CC BY
53
Bulletin ofChelyabinsk State University.
2015. No. 18 (373). Economy. Issue 51. Pp. 219-224.
УДК 334.7
ББК 65.6
TRANSACTION COSTS OF OUTSOURCING IN IRAQ COMPANIES
G. W. Heyder
South Ural State University, Chelyabinsk, Russia
The purpose of this article is to study the factors that influence on outsourcing of accounting functions and the influence of outsourcing on the companies' activity. It was established that outsourcing has an influence on the company's activity and technical efficiency. But we cannot find interconnection between the size of the company and outsourcing. Due to the researches it was found that outsourcing has a positive influence on productivity. According to the study that took place in Iraqi companies contracts reduce transaction costs. It gives companies the opportunity to escape additional expenditure, to save time and to reduce exploitation costs. By the way our analysis supposes that outsourcing of the companies allow them to compete with each other, especially on the local market.Thaf s why the companies had to work in modern information systems, particularly in the activity based on the calculation (ABC). The fact is that the activity and effeciency of the company depends on the ability to analyze the information. It helps the companies to reorganize its activity in accordance with their own resources on the one hand and in accordance with the situation on the new market which is characterized by the strict competition on the other hand.
Keywords: outsourcing, contracts, accounting, activity based costing (ABC).
The current state of outsourcing in Iraq supposes that outsourcing emerges as a management strategy. The work at the analysis of transaction costs' phenomenon is not comprehensive [6; 7; 14]. It is possible to reduce costs by outsourcing contracts, and there is a lack of structural model that would be able to assess the effects of external and internal environment on outsourcing transaction costs , as well as to define the basic elements and the goals and identify the key factors that determine the decision of outsourcing. The evaluation process of the importance of transaction costs, Gatautis and other scientists [7] state that transaction costs are the costs which appear when goods or services are exchanges, it's not that related costs to the creation of a good or service.
Coase is the originator of the theory of transaction costs economics. This theory includes four research fields in which transaction costs are dominant. According to Williamson, O. E. [14], the theory of transaction costs economics provides more opportunities to estimate the role of transaction costs for economic. In Russian economic science in that field exist important works [17; 18]. This shows that notion transaction costs is extremely important for better understanding of any empirical phenomenon related to business.
The transaction costs are examined in many economic studies. Acquisitions and associations provide more opportunities to work independently in any economic cycle. One of the most important reasons that shows why it is worth making acquisitions and
associations is an economic slowdown. Studies revealed that the relevant institutions to which provide outsourcing services play a key role in the economic transaction costs.
And it can be different for different institutions generate transaction costs. Usually the transactions made on the basis of formal or informal contracts . It is extremely important to keep transaction costs low, because any company tries to reduce costs in order to be able to compete on the market.
It is important to note that one of the main factors for choosing outsourcing is that the company deciding to buy outsourcing services does not have to care about attraction of professionals, their maintenance and training. It does not have to buy and renew necessary equipment because these processes are performed by an outsourcing supplier. Thus it leads to the conversion and the reduction of fixed and variable costs and improve product target sought by companies in order to compete.
Thereby, the company can concentrate on internal opportunities and the spheres in which it specializes. Buying outsourcing services often provides opportunities to choose fixed or variable costs and obtain outsourcing services for the fixed monthly fee, therefore, companies can plan more precise budgets. Moreover it isn't necessary to pay when outsourcing services arent necessary or the contract expired. But is not possible, when the company invests in the equipment and hires people. Another positive factor is the quality ofthe service.
In order to identify the influence of transaction costs through the cost systems, activity based costing (ABC) on outsourcing contracts, the authors of this article refer to the works and scientific studies of different authors. The aim of the article — to value the importance of transaction costs in particular the cost systems, activity based costing (ABC) in outsourcing and expand the opportunities of companies. In this context, in the field of research the theory of transaction costs, Activity Based Costing, and outsourcing make up the theoretical basis for study. The research revealed an outsourcing agreement means that a customer and a service provider conclude a contract in which they list rights, duties, aims and responsibilities of each party, politics and strategies. It is based on the agreement between the companies and the third party, and finally, and will explain the relationship between these concepts in the theoretical dimension. Then, research methodology, and results will be more exact.
Clarification of aspect of the current models outsourcing
The theory of transaction costs economics [4] provides more opportunities to assess the position transaction costs in economics. The theory proposed by R. Coase [4] consists of the following four research spheres in which transaction costs dominate:
1) production organization is considering reducing the factors of the company;
2) international trade while taking into account the various aspects of the transaction costs distinguishes it from transport, cultural and institutional costs;
3) foreign direct investment puts outsourcing and business organization at the global level.
4) Trade is studying social networks and regional role of networks and international standards which facilitate the exchange ofresources.
