Research on the Outsourcing Strategy and the Countermeasure of China
Recent years, international service outsourcing has developed rapidly with the globalization and the development of information technology. Many companies choose it as a strategy to improve their core competitiveness. It also has promoted a new round of globally industrial transfer. As the pioneers of this industrial transfer, MNC have gained huge benefit, while China is becoming one of the major destinations when MNC choose to do service outsourcing. For China, who wants to develop her service industry, this situation brings opportunity and challenge. So as to utilize our own strength and catch this perfect chance, the Chinese company should fully understand the methodology and strategy of MNC and be ready to receive the outsourcing program generated from the MNC. Service outsourcing not only brings opportunity to our enterprise, but also brings our country the chance to promote the industrial structure and lead to the healthier development. Initially, this article uses comparative advantage theory, transaction cost theory, core competence theory, value chain theory and supply chain theory to explain the practical reason, which set up a theory platform for the whole article. On this basis, this article clearly defines the concept of outsourcing and explain relative concept. Secondly, after giving relative theory, this article brings in the model of outsourcing created by Insinga and Werle. This article creatively classifies the outsourcing strategy of the MNC’s choice when they want to outsource their business. This analysis paves the way for the later research of our country’s countermeasure. Finally, this article uses the SWOT model to analyze the current situation of China, and then prompts some advice for the outsourcing development of China on both micro and macro aspects.
Chapter One: Introduction
1.1 Background of this study
Although the manufacturer industry in the global range is developing at a high speed, it does not affect the explosion increasing of the global emerging industry transfer, the most important of which is service industry. The manufacture industry’s business outsourcing has already brought substantial profit for these multinational companies. Under the background of economic globalization, MNCs have gradually become the practicer and beneficiary of service outsourcing. The first outsourcing could be found in late 1980s and in the beginning of 1990s, the contract signed between Koda and IBM which covers 250 million dollars amount became the milestone of service outsourcing development, which lasted for 10 years. After then the trends of service outsourcing development extended to Japan and Europe, finally it set off a huge storm of outsourcing all over the world by MNCs.
The advantage of outsourcing has thrown more and more enterprises into service outsourcing waves, at the time that the outsourcing suppliers enjoyed the huge profit made by service outsourcing, the accepter of the outsourcing has also found the method to increasing their self competitive advantage during the outsourcing process. The Chinese service outsourcing acceptance enterprises became maturity gradually under the globalization environment. So how to elaborate self competitive advantage and how to learn the MNCs’ successful experiences when getting MNC’s service outsourcing，how to successfully developed overseas market is the receiving side of outsourcing to solve.
Because of the rapid growth of information technology industry, the trends of global economic integration became more clearly. All of the enterprises are faced cruel competition. In order to maintain long-term advantage during the competition process, most of them did relevant adjustment to fit in the need of the environment.
Michael Porter in his famous writings 《Competitive Strategy》mentioned the five forces strategy (1993), which brought strategy management to the leading edge of management area, which concept was adopted by most of the enterprises. But along with the rapid update of both knowledge and technology, because of the more stress on companies’ external environment analysis, traditional management could not meet their demand for development. Because during the fierce competition day by day, the enterprises’ ability of relocation of resource and cost controlling become a very important factor for whether they could make leading position during the competition process. The concept of core competency recuperates the deficiency of traditional strategy management, which finally becomes the most important ability focused by each company.
On the other hand, enterprises strongly realized that in today’s such fiercely competition process, a company could not enjoy the competitive advantage in all aspects, whatever effort they made, the different aspects of enterprises’ operation are also different. Some parts stronger, some parts weaker. This phenomena promotes them try to find a new way to deal with it, which cause the creation of outsourcing. The beginning of outsourcing based on the significant that the companies transfer their production to the relevant cheaper place of labor force and capital to lower their cost. Usually this kind of outsourcing is called manufacturer industry outsourcing. The result of this emerging market made a storm of industry transfer in the range of the world. MNCs made substantial profit during the transfer, which also made China become the famous “world factory”. Along with the scientific progress especially the rapid development of communication technology, economic globalization penetrated everywhere of the world. Each of the countries at that time penetrated with other in the aspects of economy, trade, knowledge and technology. MNCs became the carrier of this trend. （Zhen, 2007）At the same time, the environment faced by the enterprises is much more complexity, with the limited resources, more enterprises realized that it should concentrate their limited resources together to increasing its core competency. Speed, flexibility and creation seem more important than any times. So more and more enterprises chose to outsource its non-core business, entrust it to other companies that who are enjoy competitive advantage in the relevant area. Under this strategy, the original enterprises could pay more focus on their core business, on the other hand, the business outsourced to other excellent companies in the area where the original ones are not good at could make them a comprehensive development. As a result a new round of industry transfer was surged, among which the service industry becomes the leading actor. Service outsourcing became the major way of industry transfer. Without doubt, MNCs are the practicer of this industry transfer.
