The Impact Of Outsourcing On General Electric

The Impact Of Outsourcing On habitual galvanicThe inform aims to highlight the rival outsourcing has had on General electric automobile Company. This study analyzed GEs last to induce quaternary outsourcing compositionnerships. The paper also discusses the impact that outsourcing leave alone wipe out on US thrift in general. The first part of the paper reveals how outsourcing has led GE to be a personify efficient, productive and profitable high society. The call upings depict factors such as the success of GE Real Estate in Mexico. It also out notationd GEs flourishing steps in India in order to source products, runs, and intellectual talent from India for its global melodic phrasees.The next section of the paper discusses GEs decision to have ninefold outsourcing partnerships. It discusses the strategies of prospering multiple outsourcing and consolidated it with GEs steps of outsourcing its businesses in different countries.In the last section the tarradiddl e elaborates different impact bequeathing outsourcing have on US economy. It contrasted the brighter side of outsourcing such as $100 worth of work sent abroad by U.S. companies $130 to $145 will be reinvested in the U.S. economy. It also reveals the downside as it discusses how sending jobs abroad merchant ship affect Ameri entirelyt joint job market.1.0 Introduction1.1 BackgroundGeneral Electric is a diversified technology, media and monetary divine go company foc utilize on solving some of the worlds toughest problems. With products and services ranging from aircraft railway locomotives, power generation, water processing and security technology to medical imaging, business and consumer financial backing, media glut and industrial products, the company serve customers in more than 100 countries and employ more than 327,000 people worldwide (General Electric Company, 2008).GE is made up of cardinal businesses, each of which includes a number of units aligned for growth. I ts four global research centers attract the worlds best technical minds. With more than 3,000 researchers working toward the next breakthrough, GE is positioned to continually innovate, invent and reinvent (General Electric Company, 2008).GE was founded by Thomas A. Edison, who established Edison Electric Light Company in 1878. In 1892, a merger of Edison General Electric Company and Thomson-Houston Electric Company taked General Electric Company. GE is the only company listed in the Dow Jones Industrial Index today that was also include in the original index in 1896 (General Electric Company, 2008).Through outsourcing, which is defined as the procurement of products or services from sources that are external to the organization (Lankford Parsa, 1999), GE established itself in more than 100 countries. It was one of the largest foreign investors in Japan, had an enormous presence in Europe, employed more than 20,000 in India, and was widely pay in Latin America (Vietor and Veytsma n, 2007).1.2 AimsThe purpose of this report is to prize the impact that outsourcing has had on GE. It foc accustoms on the American Outsourcing journal by Vietor and Veytsman (2007) in order to root the impact that outsourcing will have on the US economy in general.1.3 ScopeThe report investigates how outsourcing has impact on General Electric. The paper porees to analyze the companys decision to have multiple outsourcing partnerships. It evaluates the firms operation in Asia, India, Latin America, and Europe and how it affected the organization performance metrics, live-efficiency, productiveness and profitability. The report also analyzes the impact that outsourcing will have on the US economy. It evaluates the impact that outsourcing will have on US workplace and also how outsourcing creates value in the US economy.1.4 MethodologyThe report has used various books, e-journals and websites.1.5 AssumptionIt is assumed that information collected for the purpose of the report is c orrect and relevant.2.0 Discussion2.1 OutsourcingOutsourcing is a fashionable way of solving some business problems and there are numerous reports of its increasing use. Initially used primarily for information technology, a wide variety of business process is now outsourced. The use of outsourcing is becoming more sophisticated more organizations are outsourcing responsibility for business processes (Beaumont Sohal, 2004). For services, outsourcing usually involves the transfer of operational conceal to the suppliers. In the current environment of right-sizing, with a re rawed focus on core business activities, companies can no longer assume that all organizational services must be provided and managed internally. combative improvement may be gained when products or services are produced more effectively and efficiently by outside suppliers. The advantages in outsourcing can be operational, strategic, or both. Operational advantages usually provide for short-term trouble avoida nce, while strategic advantages offer long-term contributions in maximizing opportunities (Lankford Parsa, 1999). It is estimated that all(prenominal) Fortune 500 company will consider outsourcing during this decade and that 20 percent of them will enter into a thin