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Author: 
Dr. Mohamed A. Ramady
Publication Date: 
Mon, 2006-12-18 03:00

Outsourcing is a new and attractive buzzword that has caught the imagination of businesses around the world as a tool to increase efficiency and productivity for all concerned — the outsourcing companies and their service providers. There seems to be no limit to achieving this utopia, which includes commercial motives, as well as a desire to generate wealth in far off countries, to alleviate world income inequalities.

However, some chinks in the wall are beginning to appear in the global outsourcing market, and it is important to analyze what contribution outsourcing can make to Saudi and Gulf industries.

Simply stated, outsourcing means the transfer of part of the means of production, whether physical goods or services, to a third party, which is a separate legal entity. This third party can be in the same country or overseas, and the primary motive is that overall efficiency in terms of higher productivity, lower prices and efficient delivery is passed on to the final consumer, who is indifferent from where the final product is delivered. As such, companies producing laptops outsource their battery supplies from another firm; airline companies outsource their online booking to a third party, and insurance companies’ premium quotations and general queries are answered by someone on the other side of the globe who has never set foot in the parent company or country. Today, information technology outsourcing, or ITO, is the biggest single type of global outsourcing, but many industries have also outsourced some part of their supply chain processes.

The recipients of outsourcing contracts have tended to be in Asian countries, specifically India, and recent reports indicate that India-based service providers, as opposed to those based in Europe or the United States, have continued to increase their share of major outsourcing contracts while other areas are beginning to see a decline. Indian outsourcing servicing companies are using the country’s English language skills, IT education base, and relatively cheaper labor to penetrate this market. And what of the benefits to consumers? According to a study by Consultancy McKinsey, every dollar’s worth of business offshore from the United States or the UK created $1.45 — $ 1.47 of added value. Of this, the UK or US derives $1.12 — $1.14, while 33 cents worth goes to the recipient country. Everyone is happy, or so it seems, as the outsourcing US or European firm has lowered its costs, raised profits, making its shareholders happy, and, in theory, enabling these companies to create more jobs in their home countries.

Is this the reality though? There is evidence that outsourcing is now reaching a politically sensitive limit, and the size of the global outsourcing market looks like shrinking for the first time in 2006. Trade Unions in developed countries have now began to condemn and oppose this trend as a loss of jobs from rich nations to less developed economies, putting one more nail in the march of globalization of trade and services.

Such trade union fears are not misplaced, as the United Nations has forecast that around 5 million jobs in the United States and Britain alone could “go East” over the next decade, primarily to India and other English speaking developing countries. The value of global outsourcing for 2005 was estimated at around 44 billion euros (SR212 billion) which is not an insignificant amount.

The outsourcing market though, has been hit by several high profile embarrassing cases which left consumers wondering who is to blame in the final analysis. These included the damaging British Airways strike of its American owned on-meal supplier Gourmet Food, and the more recent recall of Sony laptop batteries by Toshiba and Dell. What started off as focus on so-called core businesses and added-value, soon descended to bitter accusations and recriminations amongst outsourcing and service contractors. Sometimes language, dialects and unfamiliarity with the culture of the outsourcing country has led to consumer complaints. Some UK financial institutions are now advertising their call centers as being “locally manned and in the UK”, to capture market share from more foolish competitors with “foreign located” call centers. The cycle has come full around ...

The situation in Saudi Arabia and the Gulf economies has not reached a similar level of anxiety, given that the majority of industries are production rather than service based. The exception is Dubai and Bahrain, where “local” labor is delivering such services, albeit that such “local” labor is often imported labor, especially for Dubai. For Saudi Arabia, outsourcing can play an economically desirable role in ensuring that smaller, specialized Saudi industries grow up who can compete in terms of efficiency and supply larger national companies on a consistently high standard.

This could enable the larger companies to indeed concentrate on “core business”, research and development and international export opportunities. The issue of taking jobs away from locals would not arise, but the opposite would be true-meaningful local job creation and skill building.

Saudi Aramco has implemented such a policy for many years, and now Saudi Basic Industries Corp. (SABIC) and other mega Saudi companies are contemplating domestic and, where appropriate, Gulf outsourcing such as the Jabal Ali duty free zone of Dubai. It will be a long way yet to see institutions such as Saudi Arabian Airlines outsource their call and reservation centers outside the Kingdom, but it is very likely that they will outsource these as well as their in-flight food and other services to local contractors. Outsourcing is one viable option for all companies, if the risks and rewards of giving up control over one part of their supply chain are thoroughly analyzed, and the consequences of a breakdown are factored into their analysis.

(Dr. Mohamed A. Ramady is visiting associate professor of finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.)

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