In the first period of service outsourcing development, MNCs mostly outsource their business to their home countries’ enterprises, but along with the scientific development and also the fierce competent between them, more and more MNC’s try to find coordinate partners expand the range to the world, which made a huge change of global industry structure. International service outsourcing gradually replaced tradition manufacturer industry outsourcing and becomes an important strategy choice for enterprise to increase its core competitive advantage.
Any of the strategy tools are not produced without foundation, unlimitedly they are the outcome that enterprises have to adapt to the environment. The first publication that mentioned the concept of “outsourcing” is the article titled “enterprise’s core competency” (Prahalad & Hamel, 1990) Outsourcing as a strategy tool has been made use of by many companies. The development of outsourcing undergone the change from manufacturer to service industry, more and more companies have already realized the change of operation environment. Also more and more countries have realized that service outsourcing could promote their economic growth. In 2008 the scale of global software and information service industry reached 940 billion dollars, the service outsourcing has already became a global economic development trends that could not be reversed.
1.2 Research aims of this study
Currently, China has already became a major outsourcing target by MNCs, compared with India, Ireland, Canada and some other developing countries, although we’ve got competitive advantage in labor cost, whether basic establishment or government support, we are till got a huge gap behind these countries. India has become the most popular outsourcing target because of its advantage in both cost and quality, which account for 80 percents in offshore outsourcing market. Compared with India, China only got 10 percents, although we are far behind India, if we could seize the opportunity in the round of new industry transfer, it will avail our domestic companies toward international market.
Simultaneity, MNCs as the leader of global economic development, they do not only control innovative technologies, but also they are the forerunner of exercising outsourcing to their operation management, they’ve got enough experiences on how to train and stronger their core competency. The global service industry transfer surged by MNCs offers great opportunities for China to realize industry upgrade. By carrying on the MNCs’ outsourcing businesses could help domestic company to develop, it could also help Chinese industry structure adjustment. It could also help them go to international market by carrying on the outsourcing business, create their own brands, develop new product with self- intellectual property rights, get more developing space.
We have been proud of that we are world factory, American Forrester research Inc predicted that there will be 3.3 million positions and 136 billion dollar of salaries transfer to major developing countries such as Russia, India, China and so on. (2009) the years between 2009 to 2014 is the important period for the expansion of world software and information service outsourcing market. It is predicted that the total outsourcing value asset will get 1000 billion dollars at the end of 2010 (Gartner Inc, 2009) The growth rate of Chinese IT outsourcing market will also get around 22 percents in this year. Compared with high energy consumption and air pollution industries, the service outsourcing industry enjoy the advantage of lower energy consumption, little environment pollution, stronger carrying capacity of technology, which is a typical green economy. The Chinese government offers lots of support to develop service outsourcing industry. That is a good opportunity for the country’s healthy economic development.
The total study will be divided in to five chapters. The first chapter is the introduction part which has already given the research background and research aims; the second part is the literature review chapter which is to give relevant theories and form scholars’ research result. The third part would be the methodology part to introduce how is this study conducted by making use of the data collected, the data collecting process would also be introduced in this chapter. The fourth chapter, which is the analyzing part is to give both the qualitative and quantitative data analyzing result, which is the most important part of this study, to examine that whether the result analyzed support former scholars’ views that available on the literature review part. The last chapter is to give a whole conclusion about this study and relevant recommendation for outsourcing strategy’s future.
Chapter Two: Literature Review
In this chapter the major work is to offer relevant theories and some public research that given by former scholars on the same or similar topic. The concepts include the definition of outsourcing with the motivation for its creation, theories about service outsourcing and different types of service outsourcing. the external motivation and strategies for service outsourcing should also be given in this chapter.