out by the end of the decade. A variety of firms already discover this trend. General Electric Corporation has entered into a five-year, $500 one million million million contract with Electronic Data Systems (EDS) to handle the corporations desktop computer procurement, service, and maintenance activities (Behara et al., 1995). A upstart study indicates that outsourcing operations is the trend of the future and that organization already outsourcing activities are pleased with the results. A year-long international study by Arthur Andersen and The Economist Intelligence unit finds that 93 percent of corporations interviewed plan to outsource in the next three years. Of those that already outsource, 91 percent are s atisfied with the results (Struebing, 1996). The next section of the paper will evaluate the impact that outsourcing has had on General Electric and analyze their decision to have multiple outsourcing partnerships.2.2 Outsourcing Impact on GEBased on transaction cost theory, when a firm has already integrated its operational functions, the decision to outsource such functions to the market should be made if it is necessary to create or protect firm value. By outsourcing tasks to specialist organizations, firms may better focus on their most value-creating activities, thereby maximizing the potential effectiveness of those activities. In addition, as outsourcing increases, costs may decline, and investment in facilities, equipment, and manpower can be reduced (Jiang, Frazier Prater, 2006).Cost efficiency remains the primary explanation for outsourcing. Firms evaluate outsourcing to determine whether current operating costs can be reduced and if saved resources can be reinvested in m ore competitive processes (Jiang, Frazier Prater, 2006). For ideal GE Mexico was GEs largest operation outside of the United States. GE worked closely with the Mexican government to make sure that their target of 6% productivity growth was met. Some of GEs businesses in Mexico were clear winners. For instance, GEs Real Estate sector was a clear winner, with over $1 billion in financing in Mexico. GE had thus live Mexicos top real estate lender. Mexicos languages Spanish and English facilitated business alliances with GE USA. Technicians from America could visit Mexico to work on system and technical improvements. Doing so in China, entailed greater expense and significant language difficulties. level off for a phone call, China was 12 hours away (Vietor and Veytsman, 2007).By carefully choosing what to outsource, the buyer is able to focus its core strength, that is, the specific talent, skills and knowledge sets that differentiate the company from its competitors and give it a n advantage in the eye of customers (Simchi-Levi, Kaminsky Simchi-Levi, 2003). For instance China exhibited a synergy between customers and markets in the areas of electronics, telecommunications, transportation, and healthcare, among differents. Metalwork, small appliances, and tooling were opposite examples of successful sectors in GE China. The manufacturing sector alone claimed only 4,000 employees. The research and development, sourcing, and distribution presence in China was substantial. The firm also successfully led in innovation. In March 2004, for example, GE became the first foreign company to announce a subsidiary in China to direct in leasing (Vietor and Veytsman, 2007). On the other hand, Nike focuses on innovation, marketing, distribution and sales, not on manufacturing (Simchi-Levi, Kaminsky Simchi-Levi, 2003).Several studies seek to explain the relationship between productivity growth and outsourcing. Abraham and Taylor (1996) find that firms contract out servi ces with the objectives of smoothing production cycles and benefiting from specialization. Ten Raa and Wolff (2001) find a positive association between the rate of outsourcing and productivity growth. Efficient firms allocate their resources to activities for which they sleep together comparative advantage. Other activities are increasingly outsourced. Contracting out production of goods and services to a firm with competitive advantages in terms of reliability, quality and cost is emphasized by Perry (1997). The outsourcing contract-granting firms assess the productivity of their in-house service functions and only undertake outsource actions if outside producers can provide comparable services better. The cost reductions due(p) to differences in labor costs lead to outsourcing and positive changes in labor input, and output produced is altered by profits and productivity growth. Outsourcing not only results in a shift of labor but also exacerbates the productivity differential b etween outsourcing contract granting firms and outsourcing contract receiving firms (Siegel and Griliches, 1992). Contracting out al modests the firm to rely on caution teams in other organizations to oversee tasks at which it is at a relative disadvantage, and to increase managerial attention and resource allocation to those tasks that it does best (Jiang, Frazier Prater, 2006). For example, GE India hired a vast pool of inexpensive, educated labor. The GE Indian program for training managers was instrumental in bringing up local talent. This schema