HI6008 Business Research : Advantages and Disadvantages of Outsourcing

Assignment structure:

1. Introduction

2. Project Objective

3. Project Scope

 

4. Literature Review

(Students’ needs to do full literature review (2500 -3000 words) on chosen topic)

5. Conclusion

6. Reference List

7. Appendix

NOTE: Students should do consultation with lecturer regarding to research topic selection before literature review.

Answer

Introduction

Outsources is a common practice in contemporary business, both private and public companies use the outsourcing strategy to provide qualified and competitive product to satisfy the consumer needs in the market (Dolgui & Proth 2013, p. 6774). Globalization has enabled companies not to produce everything and they can outsource some products and service while concentrating on the core business of the organization. The process of outsourcing aims at reducing the overall cost of maintaining productivity in the business. It also enables companies to concentrate on the core functions of the business. Outsourcing has been identified as one of the most effective ways to cut down cost (Lacity, Khan, and Yan 2016, p. 284). The process also has some disadvantages. Outsourcing was adopted as part of the business unit to help companies remain competitive in the today’s market. It is also a form of manpower management in an organization. The concept of outsourcing has been adopted in many countries in the world. This paper reviews the advantages and disadvantages of the outsourcing processes in the business functions.

Project Objective

For many decades, business function as major aspect that has played essential role in determining the failure or success of small and large-scale businesses. To outline the advantages and disadvantages of Outsourcing Business Functions. The results will help in advising business owners and organizations to have a clear understanding of the best strategies that needs to be adopted in the process of outsourcing business functions.

Project Scope

The paper focuses on the advantages and disadvantages of outsourcing business functions. It is a general overview of the companies; it has some of the theories and decision-making process of outsourcing.

Literature review

Advantages and disadvantages of outsourcing business functions

Definition and types of outsourcing

Companies source out work to cut cost as other suppliers’ are willing to do the work at a cheaper, faster and better rate. (Dolgui & Proth 2013, p. 6705) refers to outsourcing as the allocation of the risk responsibility for operating a function or service to another entity. Outsourcing refers to assigning work, duties, responsibilities and decision-making rights to a third party. Therefore outsourcing can be defined as the act of delegating job perfomance to an entity who can perform the work better, cheap and faster (Dolgui & Proth 2013, p. 6705). Outsourcing occurs when a company transfers some of its functions or duties to another supplier.

There are two types of outsourcing that is internal outsourcing and external outsourcing. Internal outsourcing refers to reapportioning of duties in the business arrangement aiming at saving the control over the organization’s performance. External outsourcing on the other hand refers to the delegation of duties of separate or interrelated functions to a third party. Outsourcing can be divided into partial or full outsourcing depending on the risk of the functions involved (Dekkers, R. (2010, p. 4092). Partial outsourcing refers to the allocation of certain functions to an outsourcer while the company itself performs set functions or duties. The company takes some of the responsibilities. Fully outsourcing refers to assigning the full responsibility of function performance to an outsourcer or supplier’. The full responsibilities of a function are delegated to a third party. Companies outsource additional functions which are not their core business functions (Oshri, Henfridsson & Kotlarsky 2018, p. 4).

Outsourcing is pursued by organizations to increase effectiveness in operations and productivity. Most companies outsource services to survive the dynamic market and make profits. Outsourcing is mainly done to empower business focus, mitigate risks factors and build a sustainable competitive benfits in the market and free up resources for the core business purposes. Dolgui & Proth (2013, p. 6705) state that outsourcing has implications on day to day management and performance of the organization and companies should outsource diligently as such decisions may affect the cost and structures of the company. Also long term competitive situations can also influence the nature of risks that the organization must control. Lacity, Khan, and Yan (2016, p. 284) discouraged long-term relationships between the supplier and companies when it comes to outsourcing services. It is important for companies to have a well outlined conceptual framework for when making the outsourcing decision and settling on a supplier.

The global economic factors such as long-term business productivity, cost projections, data security, employment stability, cultural differences and the capability of the growth of the business are some of the factors to be considered when making outsourcing decision. These factors are important as the suppliers can choose where they want to perform the work to ensure maximum profitability (Oshri, Henfridsson & Kotlarsky  2018, p.5 ).