2.2 Definition of relevant concepts
2.2.1 Definition of outsourcing
Outsourcing, which is the meaning of external resources, is one kind of management model for the enterprise to integrates its excellent external professional resources, finally get the result of lower its cost, increasing the efficiency, elaborate its competitive advantage and stronger its self-protection abilities towards complexity environment. (Jay, 2000) Outsourcing theory is a hot topic that is researched by international economists, at first the research for service outsourcing came from the practice by consultant companies. Along with the development of service outsourcing itself, the theory is enriched strongly. About service outsourcing research mostly concentrate on the following aspects:
About the definition of outsourcing, Loh and Venkatrama (1992) pointed out that it is the external supplier making materials and human resource activities that related to the whole enterprises or part of the production facilities. Lei and Hit (1995) defined it as outsourcing is making part of the products rely on the external resources. Louis (1997) think that outsourcing is the acceptance of enterprises towards some of the products and services, which means that transfer some of the internal making products or executing services to external suppliers with rational payment to them. The definition of outsourcing by Johnson (1997) has already up to the level of management tools. It is treated as a transfer of managing responsibilities towards external organizations, which is an arrangement to improve the service deliver and the management model of organize internal staffs. Brian Leavy (2004) took outsourcing to be a strategy tool to develop managers’ abilities.
2.2.2 The motivation for outsourcing’s creation
Reve (1990) thought that only those special technologies, which was called core competitive advantage should be retained within the enterprises, as the additional business could be dealt with in terms of strategy alliance or outsourcing. if they belong to the products with poor strategy value, it could be received from public market. Reve also thought that enterprises’ technology profile would also be improved along with time run out. At first, new company’s core technology always account for a big percentage during the operation process. Along with years went by, the experience curves of the company tend to be more craggedness, more and more products’ component could be got from public market. Based on the situation, their core strategy has also to be redefined and adjusted unceasingly.
After Reve, more scholars realized that outsourcing could bring more benefit for the enterprises. Quinn $ Hilmer (1994) thought that outsourcing has already become an important strategy tool, which could effectively influence organizing skills and resource relocation, promote the organization to be more concentrate on their core competitive advantage. They thought that outsourcing could effective cut the cost, release resources’ core area, increasing the investment rewards and cash flows, which could make the companies to be more efficiency. Outsourcing could also transfer fixed cost to be changeable cost. It could yet increase customer satisfaction, lower the relevant risks.
Recent research gradually joint outsourcing with environment, it held the view that outsourcing development closely related to information technology development. Technology development increases the demand of the information for enterprises. Simultaneity, companies want to make use of resources effectively and economically. Outsourcing theory is widely promoted along with the globalization. Outsourcing could let the companies get abilities of organize and distribute resources at the range of global, and then get the competitive advantage.Aspects of outsourcing decision
Williams (1998) took the view that human resource allocation is the most important factor which may affect outsourcing success. It could help enterprises get extra resource and ability without new capital investment and staff employment. Along with the trends of outsourcing offshore, professional outsourcing offers more opportunities that could not be realized domestically. But at the same time, it also brings some unpredicted risks. Service outsourcing is not only a contract, but also a business relationship. It is not only for cutting the cost, but also to realize commercial value. Mckinsey(2008) gave the concept of service outsourcing 2.0, which aims to make new products and design new skills. Value comes from the profit get from new products, customers and market. It also pointed out that the international human resource outsourcing is now transferred from simplicity human capital transition to the scrabble for global high quality human resource.
2.2.2 Theories of service outsourcing.
Service outsourcing growth developed rapidly in recent years, the major reason is that it could bring economic profit for societies. (Zhang, 2006) It is also an effective strategic tool for enterprises to pursue higher efficiency and profit, but all of this happened was not by accident, the appearance of service outsourcing has deep theory origin. Along with the strong development of service outsourcing, the research on this concept became more and more deeply, the following part will introduce the service outsourcing’s theory basement subject to economics and management.
Service outsourcing are more and more used in terms of the management language, but actually it is the development of international division of labor. The origin could be retrospect to classical trade theory.
2.2.3 The classification of service outsourcing
If the definition of service outsourcing answered the question of “what is service outsourcing”, then the classification of service outsourcing clearly explained the outsourcing targets. It is because that the leading position companies research on service outsourcing mostly are some consultation companies, the classification of outsourcing has been confusing for a long time, it did not has a clearly regulation. But along with service outsourcing development, some of the ways were admitted by more and more companies and researchers.
During the first period of service outsourcing’s spring up, according to the receiver’s geography area, it is divided to inside area and offshore. But along with the service outsourcing development, most multinational companies entrust their business to overseas’ partner to finish. So without specially illustration, the service outsourcing mentioned are offshore service outsourcing.
In addition, according to the motivation of service outsourcing it could be divided to: tactical, strategic and alteration service outsourcing. According to the form it could be divided into product or groupware outsourcing and service items outsourcing. But the most widely used classification methods are business process outsourcing (BPO) and information technology outsourcing (ITO) according to American Gartner’s view of business area and final service market. Both of them are based on the information technology, when ITO stress on technology that more involved in cost and service, BPO is more concentrate on business process, which solves the problem of the business effect and operation profit.