also al crusheded greater remote monitoring and maintenance in India. The vast major(ip)ity of employees who filled the white-collar jobs had a university- train education. The Offshore Development Centers, which pioneered the idea of software sourcing in India, was largely responsible for promoting the educational zeal. The John F. Welch Technology Center was the most famous example, being the first and the largest multidisciplinar y research facility in India. In addition to avoiding educational orientation, the Center provided critical technology, research, and development, and financing techniques. According to the Wall Street ledger 2005, that years conglomerate plan was to spend about $600 million on computer-software development from Indian companies where the firm estimated that similar products would cost it as much as $1.2 billion in the U.S. Also General Electric was successful in sourcing products, services, and intellectual talent from India for its global businesses. (Vietor and Veytsman, 2007).Traditionally, when business is booming, the temptation is to hire more staff, expand facilities, and bring more of the business in-house, where firms hope to better control costs. However, todays knowledge- and service-based economies offer innumerable opportunities for well-run companies to increase profits through outsourcing (Quinn, 1999). For instance, more than half of GEs revenue was from outside Un ited States. world-wide revenue growth for 2007 was 22% (General Electric Company, 2008). For the calendar year 2003, GE Insurance, GE Commercial Finance, and GE Energy were the businesses with the greatest revenue $26.2 billion, $20.8 billion, and $19.0 billion, respectively. In the year 2003, GE revenues reached $134.2 billion. International revenues contributed 45% of the meat (Vietor and Veytsman, 2007). When used properly, outsourcing can boost profitability in many ways, including, the use of independent contractors provides employers with the flexibility to hire help only when they need it, for only as long as they need it. Outsourcing of staffing also allows firms to avoid having to provide costly benefits. And also, payroll as salaries are a large part of a businesss costs, peculiarly in service industries (Jiang, Frazier Prater, 2006). For example, General Electric was successful in sourcing products, services, and intellectual talent from India for its global business es. In the sphere of intellectual sourcing, GE India presented very low costs, offering substantial savings in comparison with English speaking countries, while retaining high quality. GE India sales and sourcing had b rednessomed to $0.7 billion and $2.0 billion, respectively, in 2003. The current estimates predicted at least a 20% growth for both sales and sourcing by 2005 (Vietor and Veytsman, 2007).Another impact that outsourcing has that US-based multinationals are worried more about their bottom line than their social responsibilities and consider outsourcing to be unavoidable. GE, for instance, continues to stress the importance of low-cost centers in its global strategy and growth.GE also feels that globalization could lead to a loss of jobs in low-tech industries but that it will create jobs in high-tech ones too. According to the company, by centralizing its operations and leveraging low-cost operating centers in the US states of Virginia and North Carolina as well as in I ndia and Ireland, GE has also developed sophisticated technological tools that enhance performance by automating tell apart processes and reducing response times and process variations (Basu,2004).2.3 Multiple outsourcing partnershipsOutsourcing refers to the concept of looking for expertise to handle certain business functions outside the existing firm. The decision-making process that management must undergo when considering outsourcing, hinges on a make or buy philosophy. More variables are brought into play when management considers outsourcing a product or service that is currently being produced internally. Many more options exist currently than there were even a decade ago. In todays business environment it is now executable to outsource virtually any aspect of the business (Embleton Wright, 1998).One of the major challenges of outsourcing is moral hazard, as evidenced where businesses do not guard themselves prior to contract against their dependency on that supplier, and where, separately, they fail to appreciate the power which transfers to the outsource supplier in respect of their own business activities. One of the accepted ways to mitigate this is multiple outsourcing. This manifests itself normally in breaking down the outsourcing activities by separate function. By choosing to work with multiple outsource suppliers, enterprises can cut costs and promote competition between sellers, while taking advantage of vendor specialization and technical expertise (McDowall, 2005).The keys to successful outsourcing fall into three categoriesStrategic analysisSelecting the providers andManaging the relationship (Embleton Wright, 1998).Strategic analysisCost of providing the service It is imperative to have a clear understanding of the type and the amount of all costs associated with the function to be