How Outsourcing is affected by the Current Economic Recession

An investigation into Companies Usage of Outsourcing and a Critical Analysis of How Outsourcing is affected by the Current Economic Recession, Specifically in relation to Northern Ireland.

Aims and Objectives

The Aim of this research is to determine whether or not the current economic recession has affected companies’ decisions to outsource. It is important to decipher whether or not companies’ have increased their usage of outsourcing as a direct result of the recession or whether the increase or decrease in outsourcing is due to other factors. The Aim of this research shall be applied in relation to Northern Ireland companies’ and build a general consensus that Northern Ireland based companies during this time of economic pressure are increasing their outsourcing. Based on this there shall be three objectives of the research. These shall be;

To determine companies have increased their outsourcing during the unstable economic climate.

To determine that this increase is due to the unstable economic climate; and

To determine the relation of outsourcing and the unstable economic climate to Northern Ireland Companies.

Importance of the Research

In today’s volatile and largely unstable economic climate, it is important to note that the recession as it is referred to affects not just large corporations such as banks and multinationals, but ordinary people living in an everyday environment. The state of the economy affects the modest corner shop consumer right to the small to medium sized business entrepreneur. The word recession has become a word synonymous in everyday language. It is due to this that it can be seen to be important that research is carried out to determine exactly how this has impacted the behavioural patterns of people, businesses and theories.

This research is important, and more so relevant, to today than ever before with many companies’ being forced to cut costs and overheads, and inevitably, manpower, as they try to stem the tide of financial loss.

The term ‘Outsourcing’ is subcontracting a service to a third party and the decision to employ this concept is based upon the companies hopes to achieving a higher margin of profit by lowering their running costs. Lankford et al 1999 defines it as ‘the procurement of products or services from sources that are external to the organisation’

It is believed today that ‘firms should aggressively adopt the practice’ and the ‘practice is almost becoming a given, and consultants’ presentations talk of a “revolution in outsourcing”. The academic literature on the subject has grown in kind. (Lonsdale and Cox, 2000)

Outsourcing for businesses has been an integral part of a well oiled operating system for many years. It came to the fore in the 1980’s and has since been used in business lexicon, and it is today in the midst of the economic downturn that it has been a vanguard of companies value systems.

Few management practices have attracted as much attention as outsourcing is enjoying at the present time (Lonsdale & Cox, 2000)

The idea of a subcontracting deal to make the most of time and money in the depths of economic downturn would seem like a perfect opportunity to cut the cost of overheads and use resources efficiently. Faith (2009, p.36) agrees, stating ‘As the recession persists, managements are enforcing stricter budgets. All departments are reviewing their processes to find ways to reduce costs and save money. Outsourcing is an area where companies can limit expenditure’

Research into the recession and its effect on outsourcing has never been more important than it is today, and while companies’ cannot predict when the recession is going to end, and with the increasing uncertain future and the possibility of more volatility, research into this area of business practice is vital.

In a historical sense, the United Kingdom has experienced the onslaught of a recession before. The last recession struck in the 1980’s, and this is where companies found the advantages of using outsourcing during a period of economic downturn (Charsley, 1986) Within Northern Ireland, research into the recession linked with outsourcing within Northern Irish companies has been under researched and indeed very little work has been published.

So while periods of boom and bust continue throughout the decades in the worlds’ economy, research into aspects of the need of cost cutting exercises through outsourcing remain essential. There have been many research papers in the area of outsourcing and the implementation of such a business rationale, as there has been in the area of recession, however the development of one in relation to the other has only been lightly touched on, and this is one of the main reasons for the importance of research into this common area, and hopefully add to academic debate.

Critical Literature Review

A review of literature published suggests that the recession has caused many firms to reshape and refocus their energies into cost cutting exercises, and one of these comes in the form of outsourcing. The literature suggests that there are pros and cons of such an exercise, and that there may be a negative impact of such an implementation. This research is set to highlight the benefits of outsourcing as a key business tool, especially in a period of economic downturn and that it has increased during recent times in this period of economic instability.

Past recessions have changed the way businesses operate and the ability to outsource entire departments have compounded this change. Industrial organisations in the late 1980’s and early 1990’s experienced a turbulent environment brought about by an increase in internationalisation and a downturn in the economy (Tucci et al, 1997)

As a result of cost-cutting efforts during this period, many companies are opting to go the outsourcing route to cover either routine and/or non-core work. (Charsley, 1987) This proposal by Charsley would back up the research to determine that the increase in outsourcing is due to the unstable economic climate.