For organizations to make effective decisions on outsourcing, it is necessary for them to identify their needs and understand why outsourcing is the better option for them or not. Some organizations outsource their core works while other outsources the secondary values. Most organizations understand outsourcing as the general idea of saving resources and allow companies to forecast more on its core competencies (Khan et al 2016, p. 286). The outsourcing decision making is critical to the whole process. The most significant criteria when selecting a supplier are performance history, quality, cost and location. For cost, an analysis has to be done to determine all the internal and external costs for an effective decision. The organization also has to analyze to understand the impact of outsourcing services or goods from another company.

For a company to be successful or maximize on outsourcing, they must have clear objectives and goals to be achieved for the outsourcing activities. The company also has to research and understand the impact of outsourcing on the activity on the organizations’ goals or objectives. To minimize on risks of exposure, the company follows the following steps;

1. Assess the strategic risk and rationale for outsourcing
2. Conduct a due diligence process where they ensure the credibility of the supplier, if the supplier is competent, relevant knowledge and expertise, honest and financially sound.
3. Sign a contract with duration and terms indicated.
4. Change management as risks are likely to increase
5. Assigning individuals to manage the contract and do a periodic review and give feedback
6. Prepare for a new arrangement with minimal disruption to the core business. 

According to Girth, Hefetz, Johnston & Warner (2012, p. 889) there are different frameworks in various theoretical approaches that explain the outsourcing process. The three approaches of outsourcing process include;

• Resource-based View theory
• Core Competency approach
• Transaction Cost theory

The resource-based view in outsourcing refers to an organization that lack of valuable, exceptional and organized resources and capabilities seek an external supplier to overcome its shortcomings or weaknesses. According to Weerakkody and Irani (2010, p 620), the resource-based view outsourcing is frequently used in the framework of decision making and the selection of a suitable vendor. Companies use the most cost-effective way to maintain and sustain a unique product and its competitive advantage in the market. The core competency theory refers to the organization core functions kept in the house while other additional functions not considered core can be considered for outsourcing (Dekkers 2010, p. 4092)

Another theory is the core competency which refers to a cluster of features that an organization possesses allowing it to achieve its competitive advantage in the market. Organizations focus on its core competencies for sustainable competitive advantage in the market and can assign functions and duties considered not core to other firms at a low cost. The company’s main goal and objective is the core business. Another theory is the transactional cost theory which facilitates the analysis of comparative costs of planning, adapting and monitoring completion of tasks under different governance structure. A transaction occurs when a product or service is conveyed across a separate technological interface. The decisions on transactions are based on relative cost of transferable good or service (Yang, Wacker & Sheu2012, p. 469). Organizations choose to outsource the service or goods depending on the cost of the transaction. When the supplier offers a lower rate to the company, they choose to outsource the service or the products. Most companies use the reduction in the cost of production and efficiency.

Pros and cons of Outsourcing

Pros of outsourcing

The most important aspects adopted as importance and advantages of business outsourcing are; saving on cost, Focusing on core activities of the business, improving the performance of the organization, flexibility in service offered and access to experience personnel. A company can focus on its value proposition activities and increase its competitive positioning when they hand over noncore activities to a qualified and competent third party. Cost saving is another significant objective of outsourcing. A company can save on cost when they do not need the service full time and only outsource when necessary. Outsourcing supporting roles allows the organization to focus on the core business of the company. The ability to concentrate on the core business of the company enables the company to remain competitive in the market as they do not have other distraction activities taking up their time (Yang, Wacker & Sheu2012, p. 469).

When a certain resource is not needed by the organization full time or obtaining the resource cannot be financially justified, the organization outsources the resource, and it helps in reducing the overall cost. For example, for a small sized company, keeping technical expertise to provide the maintenance services needed occasionally, can be expensive hence the company can outsource these services when needed.

Outsourcing also enables companies to get access to highly qualified personnel, which the organization might not be able to afford on the payroll. They can take the advantage and exploit the suppliers’ innovations, investments, and capabilities. Outsourcing companies can help an organization achieve performance improvement. Through availability of different resources and taking responsibilities for functions that do not add financial value to the organization. The outsourced staffs or services provide the company with an opportunity to grow. With external outsourcing, the quality of service or product outsourcing is expected to be high as they only concentrate on a specific task. Many companies outsource due to flexibility. Suppliers of outsourcing services are contacted due to their flexibility which reflects in the changing business environment and how they cope.

