importance that enterprises do not underestimate threats that these changing technologies could bring to their outsourcing operation. Rely heavily on supply from off-shore providers for goods in the peak period of traffic congestion or in the time of telecommunication network errors could lead to delivery delays and products unavailability, thus possibly disrupt the supply chain and eventually ruin businesses. For instances, significant delays in ports of Long Beach, Oakland or Seattle recently have played havoc with the lead times and inventory levels of many apparel companies in US, when they have to wait weeks for ...

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Currently, there is a trend of anti-outsourcing emerging in the US, due to the criticism of high unemployment rate as well as the government supporting policy of bringing jobs back to USA.

However, outsourcing is believed as an inevitable trend in globalization and is forecast to resume when the US economy recovers from the recession (A.T. Kearney, 2011).

2) Discuss the impact of the current economic global crisis upon the operations of outsourcing by ONE multinational company.

Sony Corporation is well-known for its top consumer electronics products all around the world. With high spirit of innovation and quality reputation, customers were once willing to pay a premium for Sony electronics line. However, the economic global crisis has placed a bad impact on its operation and financial results. In the downturn, consumers worldwide cut back their spending on high-end products, thus Sony witnessed a huge decline in demand for their electronics devices (Indu P, 2010).

In the economic crisis, Sony also confronted with difficulties deriving from foreign exchange market. In 2008, the yen appreciated to its strongest level against the dollar in 13 years (Andrew Wood, 2008).Yen’s continuous strength hurt Sony by making their products more expensive overseas, eroding its total revenues from exports. At the end of fiscal year 2009, Sony reported an annual loss of 98.9 billion yen, its first annual loss in 14 years (Indu P, 2010). Also from this year, 2009, Sony took a major shift from an in-house production approach to outsourcing with the aim of reducing manufacturing costs (Jeffrey Powers, 2011). It could be said that, therefore, the economic global crisis has made a turning impact upon the outsourcing operation of Sony, because outsourcing was considered as a serious break of its traditional practices.

After serious financial problems, Sony’s CEO Howard Stringer decided to undertake a cost-cutting plan in their electronics devices, closing 8 manufacturing sites and at the same time outsourcing television division was among the top of his to-do-list. The TV department constitutes for 10% of Sony's overall sales, but it experienced real problem with 3-year consecutive losses amounting to 2.3 billion yen by the end of the fiscal year 2008 (Kenji Hall, 2009).

The outsourcing process of Sony’s TV division experienced a progressively growing path during the crisis. In 2009, Sony only outsourced its small and mid-sized TV sets, and still made ultra-thin high-end TV totally in house to avoid its cutting-edge innovation being leaked to competitors. In 2010, Sony increased its outsourcing volume of LCD panels installed on the BRAVIA TV range from 30% up to 50% to Taiwanese manufacturers (Vincent Teoh, 2010). In 2011, a Taiwanese daily newspaper reported that even the Sony Bravia’s design was handed to another manufacturer in Taiwan. This step means that eventually customers will buy a TV with Sony brand name, but actually it is assembled and designed by another company. Hence it is obvious to see that outsourcing activities in Sony have been developed both broadly (growing volume from 30% to 50%) and deeply (from outsourcing separate components to TV design) under the influence of economic crisis with the ultimate goal of reducing costs and enhancing competitiveness.

Outsourcing TV design in Sony also indicated a new trend in the outsourcing practices is that outsourcing is now all-encompassing and not only focused on one simple activity or function. Some researchers have named this as KPO (Knowledge Process Outsourcing) -a new practice of delegating high-added value tasks such as products design or R&D to outside vendors. However, firms like Sony should be very careful in choosing the right KPO suppliers as a reckless decision may end up a disastrous consequence of losing confidential business information as well as ruining its reputation in case of bad offered quality.

Furthermore, in 2011, switching from being controlled generally by logistics department, the TV business of Sony was divided into 3 divisions: the LCD TV, Outsourcing, and Next Generation TV (Reuters Report, 2011). The step of creating a separate outsourcing division holding clear responsibility and accountability meant that Sony aimed to achieve the best expertise in outsourcing, which is playing a greater role in business operation of Sony.