The disintegration, outsourcing and off-shoring of manufacturing and other ”non-core” functions have been seen as irresistible trends (Shi and Gregory, 2003, 2005; Sturgeon, 2002; Arnold, 2000)

Outsourcing and the recession appear to come hand in hand when a business is restructuring to save costs. The advantages of such a restructuring and outsourcing during a recession have been highlighted in Joanna Faith’s article in ‘Outsourcing becomes luxury in recession’ where she states that the ‘advantage of outsourcing rather than hiring internal resources is that if the state of the company declines, there is no need to make redundancies’ This helps stave the negative consequences of firing staff and leaving the workforce unsettled, while saving the company’s reputation within the market. Mukesh Butani from BMR Advisors in India believes that ‘If you outsource you can just terminate or alter the contract in seasons of peak and downturn’ however Graham Beck of PA Consulting stated that many firms who were involved in multi-sourcing were unaware of the risks. These include the integration of all the suppliers after the multi-sourcing, despite admitting that multi-sourcing would drive down costs. (Financial Management, 2009, p.7) PA Consulting’s outsourcing survey found that with the result of the recession firms are re-evaluating their outsourcing contracts or in effect outsource more elements of their firm.

Research has also found that Human Resource chiefs have lost control over making outsourcing decisions, as finance directors and chief executives look to rein in costs during the recession (Logan 2009)

In January 2009, a study by outsourcing firm Ceridian found that 20% of two hundred and fifty senior Human Resource professionals had the ultimate say in outsourcing recruitment, payroll and benefits for their organisation. Thirty one percent (31%) of the decision making went to the CEOs.

Steve Joyce of Ceridian (2009) stated that “The credit crunch has left no business function untouched, and it is clear in some organisations now that HR directors are not masters of their own strategy.”

Barker (2009) believes that ‘In a recession, sometimes it is not possible to take a long-term perspective, especially where firms are really facing an emergency, and it becomes a matter of survival to cut costs wherever they can’

Charsley, 1987, states ‘the opportunities brought about by outsourcing are several’ Charsley saw these as, firstly, ‘management could balance the work force with the load, since contracted employees and can be brought on board or dismissed’ This could be done without the headaches generally involved in changing permanent staff levels.

He also identified that management can focus on core work and more easily determine actual cost to the organization provided by non-core support units.

In his book, ‘Management Consultancy-A Cost Effective Resource’ Charsley states ‘The ability to determine costs and allocate them across different parts of the organisation also allow management to consider new structural forms that might enhance the firms overall competitive position’

However in an interview of 1,000 firms all around the world about their experiences with outsourcing, also by the PA Consulting Group, the results show that the most common outcome was a fairly neutral one.

As a result of the cost-benefit analysis comparing contract labour to company personnel, many managers were and are becoming more willing to opt for the contractor through outsourcing contracts because of the total cost of continuing the relationship with the company employee

To summarise, there has been very little research conducted to verify whether or not within Northern Ireland the recession has had a direct impact on the decision of companies to outsource more of their business. By conducting further research into this field the purpose of this investigation is to shed more light on the topic as it is of high significance in this turbulent economic climate. Many authors agree that outsourcing is an integral part of the business acumen. The shaping and refocus of business objectives because of the recession has led to this. However there a handful of ‘experts’ who believe that outsourcing has led to the relationship between the company and employee being stretched.

Proposed Methodology

The study being undertaken can be described as an exploratory research study. The research aims to find and explain the relationships between the outsourcing and the recession amongst companies in Northern Ireland. The research aims to assess the phenomena of companies outsourcing to cut their overheads and to maximise profit in the time of high economic uncertainty, and to ‘find out what is happening; to seek new insights; to ask questions and to assess phenomena in a new light’ (Robson, 2002 taken from Saunders, 2007) This research project is set to explore data and develop theories from which will directly relate to previous literature. This is an inductive approach.

The use of primary sources for the purpose of this research is decided on the fact that the researcher can focus on specific issues and have a higher level of control over how the information is collected and used. The research can be implemented on a strict timescale.

A survey strategy shall be implemented in-order to meet the aims and objectives of the research. Survey strategies are popular in business and management research and are frequently used to answer questions raised by previous research. The benefits of a survey strategy are that they allow a large amount of data to be collected from a large population in an economical way. Survey data is also seen as straightforward to comprehend and illustrate.

To conduct this survey, questionnaires shall be drawn up and sent to companies based around Northern Ireland. In social research, questionnaires are one of the most widely used in data collection. For the questionnaires a sample shall be selected from the wider population. The population in this case is all the registered companies in Northern Ireland. Because it is not feasible to send questionnaires to all the companies in Northern Ireland, for the purpose of the research, an appropriate sampling frame shall be drawn up. This is a complete list of all the cases from which the sample shall be made from. The sampling base shall be unbiased, current and accurate. Upon collaborating a suitable sampling frame the next stage of the process will be to decide how many (the sample size) and the method by which the companies shall be chosen.

Large sample sizes can be sought without the burden of major costs, and produces quantifiable data. In this instance, systematic sampling shall be used. The reason behind this is it works well with either a small or large number of cases. It is also suitable for geographically dispersed cases. Actual lists are not always needed either. The relative costs are low and is relatively easy to explain.