In recent years a new glossary appeared which is Knowledge Process Outsourcing (KPO). Some of the researchers took it to be the third outsourcing model after ITO and BPO. Normally KPO does not offer specific suggestions and recommendations to customers. It only offers some available choices, compared with BPO, KPO seems more customize, which enjoys more added value. To some extent, KPO is located at the upper river level of value chain, because that the consultation companies work on ITO and BPO businesses are also belong to the customers of KPO. So it still need a long practice stages for bring KPO into operation.
There are two types of service outsourcing, according to the current development situation of service outsourcing. ITO and BPO are still the pivot of the research on service outsourcing. ITO means the outsourcing senders entrust technology outsourcing supplier offers part or all of the informational technology functions in terms of contracts or agreements. Currently ITO’s major business range includes: 1) operation services; 2) application management; 3) Help desk management.
It is given that ITO is the combination of both product support and professional service. It could offers basic IT facilitates and also application services to customers, which could satisfy the needs of them. According to the classification by Gartner’ ITO could be subtly divided to data center, desk, network and enterprise application outsourcing.
The structure of company’s business changes at a high speed mostly contribute to the appearance of BPO. It is defined as entrust one or more IT intensive business process to an external supplier and let him manage and control the specific process. The above businesses are executed by the methods that have already been defined and measured. The business processes outsourced to suppliers include logistics, purchasing, human resource, financial, customer relationship management and some other business functions towards consumers. BPO could be treated as a creative business strategy, it involves several business department of the company, which could help to reduce the cost effectively and increase the degree of customer satisfaction. Now BPO mostly includes four business aspects, which are demand management, internal management, business operating service and supplier chain management. (Hong, 2002)
At first most enterprises chose BPO aims to reduce their costs, now more and more companies treat it to be a strategic transform instrument. They think that saving cost, increasing efficiency, transfer internal core to creation, focus on core competency and making use of overseas’ low cost labor force are major factors that attract them to take the BPO.
As two major forms of service outsourcing, both of BPO and ITO are not independent, ITO is outsource whole or part of IT works to professional companies to finish them with BPO is that the outsourcing senders are not only limited to IT outsourcing, it is developing to the business process area. So whatever classification we take, they all closely related to IT and network communications. So it is agreed that modern service outsourcing is based on IT.
Seen from outsourcing’s macro development process, although the appearance and development of BPO are based on ITO’s prevalence, and also during past 10 years ITO has really undergone a big increasing of both amount and scale and it will continually take this trends, but BPO will take a higher increasing rapid than ITO. Because BPO is admitted to be the higher service outsourcing forms that could get its competitive advantage under its business model. In fact, BPO enjoys more competitive advantage in gross profit, new customer chances and partners’ positive attitudes. So compared to traditional ITO, BPO’s potential growth power is sure to be stronger than ITO, which gradually become one of the most important powers in outsourcing market.
2.3 Motivations and tactical of MNC’s service outsourcing
When multinational companies consider about service outsourcing, the most important reasons involved is the profit brought to them. (Deng, 2005) the emerging and development of international service outsourcing is the result of market competition and high technology promotion, and it is also related to the improvement of developing countries’ investment conditions. Also it closely related to the MNC’s self development. The following contents will analyze the reason for the emerging of MNC’s service outsourcing in terms of both internal and external aspects. It also will analyze MNC’s successful outsourcing tactical, which could offer a way for Chinese enterprises to carry on the outsourcing business better.
2.3.1 The external motivation of MNC’s service outsourcing
The external reason for the emerging of MNC’s service outsourcing could be induced to two aspects: first, the enterprises’ operation management is strongly affected by external economic environment. Fierce international competition is the biggest external pressure that for MNC’s to find further development. All of the companies got their less advantage in resources or some other factors. To survive and develop under such fierce competition environment, it has to remedy its inferior position by making use of outsourcing services, entrust the part that they are not good at or do not worth doing it to professional service companies. In this case, it could concentrate their resource and energy to superior business, and also it could get higher quality services offered by professional companies, which make their inferior part no longer hinder their development.
In another inspects, information technology especially the development and widely used of internet technology made the earth become a small village, made the division of work and cooperation becomes possible, the reduction of transacting cooperation fees made the service production more flexible that could be based on the each area’s comparative advantage, to realize rational layout far from the home countries. Taking an example, if you want to take a X ray in US hospital at night, you don’t know that the X ray reading works is finished by medical outsourcing enterprises far in India. The night emergency doctors do not work at night, so Indians take this business. It only take half an hour for A Xray was sent out from US and get the result after Indians read it. It is the development of information technology that made the countries and geography’s ambit become faintness within the industry chain.