Additionally, for a stronger orientation towards outsourcing, Sony is reducing their investment in captive models such as alliance, partnership or joint ventures with other companies. By doing this, Sony can free up their internal resources such as capital and human power to concentrate on other organizational targets. Last year, Sony sold nearly 50% of its stake equity in a joint venture for LCD with SamSung Electronics to this South Korean TV maker (The guardian, 2011).

Not only outsourcing manufacturing process, in 2010, Sony also decided to outsource some of its back-office processes (BPO), namely a part of the human resources and accounting operation services to IBM Japan (Sony News Releases, 2010). This can also be regarded as a necessary step of Sony according to its structural re-organization efforts in the time of global recession. Outsourcing non-core HR functions such as human resources service, business travel and insurance operations is expected to enable HR executive in Sony to free themselves from trivial administration and low-value tasks and become more involved in strategic business planning. Moreover, due to the development in technology and communications, a company like IBM Japan with their specialty could offer Sony a very reliable and prompt accounting service.

In conclusion, from a new practice in 2009, outsourcing is being recognized more favorably as an effective way to help Sony streamline their manufacturing process, focus on core functions and thus reduce costs and improve their flexibility in economic instability.

3) With reference to the Euro Zone, explain how the contemporary financial crisis might affect the future development of global outsourcing?

The contemporary financial crisis which started in 2007 has been considered by many economists as the worst one since the Great Depression in 1929, and it is still active at the present time. Most recently, the Euro Zone’s public debt crisis ignited from the serious indebtedness of Greece has marked the concerns not only the solvency of banks but also the solvency of governments. A fear of the single currency’s collapse which could lead to adverse consequences for the global economy such as sovereign and corporate default, collapse of the banking system and international trade also looms large (DK Matai, 2011). In a scenario which is characterized by the lack of liquidity, the instability of the financial services and austerity programs enacted by the governments, it is unquestionable that many enterprises headquartered in the Euro Zone now have to change their outsourcing behaviors as an answer to the crisis. Furthermore, as Euro Zone is a major business partner with the rest of the world, this changing will also affect the future development of outsourcing operation globally.

Most noticeably, the financial crisis has accelerated and is likely to increase the adoption of outsourcing globally. recently published their report indicating that global outsourcing is predicted to experience a strong growth of 15%-20% in 2012 (, 2012), and this trend is even believed to continue growing during the next couple of decades (Clayton Browne, 2012). Unlike UK and North America where outsourcing has been a business practice established for many years, in the Euro Zone, even with 2 most strong economies, namely Germany and France, outsourcing had not been viewed favorably due to pressures from trade unions and employees. However, the crisis has made many of those overcome their fear of change to proceed with outsourcing to reach cost-reduction target (Norton Rose Group, 2011). A small illustration is Xerox France, which used to maintain a services center for accounting and back office functions centrally managed in Dublin before the year 2000. However, in 2008, they decided to close the centre and select IBM as an external supplier for this service (Miguel-Ángel González Gisbert, 2010).

Moreover, unlike before, now companies pay more attention to “total cost” of their outsourcing decisions, not only obvious cost such as labor or transportation one (Knowledge@Wharton, 2011). This is one of the important factors which make the destination of outsourcing changing. The combination of rising cost, high-profile scandals of outsourcing suppliers (collapse of the leading Indian IT vendor Satyamin in 2009) and project delays have made distant off-shoring destinations less compelling to multinationals. Near-shoring trend is likely to emerge stronger than ever, with similarities in time zones, languages, cultures and many added values from suppliers.

