OUTSOURCING MANAGEMENT THE DILEMMA OF SMALL AND MEDIUM ENTERPRISES

ABSTRACT

The practice of outsourcing management in industry and organization is universally acknowledged as effective instruments for competitiveness. Even in small and medium enterprises (SMEs). This study tries to look at the role outsourcing management can play in the development of small and medium enterprises (SMEs), their current dilemma that prevent them from becoming active players in the regional and global markets. The study also highlight the benefit, risk and the kind of measure that need to be taken to enhance their effective participation in the modern management technique (outsourcing) The study draws on empirical studies undertaken on selected small and medium enterprises in Benin City and part of Lagos state. The investigation supplies a realistic  result  on the dilemma of outsourcing  management to  small and medium enterprises. (SMEs). other objectives of this study are: To ascertain if outsourcing management create unique value for the Company’s Customer: To ascertain the net risk or benefit associated with outsourcing non-competence area: To determine if the involvement in outsourcing management by companies differentiate them from the competitor: To determine if there are factors that limit SMEs from participating in outsourcing the non-competence area, and finally to examine if there is any relationship between outsourcing and retaining the service  of  highly  skilled  experts.  To  effectively  prosecute  this  research  work,  I formulated  the  following  hypothesis:  Outsourcing  management  is  a  function of the unique value created for the company’s customers: The risk or benefit that accrues to organization is a function of outsourcing the non-competitive area: Outsourcing management is significant in differentiating the organization from its competitors: SMEs participation in outsourcing management is a function of its contracting of non- competence areas: Outsourcing management by organization is dependent on the  extent they are able to retain the services of highly skilled experts: this research work arrived at the following findings that the participation of small and medium enterprises in outsourcing management create a unique value for customers performance for the resources expended: In addition there is a relationship between the benefits that accrue to the organization outsourcing of non-competitive areas: In other words SMEs involvement in outsourcing management can improve the organization focus and can as well help to reduce risk: More still this research revealed that outsourcing management can help to improve credibility and image by differentiating SMEs from competitors: conclusively, outsourcing management helps to increases the commitment of experts.

CHAPTER ONE

1.1     BACKGROUND OF THE STUDY

As companies’ attempts to focus on core competences, many are considering outsourcing various aspects of their in-house operations. The rapid growth in outsourcing has occurred because organizations are struggling to cope with the demands on their skills. Aoki 1988- says when products becomes increasingly differentiated and renewed, the best strategy appears to focus on core competences and  let  other  firms  deal  with  production of  other  parts,  machine maintenance or distribution. Almost every organization outsource in some way. Typically, the  function being outsourced is  considered non-core to the business. The decision to outsource is often made in the interest of lowering firm or making better use of time and energy costs, redirecting or conserving energy directed at the competences of a particular business, or to make more efficient use of land, labour, capital,  (information) technology and resources. It  is  essentially a division of labour.

Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carryout narrow functions that could be done more efficiently and therefore more cost-effectively by other companies with specialized tools and facilities and specially trained personnel.

Currently, outsourcing takes  many  forms; organizations still hire service providers to handle distinct business processes or whole operations such as  benefits  management. Companies have  latched onto outsourcing as a route to almost immediate savings and quality improvement.

In their bid to be  more competitive and relevant in today’s global environment, most companies are constantly restructuring their business; downsizing them so as to become cost efficient, more responsive to customers, and to maintain or gain competitive advantage. In order to achieve these goals, companies have to outsource those services that they do not have competitive ability leaving their core competent.

Goldfrab and   Heller (2001) Outsourcing is contracting with another company or person to do a particular function or the passing

of  service  provision or  production to  another  internal or  external party. Researchers such as Hilton et al. (2001) and Rainborn et al. (1999)  regard  it  as  a  ‘strategic cost  management tool’  and  as  ‘a strategy in business’ by Diering and Click (2005) ‘not only because it can help to reduce cost, but also because it potentially enables firms to concentrate on their core activities. The areas of core competence will encompass those activities where the company possesses competitive advantage, which enables them to perform better, and at lower cost than its competitors. As a result, managers evolve strategies that progressively tend to exploit a company’s core competences. Small and medium enterprises in Nigeria cannot be left out. ( Egabor (2008) says small and medium enterprises can prospectively propel a country’s economic development and growth.