2.3.2 The internal motivation of MNC’s service outsourcing
The big change of operation environment need the companies make self adjustment on strategy and management. The self development promotes the enterprises to find innovation. Surviving and developing itself is a process to pursue lowest cost and higher profit. Cost and profit are the most important factors cared by companies, enterprises adopt any of the tactical is to increase their profit and competitive advantage. The appearance of service outsourcing as a new management instrument is also for this intention. Specifically, service outsourcing that brought to the profit mostly are: reducing cost, relocate resources, increasing competitive advantage, increasing customer satisfaction level and core competency.
Reducing operation cost is the primary motivation for companies to choose service outsourcing. Lower cost and reducing input is also the original instrument to increasing profit. Service outsourcing could cut expenditure, control cost that could release some of the resources and used in other aspects of the operation management. According to statistics by different industries, outsourcing could reduce 20 percents to 35 percents’ operation costs approximately. Service outsourcing could abate the outsourcing senders’ pressure by share in their fixed costs, receivers’ professional operation and management experiences and other scale advantages, senders could reduce their investments on the aspects that are not belong to their core business. For example, HP signed ten years IT contract with P&G valued three billion dollars, HP will offer IT basic facilities management, data center operation, customer terminal support, network management, operation maintenance for P&G covered more than 160 countries’ branches, also around two thousands’ P&g staffs became the members of HP. This cooperation could save approximately 10 to 15 percents of P&G’s IT costs, which is a substantial figure. (Zhu, 2006)
Modern information technology is popularized made a huge improvement to reduce communication costs. Decreasing of transportation costs also reduce the transaction costs, it could be treated as the origin of service outsourcing emerging. In addition, along with the technology progress and industry structure improvement, the production process’s internal services’ differentiation of competitive advantage and economic of scale seems more remarkable.
Increasing customer satisfaction level: under the cruel competition environment, market orientation gradually tends to buyer oriented market. Customer demand seems more rigorous. The consumers are not only satisfied on the level of diversified products, they also expect enterprises’ to offer better services. Rely only on a single company could hardly satisfy customer demand. Service outsourcing is a perfect choice. Enterprises could quicken their speed response to customer demand in terms of service outsourcing, which could ensure the companies offer stable and reliable high level services to customers. At the same time, generally large scale outsourcing receivers own a professional team the members of which enjoy widely knowledge that could increase customer satisfaction by their services. Like Ericsson, in order to help its information system better support the business and area development, HP found IT calling center in 25 cities to support more than three thousands users. HP’s outsourcing services help Ericsson increasing the response speed and service quality, and get the intention of increasing customer satisfaction.
Increasing enterprises’ flexibility and the response speed: as a strong economic entity, MNCs enjoy huge organizations and complicated structure. So their responses toward environment lag relatively. But the fierce competition environment requires the process to be quicker, especially along with the reduction of product life cycles and the faster of market demand changing, they could hardly get their competitive advantage by only rely on economic of scales. Some famous enterprises for their integration strategy have begun to choose outsourcing strategy under the big pressure of external competition. Through outsourcing could thinner their body and then increasing their response speed under the competition environment.
Increasing enterprises’ core competency: if modern companies want to maintain and expand their market share, it is not enough that only rely on themselves, they have to make use of all of the resources that could be used. Service outsourcing is one of effective model. Service outsourcing could furthest make use of other countries’ resources and create stronger competitive advantage. Reducing cost is one of the most important factors in outsourcing motivation. It is also the original intention for companies to take outsourcing strategy, but along with service development, more and more companies realize that stronger the companies’ core competency is more important than lowering the cost because it would bring long term profit than reducing cost. Cruel market environment extend the fierce competence to each links of enterprises’ management, this also make higher requirement to companies’ professionalization. Along with professional division of labor, subsystem within the company becomes more complicated, they could no longer make every part well by only making use of self resources. Outsourcing the non-core business could make them concentrate on core business and increasing competitive advantage. Peter (1995) depict that all of the works that have nothing to do with making profits should be outsourced with also the business and activities which do not offer the chance to promote their development. The final aim is simply just to optimize their production, management and financial resources.
Within the changeful market, the speed of single company do self adjustment by rely on their own resources could hardly catch up with the speed of market changing. So enterprises have to concentrate their limited resources to the most important businesses. Service outsourcing is happened to be such a rational resource allocation strategy. Currently companies’ technology advantage rely on external resources gradually, nearly more than 50 percents come from external resources and business partner. Service outsourcing could remedy the puzzle of resource deficiency when they develop core competency. Through outsourcing it could react superior support to the whole business.