According to a study by the global management consulting firm A.T. Kearney (2011), near-shoring countries outside the Euro Zone which were once too expensive now become more attractive options and in fact, some of these countries have climbed up in the A.T. Kearney Global Services Location Index™. For instances, in Central and Eastern Europe, Poland moved up 15 places to 24th out of 50 countries evaluated, Bulgaria and Romania also have a good positions with 17th and 25th respectively. Moreover, in Northern Europe, Estonia, Latvia and Lithuania have also made their cost level become more competitive, when their governments and private sectors slash wages by average 35% and also reduce the expenditure as a consequence of the financial crisis. Additionally, many Euro Zone-based companies which produce high-end and customized products may find great advantages of near-shore outsourcing as it helps them to respond rapidly to changing customers’ needs.

Besides that, Business Process Outsourcing (BPO) is also expected to increase significantly in the future. Before the financial crisis, worldwide revenues for BPO services was $140 billion (2005), however, it is forecast by the Outsourcing Unit at the London School of Economics to reach over $230 billion annually in 2013 ( Martin Edward, 2010). This trend could be explained that in the time of austerity measures implementation and limited budgets, companies need to focus on their fundamental functions and outsource the non-core competencies (back office processes) to be more efficient. Among different sectors, the (banking, financial services and insurance) is likely to lead BPO transaction activity as there exists a huge potential with a number of services such as transaction processing, customer service, credit card fraud management…In fact, the financial services industry, comprised of banking, capital markets and insurance, has been the leading adopter of outsourcing services with 40%- 45% of worldwide global sourcing (Avalon Global Research, 2009).

The past five to six years has also seen outsourcing activities shifting from single supplier to multiple ones (Norton Rose Group, 2011). In other words, financial crisis has made multi-sourcing a new trend which provides great flexibility and helps to reduce risk of too much dependency on one vendor. With reference to the Euzo Zone, flexibility and risk management are definitely valuable in the time of financial uncertainty, when there is increasing concern about financial viability and performance capability of partners. According to IT Outsourcing Intelligence Report 2011, a large number of enterprises surveyed based in the EuroZone such as Finland, Austria, Germany, Cyprus or Malta prefer multi-sourcing over single-sourcing (10%-70% higher).Nevertheless, companies should be clearly aware that managing multiple vendors is more complicated and time-consuming, thus it is important for managers to understand outsourcing targets thoroughly as well as evaluate critically to choose the right partners for their projects (D Satish and Shishir Kumar, 2005).

In brief, the financial crisis has affected the outsourcing practices of many companies based in Euro Zone and is asserting its impacts on the future development of global outsourcing. Adoption of outsourcing is believed to increase, with the emerging trends of near-shoring, the development of BPO and the use of multiple-vendors system.

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The relationship between outsourcing and technology, outsourcing and the global crisis.

This is a preview of the whole essay

A.T. Kearney (2011), Offshoring Opportunities Amid Economic Turbulence, [Online] available at(accessed 19th April 2012).

Clayton Browne (2012), , [Online] available at (accessed 19th April 2012).

(2012), the Everest Group 2012 Outsourcing Market Predictions Summary, [Online] available at (accessed 19th April 2012).

DK Matai (2011), What Would Be The Consequences Of A Eurozone Break-up? [Online] available at (accessed 19th April 2012).

Jason Heavey (2011), Cloud Computing: Secure or a Security Risk? [Online] available at(accessed 19th April 2012).

Jonathan Sutton (2011), Upping Outsourcing, Soon Sony May Not Even Design Its Own Bravia TVs, [Online] available at(accessed 19th April 2012).

Jeffrey Powers (2011), ,

John Williams (2005), Supply chain threats fray fragile threads: making garments abroad slashes the price of labor, to the delight of shareholders, [Online] available at (accessed 19th April 2012).

(2009), Can Outsourcing Save Sony? [Online] available at(accessed 19th April 2012).

Lisa Wang(2010), Sony to increase outsourcing to Taiwan, [Online] available at (accessed 19th April 2012).

Sony News Releases (2010), Sony to Outsource a Part of its Business Processes to IBM Japan,[Online] available at(accessed 19th April 2012).

ZaidJilani (2011), , [Online] available at(accessed 19th April 2012).

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