SMEs boost employment, capital formation and indigenous technology.  The  small  and  medium  enterprises  in  Nigeria  faces myriad of problems, which hinder its development and affect growth negatively. These problems include poor infrastructure, high transaction cost,  low demand for locally  made goods and lack of competitive advantage are impacting against the performance or even the  existence  of  small  scale  enterprises  Emoleke,  (2006).  These

preferences stem from the fact that some of the locally made goods are not durable and are inferior to the imported ones. Because competition has become stiff and force, the imperatives of globalization have all combine to force organizations to seek better ways of optimizing their competitive advantage and outsourcing those services that others can make more cheaply than they can make it. It is time;   SMEs   in   Nigeria   begin   to   appreciate   the   evolution   of outsourcing  and  its  effects  on  their  overall  technical  workforces. SMEs has to be encouraged to be involved in outsourcing policy, for this will enable them to use their skills and capital productively to produce goods and services they know best to produce.

The  researcher is  of the  opinion that companies should  not regard outsourcing management as a cure for all organizational problems, thereby neglecting other management functions like planning, organizing and controlling e.t.c. The researcher will also like to warn against a situation where management will hastily dabble into outsourcing without adequate preparation for it.

In conclusion, this paper therefore is an attempt to critically evaluate how outsourcing can positively enable companies to retain

the services of highly skilled experts, whose full-time employment is not justified.

This research tries to look at their (SMEs) current predicament characterized by numerous constraints that prevent SMEs from participating in outsourcing management, there by  hindering them from realizing their full potential as instrument of development and highlight the kind of measures that need to be taken to enhance their effectiveness and competitiveness so that they can become effective players in the markets.

1.2     STATEMENT OF PROBLEM

Companies lacking appropriate skills for immediate, saving and quality improvement may be unable to adjust to the pressure of competition, and may not expect to succeed in the long run.

Competitive pressure have the effects of driving companies to higher levels of quality and efficiency on the one hand, and on the other  hand,  forcing others out  of  competition. Heller  (2001) says outsourcing has become a very management tool for producing high- quality product/service at lower cost than in-house resource, but it requires careful assessment and management. Outsourcing

management is a very critical area of business and the expertise with which the process is handled is a significant factor in the survival of any business. One problem, however, is that if outsourcing is  not handled  correctly,  it  may  limit  the  organization’s  flexibility  and control over its direction. Unfortunately the practice of outsourcing has not been fully embraced by most businesses in Nigeria as a means of giving access to market-leading skills and technology quality improvement. Some businesses in Nigeria are not even aware that some key areas of business can be outsourced to save money without causing any issues in customer service.

However, the focus of the research is to find out the prospect of outsourcing management activities in companies and how small and medium scale enterprises can benefit from the outsourcing concept. Nigerian SMEs are far from meeting the conditions taking advantage that outsourcing promises to give. They need to upgrade their management, quality and delivery capacity before they can start to enjoy the benefit that outsourcing concept produces

1.3     RESEARCH QUESTIONS.

The study seeks to find answers to the following research questions:

2.  Does   outsourcing   management   create   unique   value   for company’s customers?

3.  What are the net benefits or risks associated with outsourcing non-competence area?

4.  Do  involvements in  outsourcing  management by  companies differentiate them from competitors?

5.  To ascertain the factors that limit SMEs from participating in outsourcing the non-competence area?

6.  Is there any relationship between outsourcing and retaining the services of highly skilled experts?

1.4     OBJECTIVES OF THE RESEARCH

The research is about outsourcing management in general. The researcher want to know the extent to which outsourcing is a significant source of downsizing in local systems of small firms. It will  identify the  factor  that  discourages choice of  outsourcing by SMEs.

In specific, term the objectives of this study

1.       To ascertain if outsourcing management create unique value for company’s customer

2.       To  ascertain  the  net  risk  or  benefit  associated  with outsourcing non competence area

3.       To   determine   if   the   involvement   in   outsourcing management by companies differentiate them from competitor

4.       To determine if there are factors that limit SMEs from participating in outsourcing the non-competence area.

5.       To   examine   if   there   is   any   relationship   between outsourcing and retaining the service of highly skilled experts.

1.5     HYPOTHESIS

Outsourcing  management  is  a  function  of  the  Unique  value created for the company customers.

HR           There is a relationship between outsourcing management and the

Unique Value created for company customers

HO            There is no relationship between outsourcing management and the unique value created for company customer.

HYPOTHESIS 2

The risk or benefit that accrues to organization is a function of outsourcing the non-competitive areas.

HR         There is a relationship between the benefits that accrue to the organization and the outsourcing of non-competitive areas.

HO         There is no relationship between the benefits that accrue to the organization and the outsourcing of non-competitive areas.

HYPOTHESIS 3

outsourcing management is  significant in  differentiating the organization from its  competitors.

HR  There is a relationship between outsourcing right of the organization and its ability to stall differenced from its competitors.

HO     There is no relationship between outsourcing right of the organization and its ability to stall differenced from its competitors.

HYPOTHESIS 4

SMES participation in outsourcing management is a function of its contracting of non-competences areas.