2.4 MNC’s service outsourcing tactical
It is no doubt that MNCs are the pioneers of service outsourcing. IBM, HP, Dell, Motorola are all the famous brands growth by outsourcing machining. It means that they all enjoy enough experiences on outsourcing whatever role they played as sender or receiver. Adequately understand the outsourcing tactical of MNCs could help Chinese receivers carry on their service outsourcing better.
2.4.1 Single information technology outsourcing
The emerging of outsourcing market is marked with the popular of information technology outsourcing. (John, 2003) even now that around 70percents of outsourcing business belong to the information technology area. Since Kodak outsourced its information technology business in 1989, this industry undertook a rapid development. Along with the coming of information era, industry of IT outsourcing grew more rapidly than before. The application of IT in each industry developed deeply. Also the effect of IT outsourcing toward their core business grows bigger. Enterprises make more strictly requirement toward the IT system’s security, economical and practicability. They need the professional IT servicers to offer low cost, high efficiency and high quality outsourcing services.
Caixa Catalunya is the third biggest bank in Spain, which owns more than one thousand branches. It manages more than 50 million Euro assets. All the while CC was confused about its high IT cost and it also suffered the pain that they could not find the new technology breakthrough. Under the bank industry’s fierce competition environment, CC hope that it could increase their service efficiency and lower 15 percent of its service cost markedly. It also expected that it could save more resources that used to expand its brand globally. So in 2000 it outsourced all of its IT application system and basic facilities to Accenture, which was conducted with a five year contract. Then Accenture improved all of its computer hardware and basic facility software and upgrade its desk operation and customer platform. In the last year of the contract, CC’s service cost lower 29.5 percents, which nearly be doubled than the expected figures. The total bank budget decreased 30 percents. (Accenture, 2007)
Through the backstage supporter, CC got its aims of decreasing cost better, and it also increase the service level. The professional IT service system make CC’s service platform own better capabilities and low maintenance percentage, which significantly increasing customer satisfaction level.
2.4.2 Single business process outsourcing
Business process outsourcing developed also quickly these years. According to Gartner the growth rate of BPO from 2004 to 2009 get 9.1 percents averagely, higher than ITO’s 6.2 percents, the gap between them is still wider. BPO’s major markets now mostly concentrate on human resource, financial, executive and payment process.
Human resource outsourcing as one of the important form of BPO is the major strategy choice for companies to develop its core business absorbedly. For example, UK telecom is one of the world leading communication solution scheme suppliers. It offers services to customers from Europe, America and Asia pacific areas. UK telecom’s major business include IT service, domestic and international telecom service, high value broad band and internet production and services. After 2000, it successfully outsourced some of the human resource positions to Accenture’s human resource service department. In the past five years, this outsourcing item help UK telecom save more than 25 percents costs, the service level further exceeded the standard regulated and increased customers’ satisfaction. Along with the cooperation, the service content promised at the first period has been enriched and upgraded with the change of UK telecom industry’s strategy and the adoption of Accenture’s new services. In 2005, both sides carried out a new 10 years contract agreed that Accenture will offer language human resource outsourcing services for all of the staffs that cover 50 countries. (Accenture, 2007) “Accenture’s global network is closely related to our own net, along with the increasing of international business, we need a sustainable and stable technical platform and payment way, to ensure the demand of the human resource service increasing.” said by Sue Gooch, the human resource director of UK telecom. This agreement was treated as the global biggest human resource service outsourcing continuation contract by business circles. UK telecom got its aim of reducing cost by outsource human resource to professional human resource companies. Also as a successful outsourcing cooperation relationship, this business not only satisfied short term profit, it also satisfied the long term demand. The relationship between them are not only limited to short term outsourcing, but also developed to be a long term cooperation relationship.
2.4.3 Binding of ITO and BPO
Along with service outsourcing strategy gradually becomes an essential trend for global economic development, no matter ITO and BPO all developing rapidly. Now more and more outsourcing senders prefer to bind ITO and BPO, which means that it requires the receivers of outsourcing do not only offer simplicity technical outsourcing, but also service outsourcing. The reasons for MNCs to choose this outsourcing method mostly because along with their business’ development, some service process combined with technical more closely.
Chapter Three: Methodology
In this chapter the major work is to introduce all the methods that would be used in this study to conduct with the analyzing, it will also give the ways for collecting the relevant data. Based on the characteristics of this study, both qualitative and quantitative research methods would be used in this part.