outsourced. Labor, resultant level of service, impact of corporate culture and real estate costs such as space, utilities taxes and insurance all need t o be considered (Embleton Wright, 1998). For instance, GE Mexico was GEs largest operation outside United States. As Mexico languages are Spanish and English, it facilitated the business relationship with GE USA. Technicians from United States could visit Mexico to work on system and technological improvements. It could have been more expensive and had language difficulties if the operation was done in China (Vietor and Veytsman, 2007).Quality level of service It is also important to Develop a clear understanding and quantification of the type and the level of service being given with the current provider, then come to a clear understanding of the type and the level of service that will be acceptable in the future (Embleton Wright, 1998). For example GE India extended their business to aircraft engines, capital services, medical systems, industrial, systems, plastics, power systems, broadcasting, and others. In 2002, revenues and orders exceeded US $1 billion for GE India. The com pany employed over 22,000 people in the country. It was an intelligent move for GE to outsource their business in India as India offered them a vast pool of manpower with good language skill and education. Another reason to outsource their business in India GE India offered very low cost with substantial savings in comparison with English speaking countries while retaining high quality (Vietor and Veytsman, 2007).Quantify outsourcing goals It is important to define goals explicitly. Without measurable goals, it will be impossible to quantify current results, or to define the level of service exactd in the future (Embleton Wright, 1998). For instance, in Mexico GEs target of 6% productivity growth was met as they closely worked with the Mexican government. By doing so, GEs Real Estate sector became a clear winner, with over $1 billion in financing in Mexico. GE had thus let Mexicos top real estate lender (Vietor and Veytsman, 2007).Selecting the providerAfter the decision to outso urce has been reached, it is essential that the right vendor is chosen. Typically, outsourcing is a long-term relationship, which requires the supplier and the purchaser to work closely together. Often, additional services are required and should the agreement be terminated, the organization will require the suppliers co-operation until the outsourced service is settled elsewhere. Also there are many costs associated with changing an outsourcing vendor (Embleton Wright, 1998). For example in China GE entailed $1.5 billion in investments, employment of more than 12,000, and formation of more than a dozen joint ventures. These ventures thrived in high-technology industries which included medical systems, plastics, and lighting products, and in aircraft engine maintenance facilities, training, and persona manufacturing. GE China also had formed a One GE strategic and practical approach. It involved four components. There was a sourcing component, in which GE would source parts and go ods from domestic producers where cost savings exceeded 10%. The other three components were focused on Chinas own swelling markets. GE planned to do products for China, develop distributional channels for selling, and build up its services for both product related services such as locomotive repairs and jet engine services, and eventually GE Capitals more sophisticated financial services (Vietor and Veytsman, 2007).Managing the relationshipIt is suggested that managing multiple outsourcing vendors can be a strain, but industry research indicates that multi-sourcing will be the prevailing outsourcing model. This is despite a very significant minority of enterprises being dissatisfied with their outsourcing relationships which formed inadequate governance models due to being ailing developed, under budgeted and having insufficient resources. Unfortunately, managing outsourcing relationships requires a whole new set of skills, requiring staff training and setting up a new management structure. None of this can be done with an immediacy which enterprises demand (McDowall, 2005). GE for instance, operated 30 plants including joint ventures, many of which were maquiladoras. In China, GE had invested in a dozen operations, mostly in Special Economic Areas. GE sold products in China and purchased products to supply its U.S. operations. In India, GE established its position in the software sector, taking advantage of the availability of human capital. All these operations could not have done without proper managerial relationship with the foreign buyers and suppliers and also the governments (Vietor and Veytsman, 2007).From the discussion above it can be tell that GE has maintained proper step to do multiple outsourcing. Their decision to have multiple outsourcing partnerships was a major breakthrough in their businesses. Not on only in Mexico, China and India, GE spread their businesses successfully in all over the world including Canada where they have 10,000 emp loyees, 15 major manufacturing locations and over 150 sales and service locations. They also have businesses in Southeast