Implifications of Offshoring 40 Mks

Implications of offshoring

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Discuss the implications for UK service sector firms that have off shed IT or
administrative functions to low cost economies, such as India.
The relocation of certain industries or functions from the UK to other low-cost economies
abroad has raised a number of issues over the years. From a management perspective, it is
seen as a great way of reducing overheads. However, customers have identified this as a
drawback in most industries today.
Firstly, transferring parts of a business to a low cost economy decreases overall expenses as
mentioned earlier. This could be that, the value of the pound is much stronger than that of
the currency in these low cost economies so businesses have to pay much lesser total
overheads. As these firms receive their revenue in pounds sterling, they would rather pay
out their expenses such as electricity in Indian rupee which is about 0.01% of a pound. This is
an ideological tool in exploiting different economies efficiently. It helps businesses to keep
their costs very low but rather increase their profit margins. This may not always be the case
though, since economic factors are very much unpredictable. Such firms are likely to have a
huge loss should there be any increase in the value of the Indian currency. This could create
potential instability in the business thus causing them to relocate into the UK service sector.
Also, firms relocating in low cost economies are able to benefit from cheap labour costs.
The increase in young, well educated workers in such economies have caused these
industries to enter such markets since they are rather skilled labour that have the right skills
and expertise but rather tend to demand less wages. According to statistics from the work
foundation in 2004, software engineers in India received about £5000 to £15000 per annum
which is a staggering 15-17% of what employees with the same position in the UK receive.
This explains the use of highly skilled workforce which potentially increases productivity rate
however keeping expenses such as wages at a reduced rate. Furthermore, service sectors
which may have offshore are likely to gain from greater economies of scale because of the
increase in the demand for the firm's services. This may lead to a reduction in unit costs
such as computer systems. Lower average costs should help such firms to be able to
expand into different markets and to be rather competitive. However, the extent to which
these firms can increase demand for their services depends whether it can meet its business
objectives and attract customers since it has different departments of the business in
different parts of the world. Without driving in enough customers through quality business
management, the firm will certainly fall short of demand thus diseconomies of scale.
Moreover, service sector firms might transfer parts of its business to places such as India to
be able to benefit from cheaper land. Since in the UK, there are many restrictions to the
acquisition of land, different taxes and legal permits to be able to acquire a location, it is a
much wiser idea to locate in places where there are much fewer red tapes or barriers which
could reduce costs. The difficulty however, could be the maintenance of quality customer
services since these functions are nowhere near close to the department responsible for
maintaining good customer relationships.

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Having mentioned all these positive implications, there may be some negatives attached to
transferring a part of a business to another location. Critically, there may be some difficult
ethical issues involved with this process. It may not be of good benefit to the economy if
businesses were to shut down and create employment in another part of the world since
employment is one of the main boosts to the economy.…read more


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