3.2 Qualitative and quantitative researches
Qualitative research is used to gain insight into people's attitudes, behaviors, value systems, concerns, motivations, aspirations, culture or lifestyles. It’s used to inform business decisions, policy formation, communication and research. Focus groups, in-depth interviews, content analysis, ethnography, evaluation and semiotics are among the many formal approaches that are used, but qualitative research also involves the analysis of any unstructured material, including customer feedback forms, reports or media clips. (Dian, 1999) Quantitative research mostly involves analysis of numerical data, it is about asking people for their opinions in a structured way so that you can produce hard facts and statistics to guide you. To get reliable statistical results, it’s important to survey people in fairly large numbers and to make sure they are a representative sample of your target market. Quantitative market research typically includes customer surveys and questionnaires. These can be conducted face-to-face with a clipboard and pen, over the telephone, via post or email, online or via your website. Survey questions have to be carefully considered so that the results will provide meaningful data. So don’t just ask if people know about your business, ask how often they visit, what products they buy and where else they go to buy the same products and why.
3.3 Data collection process in this research
In this study both qualitative and quantitative research would be used to conduct with the research topic, related to the research aims, interview would be the major way to conduct with qualitative research, the interview targets would be composed of different groups, in this research, the interview targets would come from: first, management staffs work in the outsourcing companies which mostly support MNC’s non-core businesses; second, some of the scholars from famous Chinese university whose major researching area is about multinational enterprises strategy and marketing. The results come from the interview targets will mostly used in next chapter’s SWOT and other basic data analysis. There are several interview questions toward different groups, each interview process will last for about half an hour, each of the group there are three candidates to help us with the interviews. For the company staff group, under the help with some of the friends, it was relatively easy to get in touch with the management staffs in HR and marketing departments with the enterprises of outsourcing companies which is Golden Bull outsourcing service company. It offers different types of outsourcing services from technical to HR, financial, marketing and so on. Wang Jun, the HR department manager of Golden Bull was agreed with our appointment and taking the interview. The interview questions are arranged as: first, why now China is popular to be targeted as the outsourcing host country? Second, what are the advantages and disadvantages of outsourcing in China? Third, how does Chinese enterprise deal with MNCs’ outsourcing strategy? The same questions would also be sent to the other interview targets whom are Shen Qiang, an executive manager of a Germany technical company subsidiary in Beijing and Lihong, the marketing assistant from the same company. All of them are around 30 years old and got the overseas education and working background. They are quite familiar with the MNC’s outsourcing process and motivations. It is the reason for choosing them as the interview target, which may effectively answer the research questions of the total research.
Chapter Four: Data analysis
This chapter’s major work is to give the analysis based on both qualitative and quantitative data collected in the last chapter, and try to find that whether the outsourcing’s motivation is similar as given in the literature review part of the study.
4.2 Data analysis
The motivation of MNC’s offshore service outsourcing strategy: in recent years, more and more multinational companies outsourced their non-core production service functions to overseas service suppliers. It is not by accident that mostly because both external environment influence and self demand. External environment analysis: globalization made capital. Information, technical, labor force, resources flow, relocation and reorganization in the global range, which made production, investment, finance, trade amalgamation and rely on each other and compete with each other, finally made the world become a huge market. Under this situation, MNCs found strategy partner relationship in terms of service outsourcing that aims to get long term competitive advantage, enjoy the harvest brought by globalization. The development of information technology and internet: to a big extent information technology’s rapid growth decrease the transaction costs. This made the enterprises’ business scale and market share expansions are more inclined to be realized in terms of outsourcing. The development of internet expand the range of their choices, it could made them choose ideal service suppliers without worrying about geography problems. Fiercely market competition and the rapid whirl of market environment force MNCs to adopt outsourcing strategy. Through service outsourcing, supported by internet technologies, enterprises join different advantage resources together and become flexible dynamic union, share resources, advantage complementary, effective cooperation and deal with market challenges. Developing countries’ economic and technological rapid growth, basic establishment consummate, education conditions are also improved a lot. Labor qualities increased and the labor cost is still much lower than other developed countries. In addition, the developing countries’ government made policies that expire and support outsourcing take over. All of these deeply attractive developed countries, which is the major reasons that promote MNC’s outsourcing to developing countries.Internal motivation analysis
- Cost decreasing is the biggest temptation towards enterprises that for making profits. Western companies all seek offshore outsourcing targets to maximize profit and minimize cost. According to GreatWall consultation company’s investigations, the major motivation for outsourcing is to reduce the cost for all MNCs. The reducing range mostly around 20 to 40 percents and the real reducing range always exceed the predictions by companies.