In theory the costs of the deal are reasonably high for foreign companies. This paper makes a contribution to TCE theory of by referring once again to [4] original work and restating the TCE premise that high transaction volumes are associated with insourc-ing. Transaction costs can change due to information technology, the assumption that a high level of transactions equates to a high level of costs is not valid. The spirit of transaction cost theory is determined by the factors that have the influence on its level.
Outsourcing should be considered not only as a pure purchase of goods and services outside the company but also as one of the forms of strategic alliance [15]. The links of strategic outsourcing often bring the company significant benefits such as qualified
work force, high level of R&D activities and higher additional value for lower total costs which ensure the profit for all outsourcing partners working together in an alliance [15]. But when indirect costs calculated incorrectly they lead to mistaken decisions of the company [16].
From this point of view, outsourcing is both an opportunity and a challenge for most traditionally integrates organizations [3]. Working in a net, companies can become soon market leaders , increase their flexibility and cost efficiency [10]. Globalization and international competitiveness has brought a new era in the construction industry as well as in housing market [9; 11-13]. Most researchers analyzed the factors determining outsourcing from the viewpoint of transaction costs economics. They concentrated on identification of the factors which have the influence on outsourcing [1].
On the other hand, more efforts have to be put in applying innovation policy in broader scope, i.e. upgrading technologies in traditional industry sectors and upgrading skills and qualification [2].
If a company starts outsourcing initiative, steps for success are: knowledge, planning, sourcing and execution. The success primarilydependends on explicit planning and identification of all possible opportu-nities.Thaf s why organizations need to take various measures for the inputs which are critical for themselves and have uncertainty in provision [5; 8].
Strategic outsourcing plan must be done from the perspective that will help to grow business instead of focusing only on cost cutting, leaving out from consideration long term business implications [Boguslauskas&Kvedaraviciene, 2008]. For instance, Sink and Langley [Sink&Langley, 1997], Bagchi and Virum [Bagchi&Virum, 1998] focus on logistics outsourcing. And any organization inherently strives to be the best among its competitors that is to seek anymeans to reduce costs. And method that are its presumption to achieve this is system Activity Based Costing (ABC) although it is presented not in all models. It may be:
1) definition ofthe main activity and strategy;
2) evaluation of total costs;
3) Activity analysis.
Using Activity Based Costing (ABC) seems like a natural choice of method. Focusing on outsourcing, the company must therefore evaluate the profits if it uses the ABC.
If transaction costs help to explain different management mechanisms, the theory of resources reviews comparative capacities of trade partners of
the company. Thus, the removal of these activities through outsourcing work can reduce the costs. Table (1) shows the activity centers costs in the Iraqi Companies for the production ofconcrete blocks.
Table 1
The activity centers costs
Cost center The cost center code
Production centers 50101
Pouring concrete armed 5010101
Shipping & Dismantling 5010102
reinforcing bars 5010103
templates installation 5010104
Planning Services 5010105
Production of wooden crates 5010106
maintenance of electrical 5010107
Blacksmithing Workshop 5010108
service centers 60101
quality control 6010101
Engineering Affairs 6010102
warehouses 6010103
maintenance 6010104
Technical Department 6010105
transport 6010106
social services 6010107
Table shows (1) cost centersby activityand figures-for eachcenter.The company relies on standardized accounting system in the classification of cost elements (uses). On this basis we can say that there are some notes in the work of the department costs that
spent all costs on production centers regarded as direct costs on the grounds that including costs such as water and electricity costs, maintenance costs, depreciation costs and others. As well as the most important thing that must be referred to the indirect costs allocated on the basis of unfair. These costs have become a major part of the new equation of the structure of costs, so the lack of justice or efficiency in the allocation will not provide efficient information.
The company is a research sample of Iraqi companies which face strong competition with foreign companies operating in the Iraqi market, which put better products, so the administration needs more efficient informational system.
Table shows (2) the activities in the Iraqi Company for production of concrete blocks, and the distribution of these activities, as in the traditional system as activity based costing (ABC).
After the scientific analysis of the models of general outsourcing processes in which particular attention is paid to logistics, the researcher will present empirical examples about of activities of outsourcing logistics and compare descriptive models proposed by the empirical research. Using of outsourcing in different kinds of activity can lead to their disap-pearance.The result of the analysis process, which focuses on the system activity based costing (ABC) shows the necessity of outsourcing contracts. This downsizing leads to a significant reduction in the total cost.
