UK service sector firms
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 i?? 5000 to i?? 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. 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. An increase in unemployment creates a decrease in consumer confidence which effectively means that customers would not purchase any items therefore; the government would therefore not receive huge amounts of tax. This does have a huge impact on the position of the economy and position of individuals.
Another ethical issue could be; is it right to pay much lower wages abroad than in the UK? Certainly, the answer should be ‘No’. Another potential problem of off shoring is the language and cultural differences between the UK and places such as India. Communication is one of the key tools for any successful firm. Lack of understanding between colleagues might hinder the success of the firm since information will not be passed on correctly. ‘The TalkTalk group was the most complained about provider of landline and broadband services between October 2010 and February 2011’.
This was majorly due to the fact that most of its customer service assistants were based outside the country which made communications between the two parties i. e. customers and customer assistants difficult. Practically all UK firms based in India have had to train their staff there, to increase their fluency in English. Certainly, this comes along with certain costs which again increase their total overheads. There might also be differences in working practices between countries, including the working hours, which can have great impact on the performance of the business.
Offshoring also has an impact on the public image or reputation of a firm. A number of UK service sector companies have attracted the media over allegations of worker exploitation in low cost economies on order to reduce costs. Such media representations might reduce demand for a firm’s services or might also make workers feel unsafe at the workplace. These could directly have links with the mobility of demand for the firm’s services. Also, it is seen as a way to avoid competition in the market which then again, ruins the public image of the firm.
Overall then, offshoring is a great business technique which exploits different markets but at the same time reduces costs effectively. However, it brings about some ethical issues such as the impact on the economy and also could be seen to be very costly in terms of training staff in other parts of the world because of language barrier. Also, does not take the interest of its customers who are a great asset to every firm, into concern. It is therefore with no doubt that most businesses are moving back to the UK since it has been discovered that the negatives of offshoring do outweigh the positives.