- Quality guarantee: according to the study, 43 percents of the respondents hold their opinion that offshore service outsourcing could increase service quality. There are two reasons to explain it: first, in developed countries, many of the outsourced positions are treated to be less important and even could not be respected by others. But if these positions offer to developing countries they are still attractive. The offshore labor force are not only low cost, they are also hard working. Second, offshore enterprises could hire more excellent labor force without spend so much capitals.
- Increasing core competency: a very important reason for outsourcing is to help the enterprise maintain crack. More and more enterprise outsource their non-core business to concentrate on their core competency. For example, Microsoft makes internal alteration aims to concentrate on what it is good at to ensure the principle of holding competitive advantage on its core business. After the alteration process, it only focuses on its core business, which is developing popular software product. In the aspects of customer service and support, it undertook the way of strategy alliance, which means to cooperate with other software companies.
- Decentralization of risks: there are also two aspects of risks for MNCs: first, the limitation of their self service professional level or badness management condition may bring quality risks; second, some of the business links may need big capital flows that bring the risk of capital tied up to only few links, considered self economic safety, it could also allocated outsourcing businesses to more countries to avoid the risk of “put all of the eggs in one basket.”
- Human resource hunting: although reducing cost is the major judge standard of whether to operate outsourcing strategy, labor force arbitrage is no longer the motivations for outsourcing strategy. When the qualified human resource are increasing at a high speed in developing countries such as China, India, the same index in developed countries is decreasing conversely. Poor supplement make the MNCs hunting high qualified candidates overseas. So more and more companies are recruiting high technical scientific and engineering human resources in Asia and east European countries in terms of outsourcing.
Service outsourcing that take mostly take information technology as the carrier is now growing at a high speed all over the world. Service outsourcing has already become the essential choice for global economic development. Service outsourcing is not only accelerate the industrial chain’s specialization and promote the relevant enterprises’ expansion, but also increasing powers for national economic development. As the emerging countries of service outsourcing receiver, to give a clear analysis about the situation based on the environment and competition is essential.
- Human capital: human resource is Chinese advantage that during the competition of service outsourcing with other countries. The most advantage of Chinese labor force is still low cost, the average salary in China is only 2.5percent of America, currently, along with the workers’ skills become more influential and also the increasing of demands toward India services, it leads to the big increasing of India workers’ salaries. Some economists predicted that in the next following ten years, most offshore outsourcing businesses will be transferred from India to China and other developing countries with low salary levels.
- Bright marketing future: global service outsourcing business started from 1980s, currently China enjoys 5 percent global outsourcing market share, although we are still behind India, Ireland and some other countries, along with the policies’ improving and development of basic establishment, more and more countries taking China as their outsourcing target. Chinese market is developing towards a standard, rational direction. As we know that the there are big differentiation of culture and values between eastern and western countries, which may become an obstacles during the outsourcing process. This differentiation made China enjoy better advantage toward Japan and Korea’s outsourcing business. DALIAN software garden is a good example under this type of outsourcing.
Chapter Five: Conclusion and recommendations
With the trend of the more emphasize on specialization, many companies are focusing more on their core competencies. At the same time, the competition pressure from the market requires enterprises make corresponding responses rapidly. As a modern model adapted to the market characters, outsourcing is coming in for more and more attentions. Many companies are considering outsourcing their non-competency business when they develop their core competencies. Now outsourcing transactions with multinational companies is an important method for China to improve economic, increase employment and expand export. It is necessary for Chinese companies to know what factors would influence a company’s outsourcing strategy decision, to know what shortcomings they have and to know how to overcome the limitations. This is the meaning of the paper. This paper focuses on nature determination. First I summarize some concepts of outsourcing to indicate outside is the major character of outsourcing. It means to give some specified operation to independent third-party to make full use of resources. The basic theories underlying outsourcing include comparable advantage theory, transaction cost theory and core competency theory. According to comparable advantage theory, different companies have own comparable advantages on different operations. So outsourcing could help them to focus on the work they are good at. With other work done by outsourcing partners, both sides of the transaction can benefit from outsourcing. According to transaction cost theory, outsourcing could simplify the organizations, and then reduce transaction costs. And core competency theory tells out which operations would be really important for the company’s strategy and which operations should be outsourced. There are many researches on the reasons of outsourcing and how to choose outsourcing suppliers. In summary, when making outsourcing decisions a company should consider the complexity of operations, the reduction of cost, the acquirement method of technical resources and the existence of appropriate suppliers. The evaluation factors include culture, reputation, market position, self-shortcomings, financial steadiness and working experiences. According to above factors, this paper points out the conditions Chinese suppliers need to compete for the outsourcing contracts from multinational companies: technical ability and core competency, a set of modern business administrative system and full use of information resources.