ASSIGNMENT 1

CRITICAL ANALYSIS ESSAY Does everyone win???

A comprehensive analysis Global financial crisis and outsourcing
Global Financial Crisis of the year 2008 was termed as the worst since the Great Depression and this worldwide crisis could be attributed to sub-prime mortgages sector in the United States of America. (Kluza, 2011, p. 23). The purpose of this essay is to provide a critically analyse the statement that the global financial crisis has encouraged organisations to outsource a diverse range of functions to foreign countries and everyone wins when organisations takes the outsourcing approach to international business. Therefore, this essay will begin by addressing the cause and consequences of the global financial crisis.

Globalisation is defined as the rising economic interdependence of global countries through increasing cross border transactions in goods and services, free flow of capital and rapid diffusion of technology (Liang, 2012, p. 101). The globalisation of labour markets drove down the incomes in the United States of America (USA) and Western Europe (Mbemba, 2012, p. 189). Moreover, in the years before the 2008 financial crisis, significant amounts of foreign money entered the USA and there was a trade deficit with over imports and less of exports (Mbemba, 2012, p. 189). In order to fuel the economy, the banks started lending out customer credits at low interest rates (Auguste, Lund & Manyika, 2011, p. 100). With the inflow of funds combined with low interest rates, housing and real estate were profitable and safest investments (Kluza, 2011, p. 25). Most people were able to afford houses due to easy money lending policies and growth increased due to high-risk loans or subprime mortgages given to people with troubled credit. Through loans, sales and refinancing, customer took out a total of 2 trillion dollars and by 2006, it was evident that housing bubble was beginning to burst (Demyanyk & Hemert, 2011, p. 1848). The globalisation of financial markets moved the source of capital or credit from regulated national environments to deregulated international environment (Terazi & Senel, 2011, p. 187). Loans were easy to obtain and consumers had an unprecedented debt load. As

people started defaulting on their loans, it created a domino effect where more people entered foreclosures and pushed down house prices (Mbemba, 2012, p. 189). This triggered the downward spiral finally leading to many banks facing insolvency and causing other banks to default (Mbemba, 2012, p. 189).

Serious crisis occurred in 2007 when IKB Deutsche Industriebank and Northern rock collapsed. In order to finance the banks, the European central bank wired 500 million dollars into the financial system of USA (Moseley, 2011, p. 60). With the bankruptcy of Lehman brothers, banks stopped lending which lead to the credit crunch that affected consumption and investment (Moseley, 2011, p. 60). In the latter part of 2008, the financial crisis affected the entire global economy resulting in downfall of stock prices, bailing out of banks by the governments and the collapse of big financial institutions around the world (Sanchez, 2011, p. 521). Due to financial deregulation, banks from many countries, particularly Continent of Europe made loans in these markets, which led to the global spread of the financial crisis (Sanchez, 2011, p. 521). World trade collapsed by 10 percent, inflation doubled and the bursting of the housing bubble caused a loss of household wealth, reallocation of capital and drop in consumption (Ip, 2012, p. 9). The economic recession led to unemployment and increased need for cost reduction by public and private sectors or firms to produce their goods and services, which led to outsourcing (Moseley, 2011, p. 60).

The global financial crisis has encouraged organisations to outsource a range of functions including accounting, financial services, public relations, legal, production and information technology (IT) to foreign countries. The term outsourcing involves transfer of the organisations functions and processes to outside service providers that provides their services to the organisation, usually by means of a long-term contract (Metzger, 2010, p. 7). According to the Global Services Location Index, India continues to remain as the global leader in outsourcing, followed by China and Malaysia (Dhar, 2012, 664). India has a comparative advantage over US in services like Call Centre operations, IT, manufacturing and health (Dalal, 2010, p. 29). Outsourcing occurs when a nation has a comparative advantage, which means that the country can produce a good or service when the opportunity cost is relatively low (Moseley, 20122, p. 60). This is different from absolute advantage that describes the countrys ability to produce a good or service with fewer inputs (Moseley, 2011, p.

60). Previously, outsourcing was not well established in countries like France and Germany but after the crisis, the companies were forced to outsource in order to harbour a win-win situation (Holt &Greenwood, 2012, p. 363).

Organisations often outsource to get a profitable gain with access to skill sets, increased flexibility and possibly in the reduction of carbon footprint (McIvor, 2011, p. 31). Like a coin that has two sides, outsourcing possesses major disadvantages like communication problems due to language barriers, time zone differences and cultural differences (Maughan, Millstein &Stamp, 2009, p. 2). More importantly, major issues like loss of managerial control, quality control problem or threat to security and confidentiality information could cause serious detriments (McIvor, 2011, p. 35). Since outsourcing to other companies includes a contract, anything that is not included in the contract may cause additional charges and therefore, hidden costs should also another disadvantage (Maughan, Millstein &Stamp, 2009, p. 2). This essay will now look at the two functions of legal process outsourcing and information technology outsourcing.

