Hargo Utomo
There are many reasons why a business manager decides to outsource a particular function or job to another party. These reasons may be efficiency, a cut in capital expenditure, an improvement on managerial skills and competence or even matters related to effective resource management.
Outsourcing is currently like a very effective mantra allowing managers to obtain added value in their business through the re-arrangement of a business process at the level of either corporation or function.
Outsourcing has been adopted as an alternative approach to overcome problems related to limited resources not only in terms of processing or engineering activities, which are technical in nature, but also in other areas, which are managerial in character, for example, in financial and accounting areas, human resources, customer service, supplies, data management and logistics management.
Furthermore, the latest report issued by the International Data Corporation (IDC) in 2006 also shows that outsourcing activities, particularly when related to information technology in the Asia-Pacific region, has enjoyed an increase in terms of volume and monetary value. In the last decade, countries in Asia, particularly India, the Philippines and Malaysia, have enjoyed the blessing of global outsourcing because these countries have become the destinations of multinational corporations in job transfers.
Multinational corporations are interested in outsourcing their jobs to Asia because of, among other things, the classical reason that these countries supply cheap labor with satisfactory competence and at the same time serve as a highly potential market for the products turned out.
Aside from the above considerations, which are related to the market and cheap labor, another reason of no less significance is the diligence of Asian workers in doing their jobs and their ability to speak English.
Therefore, many success stories about outsourcing have come from these regions and some have even become specific anecdotes in the literature of management. Nevertheless, it should also be borne in mind that in reality there are certain outsourcing practices in the manufacturing or service areas in Asia that have had other results but have not been exposed to the public.
It is not the intention of this article to condemn outsourcing practices that have been adopted by many business players in Indonesia, in particular, and in Asia in general. Rather, it is an effort to re-digest several aspects that have until now usually escaped attention in public discourses on this realm.
More specifically, the following tries to expose part of the crucial aspect of outsourcing caused by divergence in the strategic orientation in outsourcing practices. This phenomenon indicates a paradox, which, in turn, prompts a debate related to the management of outsourcing risks in a global business.
Outsourcing indeed carries risks.
Managing the risks of business conducted under an outsourcing pattern is a complicated process. The complexity of the matter arises not only because some of these risks are systematically embedded in the format of an outsourcing assignment, which is collaborative in nature, but also in the variety of aspects operationally related to many parties.
Easing or lowering of the level of confidentiality of information, a change in the job scheme and the transfer of local responsibility to partners and suppliers are unavoidable once one decides to adopt outsourcing practices.
In relation to the confidentiality of information about financial and human resources matters, for example, what should be carefully observed is how to convince the partners not to disseminate this sensitive information for the sake of monetary gain.
Business risks of such a systemic nature should, of course, be calculated and given an optimum portion of attention before a decision to outsource jobs is made. Steven Bragg, in his book titled Outsourcing (2006), discloses three important areas that one must observe in this respect, namely (1) the risks in relation to the choice of a unit, area or function to be outsourced to another party; (2) prudence in negotiation and the determination of contract clauses regarding a guarantee of the service level agreement and (3) control mechanism in the process of performance achievement and termination already agreed upon.
An outsourcing mechanism procedure is relatively standardized and has not undergone change over time, but how these areas referred to earlier can operationally be properly dealt with is more contextual in nature. This means that prudence on the part of a manager in determining the scope, time setting and place is the determining factor in managing the risks of outsourcing.
Therefore, the social, cultural and political factors should be considered before one makes a decision to outsource jobs.
What are the relations of mutual trust and outsourcing risks?
Some people believe that a decision to outsource jobs sets aside the humanitarian element because it is based on a pragmatic consideration in transactions. The magnitude of the costs of outsourcing relations is often considered of less significance because of the mutual trust shaped up by the partners involved.
The question that will arise is how it is possible that mutual trust can be used to control the risks of a business conducted under this pattern. It is true that it requires more than a single answer to this question to be able to meet the expectations of all parties.
The aspects related to the change in the orientation of management has become a critical issue, which, in turn, will determine the continuity of a business relationship in an outsourcing scheme.
To many businessmen, the popular phenomenon of outsourcing is still construed as a business practice using an ordinary sub-contracting pattern. A business decision is made solely on the basis of the fulfillment of a transaction-related business need with the elements forming the bond of institutional emotion being set aside.
The adoption of this pattern will not allow the inter-institutional working relationship established to fully reflect the balance of position in a proper bargaining position in doing business because one party may have a more dominant role over the other. There is indeed nothing wrong with this transactional relationship in doing business but to ensure that a business relation lasts a long time, the nurturing of the bond of institutional emotion needs special attention.
Much of the conviction that outsourcing activities will bring in benefits is based on the capability of a manager in building the trust in a particular individual or institution to undertake a job mandated to him or it.
Therefore, a business player can focus more on the activities of his core business and transfer non-essential activities to another party. Building trust in partners is closely linked with the capability of the managers to understand a series of business processes and the creation of a value they desire.
Managing outsourcing may be likened to first entering married life where mutual understanding is needed and alignment can be maintained on the basis of a collaborative spirit to reach a performance level expected.
Dr. Hargo Utomo is deputy director of Academic and Student Affairs of Master of Management Program at Gadjah Mada University.
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