Outsourcing also enables companies to share risk. The outsourced company must have the ability to analyze risk and handle some of the responsibilities of the business process. Outsourcing also enables faster delivery of goods. Work is outsourced to other companies or third parties who specialize in the particular field and have the expertise needed to carry out some of the services. It leads to completion of work faster, and delivery of quality work when well-coordinated (Yao, Jiang, Young, & Talluri. 2010, p.312). Outsourcing also helps reduce costs such as the recruitment and operational costs. It reduces the need to hire individuals in-house which saves time and other costs related to recruitment are saved.

Disadvantages of outsourcing.

The outsourcing concept also has some disadvantages. Loss of managerial control over outsourced operations is one of the main disadvantages of outsourcing. Managing external resources requires special skills such as process management, people skills, contract management and power negotiation. Another disadvantage of outsourcing is lack of confidentiality. Accompany outsourcing accounting services has to provide all he needed information to the supplier, making it difficult to control the operations of the outsourced services or goods. The auditing of outsourced services proves difficult as the confidentiality cannot be kept. When a company allows outsourcing, chances of imitation products coming up are high. Other investors pick the idea and start distributing the same products in the market.

The third disadvantage is the high expectation of receiving better services from the external outsourcer than internal staff (Schoenherr, 2010, p.310) The outsourcer has to prove that they do not have a bad influence on the goods and services produced as many companies might lose their market position in case of any irregularities.  When outsourcing services, the parties involved signs an agreement on the kind of services to be offered, and when there is an additional service needed, the company has to pay additional charges. Some of the outsourcers intentionally exclude some costs to gain the upper hand when selecting the supplier to be used and add some of these costs later on which are not covered in the contract.

When outsourcing some services, it is very difficult for the management to reallocate the existing employees. The employees view the outsourcing process as a lay off system. It is difficult for existing employees to be absorbed in the new system hence the company loses some of the skills and existing workforce. Only few employees accept change and integrate in the new system. The team moving to outsourced one goes through a lot of changes which may interrupt the company’s performance, and failure of the program may lead to the firing of some members of the management team who came up with the outsourcing idea(Schoenherr, 2010, p.309).

According to a study done Wongleedee (2016, p. 42)  when a wrong outsourcing partner is chosen, problems such as delay in delivery time arises , the sub-standard quality output of goods, a lot of defects and inappropriate categorization of responsibilities that might lead to loss of customers to competitors. Mitigating these factors inside an organization is way easier than when dealing with an outsourced service. The third party has different ways of handling problems which might take a lot of time and resources.

According to Dekkers (2010, p.42) outsourcing is not customer focus oriented. Since the outsourced vendors serve many companies and different organization at the same time, they might not be much focused on your organization tasks. They try to perform their duties as quickly as possible and move to the next client and sometimes not paying attention to the customers’ needs (Wongleedee 2016, p.42). Customer satisfaction is not their main objective.

Outsourcing also leads to loss of internal expertise. There is no opportunity to train and develop new skills as the duties are outsourced and developed somewhere else. The company does not invest in the existing employee skills leading to stagnation in the company and sometimes loss of very skilled workers who moved to other companies where they can grow. Reliance on external firms may cause the wearing off of the internal skills of the organization and no chance of growth for the available employees (Schoenherr 2010, p. 342)

Conclusion

There are different reasons why companies make decisions to outsource their employees. Outsourcing has both advantages and disadvantages. It is up to the company to choose what outweighs the other. Companies have to go through the decision making process on choosing the best supplier in order to avoid loses. The outsourcing can lead to legal ramifications and bad public relations due to a bad relationship if the process is not clear and there is a breach in contract. When looking to outsource, the business practices need to be considered. The decision-making process needs to be followed and the supplier thoroughly analyzed.  For example, outsourcing vendors need to pass through vetting, and they must have specific skills and equipment required to perform their duties. They should also be experts and deliver services first and quickly. It assists the company to maintain the quality of their services and products without compromising on standards. The vetting of the outsourcing supplier has to be done thoroughly for better results. Outsourcing also creates a gap between the customer and the company as the third party does the services for the customer while on the other hand, the company loses contact with its customers.