HR          There   is   a   relationship   between   SMEs   participation   in outsourcing management and the contracting of its non- competence areas.

HO          There is no relationship between SMEs participation in outsourcing management and the contracting of its non- competence areas.

HYPOTHESIS 5

Outsourcing management by organizations is dependent on the  extent they are able to retain the services of highly skilled experts.

HR        There is  a relationship between outsourcing management by organizations and the extent they are able to retain the services of highly skilled experts.

HO            There is no relationship between outsourcing management by organizations and the extent they are able to retain the services of highly skilled experts.

1.6     SIGNIFICANCE OF THE STUDY

This study is  not  intended to be an aid  in itself; rather the investigation is  designed  to  provide  an  aid  for  further  and  more thorough inquiry into outsourcing management in both large companies and SMEs.

This will create awareness about the futility of non-value added corporate activities and therefore offer helpful suggestions that may assist companies to concentrate on their core competences and outsource those activities where they have negligible competitive advantage. The study also will highlight the various key functions in companies that can be outsourced, and availability of professionally trained experts in the field, and offer suggestions that may encourage small and medium enterprises and to outsource such key functions and enjoy trained professional services which they otherwise may not have been able to  enjoy without outsourcing. Through this study, awareness on the benefit and risks available in outsourcing is to be created, and the suggestions made may assist the companies or SMEs to embark on outsourcing arrangements that will help to minimize the risks and provide maximum benefits to the businesses.

The study also will encourage big companies that are beneficiaries of outsourcing management to give priority to SMEs with relevant competence.

1.7     SCOPE OFTHE STUDY

This research work essentially covers outsourcing management activities in firms particularly SMEs within Benin City Edo State Nigeria.

It also encompasses the nature process, rationale and the advantages of outsourcing management.

This research work will also dig deep to know the reasons why SMEs are not participating fully in the modern management techniques. The benefits, risks and the dilemma faced by the SMEs in their   non   involvement   in   outsourcing   management   shall   be highlighted.

1.8     DEFINITION OF TERMS Management

Management is a process of requesting the performance of a particular function. Agwu Akpala (1990 p.3) defined management as the   process   of   combining   and   utilizing,   or   of   allocating   an organization’s  inputs  (men  materials  and   money)  by  planning, organizing, directing and controlling for the purpose of producing outputs (goods and services or whatever the objectives are) desire by customers so that the organizational objectives are accompanied. In the  process,  work  is  performed  with  and  through  organization personnel in an ever-changing organization environment. Thus those who carry out the activities as defined above are managers. Privatization

(GAO, 1997) “Privatization is defined as any process aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sector”

Privatizing; is selling a state owned firm to the private sector.

Strategic Outsourcing

Strategic   outsourcing   is   the   organizing  arrangement   that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a  firm’s value chains. Such an arrangement produces value

within firms’  supply beyond those benefits achieved through cost economies.

Globalization

Is the making of products or services worldwide. Globalization is a process in which local lives are increasingly influenced by global forces, leading to greater cultural interaction. It is the trend toward an integrated worldwide economy MOI ALI, George (B 2002)

Core Competencies

Core Competencies have been defined as a “bundle of skills and technologies that enable a company to provide a particular benefits to customer” Hamel and Prahalad, (1994) Core competencies according to Raiborn, Barfield and Kenney (1999) is any critical function or activity in which an organization has a higher proficiency than its competitors.

High proficiency can be interpreted to mean activities, which the firm can do better or less expensively than its competitors. High proficiency or core competency is the root of a firm’s competitiveness and competitive advantage for private sector organization or firm’s, core competencies may be skills that are (i) difficult to duplicate

(2) Create a unique value (3) constitute the organization’s competitive advantage (i.e what it does better than anyone else)

Off shoring

This is the transfer of an organization function to another country, regardless of whether the work is outsourced or stays within the same corporation/ company.

Multisourcing

This refers to large outsourcing agreements (predominantly IT). Multisourcing is a framework to enable different parts of the client’s business to be sourced from different suppliers. This involves using both internal and service provider staff in order to speed up the time launch. They hire a  multitude of outsourcing service providers to handle almost all aspects of a new project, from product design, to software coding to testing, to localization, and even marketing and sales. Smoothing out workloads/matching personnel to the volume of work. At time of peak business activity, an organization can contract for personnel and other resources to handle peak or unique workloads and to meet the demands of multiple projects or shifting workloads and reduce the disruptions and costs associated with hiring and then laying off “permanent” staff.

Benchmarking

Benchmarking is a measure used for comparing performance to set targets that the company seeks to exceed. That is comparing what the organization does with what is done elsewhere. It is a valuable way of identifying areas for innovation or development that practiced to good effect elsewhere by leading companies.

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