Asia, Australia, Europe and Middle East (General Electric Company, 2008). The next section of the report will focus on the impact outsourcing has on US economy in general.2.4 Impact of outsourcing on US economyThe mere mention of outsourcing and its impact on the U.S. is enough to elicit strong emotions on either side of the issue. Proponents argue that relocating low skill service jobs, like those in customer service or data entry, to foreign shores is necessary to ensure the productivity and competitiveness of the U.S. economy. Detractors say American companies are betraying their own workers and destroying the middle class, all in the crap of the almighty dollar. But amid the debate over whether outsourcing is good or bad for the U.S., an important point has been largely ignored Outsourcing is as much a regional issue as it is a national concern. Certain citi es and areas are hit hard, while others remain largely unscathed (Elstrom, 2007).The important thing is to make a way of determining whether the gain is worth the pain. Suppose the net benefit to America is the degree to which the average employees purchasing power increases. The benefit really depends on four factors the proportion of consumer expenses fatigued on potentially outsourced goods, the decrease in prices due to outsourcing, the proportion of American jobs that can be outsourced economically, and the wages of jobs that can be outsourced relative to the jobs that cannot. In the long term, American workers will be competing with labor elsewhere, pressuring American wages. Though prices should fall, its unclear whether these benefits will compensate Americans for lower wages. On the other hand, India and China will benefit from both higher wages and falling prices. Consequently, outsourcing will likely narrow Americas standard of living lead over other countries (Gibbons, 2004).An interesting corollary benefit sometimes mentioned is the benefit to the American economy. Indias National Association of Software and Services Companies commissioned a report by Evaluserve that stated that for every $100 worth of work sent abroad by U.S. companies, $130 to $145 will be reinvested in the U.S. economy. Cost savings are said to create value in the U.S. economy, and it is sometimes claimed that offshore outsourcing makes U.S. companies more globally competitive (Braun Consulting Group, 2004). Outsourcing results in higher production and lower costs, and consumers realize the benefit in lower prices and rates for goods and services. Manufacturing jobs, which commonly receive the most focus as candidates for outsourcing, are being lost not only in America but also in other countries due to emerging technologies that eliminate the need for manual labor. Furthermore, at the same time that manufacturing jobs are moving overseas, people in the United States are takin g on manufacturing jobs from other countries. Efforts by the government to prevent outsourcing and to extend jobless benefits would negatively impact the free market economy and result in the loss of billions of dollars, say proponents of such initiatives (The Gale Group Inc, 2007).A recent survey by the McKinsey Global Institute has shown that for every dollar spent on outsourcing to India, the US economy gains at least $1.12. For example when medical reports are sent from the US to India for analysis it directly reduces the cost of health care. The cost saving thus achieved helps fuel new business opportunities, which in turn create more employment avenues. Health care is the primary concern for Americans today. Even if white-collar jobs were outsourced it would still make the US more productive, raising wages and increasing productivity. Just like the American free trade agreement created jobs in 1990s the upcoming outsourcing expansion will have a positive effect. If the US econ omy goes for job protection, it is heading towards job destruction. For instance had the US saved farm jobs a century ago, 70% of the Americans today would be tilling soil instead of 3%. The more the USA does to limit the import of services the more difficult it will become to export. The benefit of importing services is the same as importing goods. It increases productivity. Increased trade also forces domestic producers to become more productive. Improved productivity raises the standard of living, puts downward pressure on price and gives boost to profitability and wages (Chillibreeze Solutions Ltd, 2008).Outsourcing can also affects every part of business from manufacturing through to design, software development, financial control, logistics management, customer support and sales. Outsourcing has been praised as cost-effective, efficient, productive and strategic but also condemned as evil, money-grabbing, destructive, ruthless, exploiting the poor. A good example of this has b een tensions over relocating call-centres and software support from countries like the UK and the US to India. More than 230,000 jobs are bringing lost each year in America as a result of outsourcing but many economists believe that a similar number of new jobs are being created at the same time. Research shows that some of the new economic activity generated in developing countries by outsourcing will