The next stage of the research having identified the method by which the data shall be collected, the sample and the sampling technique is to decide upon the technique of data collection. For this research it is proposed to collect the data via postal questionnaire. This is decided upon the characteristics of the respondents and the size of the sample.

Having designed the questionnaire the next step is piloting. The purpose of piloting the questionnaire is to refine it so that the respondents have no ambiguity as so how to answer the questions and the questionnaire exhibits face validity thus ensures accurate feedback of results. In addition to this it shall provide some form of validity to the questionnaire and the results. Reliability of the results is the main aim here. Initially to pilot the questionnaire, a group of experts in the field of which the questionnaire is to given to, should be asked to complete it. Allowing suggestions to improve the questionnaire would further enhance the content of the questionnaire. Upon completion of the pilot, the necessary adjustments can be made. The pilot should also ensure that the structure of the questions is correct and there is an established flow allowing an easier understanding of what is being asked. For the purpose of this research it would be suggested that ten pilot questionnaires be distributed amongst a field of experts to ensure that any trace of ambiguity or misinterpretation be eliminated before the actual questionnaires are distributed. The responses of the questionnaire will provide an idea of reliability and sustainability. It is good research practice to follow through with a pilot of the questionnaire.

The final stage is administering the questionnaire. Attempts must be made to maximise the response rate. In order to do this, factors such as appearance, type of delivery and incentives, should be considered.

In order to achieve the aims and objectives of this research, the key data collection method employed shall be interviews. For the purpose of the research the key figures to be interviewed shall be managers from the Human Resource (HR) departments. Reasons for this are that evidence from prior research suggests that it is this department who are in charge of outsourcing despite Logan, (2007) suggesting that many companies are taking this responsibility away from the HR departments.

To conduct the interview for the purpose of the research a semi-structured interview shall be implemented as opposed to a fully structured one. The drawbacks of the fully structured interviews in research like this are the fact that the answers that may be given could be irrelevant, providing little or no use to the research, the questions are normally closed and thus does not allow freedom to operate outside the constraints of the questions and removes the interviewers ability to back track and highlight certain topic areas.

As questionnaires shall be produced and sent out to various companies, the need for a structured interview is further outweighed as fully structured interviews are broadly similar to structured questionnaires.

To complete the semi structured interview the main areas of the research to be covered shall be worked out in advance so the overall focus of the interview can be guided by the researcher.

The advantage of using the interview situation is that the response rate can tent to be higher than perhaps if requesting information in a non face to face environment. The ability to judge the seriousness of the answers can be helpful in interpretation as well as noting body language.

The planned sequence of questions may change during the semi structured questionnaire. This is a huge advantage, as a number of topic areas may covered simultaneously and the interviewee may revert back to a question to be covered in more detail. The naturalism of conversation can take effect and allow the interviewee peace of mind.

Before the interview takes place, the interviewee shall be asked whether or not it is possible to ask for the interview to be recorded for further evaluation. This would be an advantage as the flow of the interview shall not be disturbed.

In-order to gain access to the HR department within the companies, adequate time shall be allowed to let the organisations allow feedback, and the proceeding follow up contact. A clear account of purpose shall be given to the company. This should clear all concerns regarding credibility. The gatekeeper is the sole source through which contact should be made to gain access to the interviewee. This is done to ensure feasibility of the actual interview.

The analysis of the semi structured interviews shall take the form of transcribing the conversations and from that withdrawing key themes and concepts which may help with the implantation of the research objectives. This is known as grounded theory approach, a widely used method for generating a theory from research. The data derived from this research method shall be qualitative data, and shall emerge from the data collected rather than being imposed.

Having completed the transcriptions of the interviews, and the keys themes of note are recognised, the information must then be transformed into a form of quantifiable data which allows easier understanding. This involves coding. The data is split into segments which are relevant and meaningful to the overall research and the aims and objectives. The purpose of this is to highlight any trends which may appear from the qualitative data and add weight to what the research is investigating in a statistical manner. As more data is analysed the codes may change. The program used to carry out statistical analysis is SPSS.

Time Scale

The research shall commence on January 11th 2010 and will be collated over the course of the following fourteen weeks. It shall conclude on April 16th 2010. Here is a detailed plan of the timescale of each proposed stage of research. While conducting the research it will be important to note that there will be time allowed for contingencies should there be any unforeseen circumstances occur.

Due to Undertake Activity

Activity

Week 1-3

Background reading

Week 3

Construction of Questionnaire

Week 4

Pilot questionnaire/Select Sample Size

Week 5

Feedback from pilot questionnaire and modify accordingly

Week 6

Perform final questionnaire, allow three weeks for postal surveys to return and begin interviews’

Week 9

Collect data from Postal Questionnaires. Begin interview Transcriptions.

Week 10

Begin coding of questionnaire results

Week 12

Results and Discussion

Conclusion and recommendations

Week 14

Final Draft prepared and Submitted