Table 2
The number of activities reduced Activities under the ABC system (activities transaction costs) Activitiesinthe traditional system
0 - Pour reinforced concrete
0 - Shipping and dismantling
0 - Rebar
0 - Installation templates
1 Quality control Quality control
1 Engineering Affairs Engineering Affairs
1 Warehouses Warehouses
0 - Maintenance
1 Technical administration Technical administration
1 Planning services Planning services
- Installation templates The production of wooden crates
- Maintenance Maintenance Electric
- Maintenance Blacksmithing Workshop
5 7 13
The activities concerned
Table 3
Costs in the traditional system and costs in the system ABC
Difference Unit cost in transaction costs Unit cost in the traditional system Pattern Type for concrete
(70895660)* 158849250 229744910 6XNF 11R
(55842420) 162691800 218534220 6XCS 13R
(31563486) 406508082 438071568 6XTFZ 19-3R
(981034) 12632533 13613567 6X 19-4L
(362882) 28122511 28485393 6XTFZ 21-3R
7766931 87965290 80198359 6XCE 25-R
(313942) 14653476 17792908 6X 15R
(155017983) 871422942 1026440925 Total
* The parentheses indicate a decrease in indirect costs resulting from the application of the activity.
The following conclusions can be made:
- reducing activities through the integration;
- Conversion of other activities which represented (transaction costs) in outsourcing;
- a reduction in the total costs through mergers and conversion in outsourcing activities;
The table (3) shows the comparison between the carrying unit from its indirect costs in accordance with the applicable system cost, and each unit production costs of transaction costs in the system activity based costing (ABC).
The analysis of the table (3) shows the reduction of the cost. We can say that whenever management can obtain information about the activities efficient as a work center whenever helped in conducting of the allocation of resources for the factory on the necessary activities.
The indirect costs have become a large part of the cost structure. The process of cost allocation to units from producer process of has become a very important issue. So the company management's reliance on information provided by the costs section, which uses the basis of unfairly in the allocation. It could lead to wrong decisions. On this basis, we say that the cost calculation in the system activity based costing (ABC).
All companies are trying to perform every activity in its own structure.The provision of services or inputs from abroad is expensive and unnecessary cost factor in the past have now replaced with today's competitive and conscious Companies, which are aware of the uncertainty and risk about accessing resources, especially in business that realize fixed investment costs such as constantly changing
and evolving technological products reached serious proportions. These companies want both to focus on core competencies through transfering of many of its activities to the experts company in this field, and the reduction of all production costs, and transaction costs by taking advantage of economies of scale, and therefore want to control the sustainability of competitive advantage.
According to the results of fundamental analysis, we can conclude that outsourcing reduces transaction costs and depends on resources.
Outsourcing allows companies to rid from additional costs; availability of time-saving, provides a limit Labor costs, and the costs of stock-holding or storage costs, and the amount of the decline in costs resulting from the integration of some of the activities unnecessary by applying the system Activity Based Costing (ABC) in outsourcing contracts, and because of the intense competition between companies, it provides the necessary inputs or services which provide the lower costs and better quality. In fact, even companies which have technological infrastructure necessary for the product or semi-finished products of their own core capabilities have to use outsourcing because it is cheaper and guarantees good quality, and save time
Due to this system Activity Based Costing (ABC), in outsourcing contracts, the costs can be reduced by integrating non-essential activities. Through a reduction in the transaction costs, that can be expressed in the business environment that ensures the leadership strategy of the company on the basis of excellence to deliver a product at a lower price than provided by other competitors.
Data on the author
Heyder G. Wannes Alkarawy — graduate student South Ural State University, Chelyabinsk, Russia. hw_22298@ yahoo.com.
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Вестник Челябинского государстеенногоуниеерситета.
2015. № 18 (373). Экономика. Вып. 51. С. 219-224.
ТРАНСАКЦИОННЫЕ ИЗДЕРЖКИ АУТСОРСИНГА НА ПРЕДПРИЯТИЯХ ИРАКА
Д. В. Хайдер
Южно-Уральский государстеенныйуниеерситет, Челябинск, Россия, [email protected].
Целью статьи является изучение факторов, влияющих на аутсорсинг учётных функций, и влияния аутсорсинга на работу иракских компаний. Установлено, что аутсорсинг имеет позитивное влияние на работу компаний и техническую эффективность, но не было выявлено связи между размером компаний и аутсорсингом. В ходе исследования обнаружено, что аутсорсинг имеет положительное влияние на производительность. По результатам исследования иракских компаний сделан вывод, что аут-сорсинговые контракты снижают трансакционные издержки через комбинирование их друг с другом, в свою очередь, это позволяет компаниям избавиться от дополнительных затрат, сэкономить время, сократить эксплуатационные расходы. Кроме того, выдвинуто предположение, что аутсорсинг компании позволяет использовать ресурсы более эффективно, что приводит к возникновению конкуренции и позволяет включиться в конкурентную борьбу, особенно на местном рынке. Это требует от компаний инвестирования в современные информационные системы. В частности, средста должны инвестироваться в систему ABC в силу того, что работа компаний ориентирована на работу в современных информационных условиях. Чтобы эффективно управлять компанией, необходимо перестроить свою деятельность, совместимую с имеющимися ресурсами, с одной стороны, а с другой стороны, необходимо вести деятельность, совместимую с условиями нового рынка, который характеризуется жёсткой конкуренцией.
Ключевые слова: аутсорсинг, контракты, бухгалтерия, метод ABC.