generate new demand for goods and services in the country where the jobs have moved from (e.g. America). McKinsey Global Institute estimates that for every dollar US corporations spend on outsourcing to India, 33c gets 33c and the US economy benefits by $1.14. This is based on several assumptions that 69% of displaced service workers will find new jobs within a year, and will end up earning 96% of their previous wages backed up by 1979-1999 data. However aged workers may be out of work far longe, especially if their education is poor. Outsourcing saves money for corporations which mea n lower costs for consumers and higher dividends for pensioners who own 75% of US and UK wealth which means more money to spend on other things such as local services and that produces new jobs (Global Change Ltd, 2008).3.0 ConclusionOutsourcing other known as subcontracting is the strategic use of resources outside the company to perform tasks that are usually handled internally by the company itself. In todays competitive world, successful outsourcing is a powerful tool for companies to generate value and gain competitive edge over rivals. The paper contrasted the impact of outsourcing has had on General Electric Company. The report critically evaluated the outsourcing steps made by GE which led their business to be cost efficient, productive and profitable. The paper also analyzes GEs decision to have multiple outsourcing partnerships. It demonstrated GEs successful multiple outsourcing strategy through strategic analysis, selection of providers and managing relationships. The r eport concluded by analyzing the impact outsourcing will have on US economy in general. It explained how outsourcing can affect the American job market also how it can input benefit in US economy. It revealed facts such as, every $100 worth of work sent abroad by U.S. companies, $130 to $145 will be reinvested in the U.S. economy.ReferencesBooks JournalsAbraham, K. and Taylor, T. (1996), Firms use of outside contractors theory and evidence, Journal of Labor Economics, Vol. 14, pp. 394-424.Beaumont, N. and Sohal, A. (2004), Outsourcing in Australia, International Journal of Operations Production Management, Vol. 24 No. 7, pp. 688-700.Behara, R.S., Gundersen, D.E. and Capozzoli, E.A. (1995), Trends in information systems outsourcing, International Journal of Purchasing, Vol. 31 No. 2, pp. 46-51.Embleton, P.R. and Wright P.C. (1998), A practical guide to successful outsourcing, Empowerment in Organizations, Vol. 6 No. 3, pp. 94-106Jiang, B., Frazier, G.V. and Prater, E.L. (2006), Out sourcing effects on firms operational performance, International Journal of Operations Production Management, Vol. 26 No. 12, pp. 1280-1300.Lankford, W.M., and Parsa, F. (1999), Outsourcing a primer, Management Decision 37/4, pp. 310-316.Perry, C.R. (1997), Outsourcing and union power, Journal of Labor Research, Vol. 18 No. 4, pp. 521-34.Quinn, J.B. (1999), Strategic outsourcing leveraging knowledge capabilities, Sloan Management Review, Vol. 40 No. 4.Siegel, D. and Griliches, Z. (1992), Purchased services, outsourcing, computers, and productivity in manufacturing, in Griliches, Z. (Ed.), Output Measurement in Service Sector, University of Chicago Press, Chicago, IL, pp. 429-58.Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E. (2003), Designing Managing The Supply Chain, 2nd edn, McGraw-Hill Higher Education, p. 180Struebing, L. (1996), Outsourcing is the firmness or is it?, Quality Progress, Vol. 29 No. 3, p. 20.Ten Raa, T. and Wolff, E.N. (2001), Outsourcing of services and the productivity recovery in US manufacturing in the 1980s, Journal of Productivity Analysis, Vol. 16, pp. 149-65.Vietor R.H.K. and Veytsman, A. (2007), American Outsourcing, Harvard transaction School, 9-705-037Web SitesBasu, I. (2004), Anti-outsourcing cry unnerves corporate giants, Asia Times Online Ltd, viewed 9 October 2008, procurable at http//www.atimes.com/atimes/South_Asia/FC13Df03.htmlBraun Consulting Group, (2004), Offshore outsourcing Impact on the American Workplace viewed 8 October 2008, easy at http//www.braunconsulting.com/bcg/newsletters/summer2004/summer2004.htmlChillibreeze Solutions Ltd, (2008), The Impact of Outsourcing on The American Economy, viewed 7 October 2008, available at http//www.chillibreeze.com/articles/The-impact-of-outsourcing-on-the-American-economy.aspaElstrom, P. (2007), The uneven impact of outsourcing, viewed 7 October 2008, available at http//www.msnbc.msn.com/id/17281339/General Electric Company, (2008), Our Company, viewed 5 October 2008, a vailable at http//www.ge.com/company/index.htmlGibbons, R. (2004), Weighing Outsourcings Impact, viewed 6 October 2008, available at http//www.fool.com/investing/small-cap/2004/09/07/weighing-outsourcings-impact.aspxGlobal Change Ltd. (2008), The Future of Outsourcing, viewed 8 October 2008, available at http//www.globalchange.com/outsourcing.htmMcDowall, B. (2005), Multiple Outsourcing (Multisourcing), IE4C, viewed 8 October 2008, available at http//www.it-analysis.com/business/content.php?cid=7913The Gale Group, Inc, (2007), Outsourcing Does Not Negatively Impact the American Economy, viewed 8 October 2008, available at http//socialissues.wiseto.com/Articles/FO3020630100/