Legal Process Outsourcing (LPO) are attributed to the legal work performed outside a country and delivery of legal services by a third party. The major advantage of the LPO services is cost reduction (Ramanujan & Jane, 2006, p. 52). Taking the example of USA and India, there is substantial cost reduction in engaging an Attorney in India compared to the USA (Kumar, 2008). SSD Global Solutions is known as the India arm of Channel 4's U.S. counsel, SmithDehn LLP (Kumar, 2008). It has been ranked among the top 10 companies for legal outsourcing by the Wall Street Journal (SSDGlobal, 2012). The rent paid for the SSD Global premises is itself, 90 percent less per square foot compared to the space in Florida. SSD Global in India is very successful because of the defeating the lawsuit and winning the appeal for the Hollywood entertainer Sacha Baron Cohen case (SSDGlobal, 2012). Here, LPO outsourcing proved to be a cost efficient marking the difference between survival and extinction compared to the Florida corporation defending the lawsuit It was an innovative path to success by combining the skills and expertise of USA attorneys with US law (SSDGlobal, 2012).

Notable advantages of LPO include timeliness and sincerity of the businesses

offshore, round the clock services and, access to flexible labor pools offering a variety of expertise solutions using their modern tools or latest databases (Ramanujan & Jane, 2006, p. 52). Legal challenges include communication problems or poor educational knowledge of foreign laws to perform the required job (Sankoorikal & Jonnalagadda, 2010, p. 24). The other threat arises with breach of security and in outsourcing high technology based patent applications that could hold criminal liabilities (Sankoorikal & Jonnalagadda, 2010, p. 24). Information technology outsourcing is technical support outsourcing to an external provider that takes care of a companys IT services.. Again, India is the largest spot for IT outsourcing because of advanced technology, skilled man power, reliable communication facilities and command over the English language (Swami, 2010, p. 21). IT outsourcing has a lot of advantages. Outsourcing can save at least 30% of companys expenditure by slashing hiring costs, infrastructure costs and training costs leading to cost effectiveness (Ramachandran & Gopal, 2010, p. 181). Outsourcing enables the firm to focus on its core competencies and enables the expertise service provider to provide qualitative services are competitive rates (Ramachandran & Gopal, 2010, p. 181). However there could be many disadvantages like time zone because IT services are needed at working hours and there needs to be understanding the difference of timings for online meetings and serve the needs of customers (Dhar, 2012, p. 644). Another threat is that, the service provider would want to diversify the business and take up more projects and, the technology expertise of the service providers might make the company dependent on their services (Dhar, 2012, p. 644). As a result, there is no preference for better quality of work. A bad case of IT outsourcing took place in NatWest bank, which forms a part of Royal bank of Scotland that was the beneficiary of 37 billion pounds bailout during the 2008 financial crisis (Peston, 2012). There was an error in upgrade of software within the RBS system, which caused the entire days transactions by millions of customers, to be erased from the system (Allen, Barrow & Salmon, 2012). This accidental error could not be rectified immediately and there was a large chaos among customers, especially those whose salaries were being paid on the day, or whose rent payments were due on the day (Peston, 2012). Another tragic incident due to inaccessible funds was that of a man, who had to remain in prison for the weekend

after being granted bail (Peston, 2012). Likewise, plenty of housing purchases and business transactions fell through and this error cost the bank hundreds of millions of pounds, loss of customer confidence and bad publicity (Peston, 2012). The reason for the biggest computer error to occur in the UK banking system was due to the layoff of UK based technicians and the outsourcing of technical IT support to the inexperienced technicians of Hyderabad in India to do the job for quarter of the salary (Allen, Barrow & Salmon, 2012). In summary, the global financial crisis began with the accumulating losses on US subprime mortgages and triggered widespread disruptions in the financial institutions worldwide. There was collapse in world trade, fall in GDP, downfall of stock markets and increased unemployment. Western economies faced recession and lay offs in the private and public sector increased the importance of outsourcing as means of achieving high margins of profitability by cost reductions. Outsourcing allows transfers control of a companys services to another specialized company that holds the comparative advantage to provide those services. The benefits of outsourcing include less capital expenditure, less tax implications, cheap labour and ability to focus on core competencies. The major threats include communication problems, breach of security, loss of jobs and control to another company. Outsourcing can also be more expensive based on non-inclusion of additional hidden costs and chances of poor quality of work. Therefore, it is safe to conclude that, not everyone wins when organisations take the outsourcing approach to management.

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