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Evidence to Support that the Benefits of Outsourcing Outweigh the Disadvantages Essay

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Updated: Apr 16th, 2019

Introduction

The number of businesses engaging in outsourcing today has increased considerably. Outsourcing refers to the process by which an organisation contracts service or third party providers that can either be an individual or another company to perform some or all designated tasks (Amit, & Zott 2001, p. 494).

However, outsourcing challenges intensify especially when the work is done offshore due to language, cultural aspects, and time zone differences (Kumar, & Wilson 2009, p. 144). Therefore, offshore outsourcing implies the reassigning of an organisational task to another country regardless of whether the task is outsourced or stays within the same corporation.

Even though both outsourcing and offshore outsourcing involve the provision of services by a third party, it is only the non-core aspects of the business that are outsourced thus enabling an organisation to remain focused to its original business (Rosenfed 2006, p. 1463). According to Peng (2001, p. 805), outsourcing strategies establish significant competitive advantages, flex organisational structures, and reduce costs.

Despite substantial researches showing major diseconomies and other drawbacks associated with outsourcing, there is enough evidence to support that the benefits of outsourcing and/or offshore outsourcing outweigh the disadvantages

Why Outsource: Based on Types

In providing evidences to support or not to support the claim that the benefits of outsourcing and/or offshore outsourcing outweigh the disadvantages, analysing different categories of outsourcing and rationales for outsourcing and offshore outsourcing is inevitable (Amit & Zott 2001, p. 495).

Ideally, categories and rationales coupled with benefits and cons are the contentious terms that form the basis for either agreeing or disagreeing with the statement. Outsourcing exists in several forms. Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO), Offshore Software Development, and Information Technology Outsourcing (ITO) (Barney 1991, p. 102).

BPO is where a service provider carries out standardised process for the client leading to outsourcing only a particular process task (Tadelis 2007, p. 266). Unlike BPO, KPO requires service providers to possess advanced skills for research, analysis, and technical know-how to undertake the higher level works (Herath & Kishore 2009, p. 313).

As ITO involves outsourcing works that deal with computer programming and the internet, Offshore Software Development outsources software development services from external supplies in geographically remote areas compared to the client enterprise (Barney 1991, p. 100). Companies are interested in using offshore software development because of higher development costs of the local service providers (Kumar, & Wilson 2009, p. 145).

Therefore, the fact that companies, whether small or large, analyse and choose these outsourcing options depending on the needs or deficiencies and objectives to be achieved in advance before venturing into outsourcing is enough evidence that outsourcing is the only way out based on these benefits (Ramingwong, & Sajeev 2007, p. 102).

Why Outsource: Based on Reasons

There are several rationales why organisations opt for outsourcing and/or offshore outsourcing. First, carrying out business process internally does not necessarily contribute to competitive benefits (Barney 1991, p. 105). As such, the effects of globalisation have compelled several organisations in the world to outsource in order to meet the competitive nature of businesses.

Globalisation increases business operations and connectivity (Peng 2001, p. 809). The main reason why companies outsource is therefore to compete favourably by improving their production and services with minimum costs as far as possible. Consequently, enhancing a company’s likability and boosting customers’ morale will maximise the company’s profit (Tadelis 2007, p. 273).

The absence of business organisations that aim at making losses supports the fact that they opt for outsourcing and offshore outsourcing because of the underlying numerous advantages. Second, as confirmed by Amit and Zott (2001), organisations do outsourcing and offshore outsourcing to cut the capital expenditure over business practice (p. 497).

External providers can do some business processes better and cheaper. Therefore, identifying such processes minimises company’s operation costs thus directing more funds towards the provision of internal resources that are unavailable in order to complete a business process (Herath, & Kishore 2009, p. 315). Since businesses outsource the right business processes to the right external service providers, they minimise expenses that may lead to loses in the business.

Finally, there is always unexpected problem associated with enormous business growth. To curb these difficulties, at times, outsourcing and offshore outsourcing are inevitable (Kumar, & Wilson 2009, p. 147). Companies therefore outsource to replace poor internal service and skills to complete processes in order to improve management competencies, which thus reduce dependency on internal resources (Peng 2001, p. 813).

Competency in management increases flexibility in meeting the ever-changing business and commercial conditions (Barney 1991, p. 107). However, the realisation of the set objectives upon which a company outsources is limited to the fact that outsourcing has its challenges and drawbacks.

Why Outsource: Based on its Few Drawbacks

Even though there are several reasons to support that the benefits of outsourcing and/or offshore outsourcing outweigh the disadvantages, one should not overlook its limited cons. First, an outsourcing company looses its managerial control to the external service providers (Amit, & Zott 2001, p. 499).

As the business, which outsourced the process gains maximum managerial control over jobs and processes, the outsourcing company becomes insignificant in controlling employees (Kumar, & Wilson 2009, p. 149). Notwithstanding, it is only easy to have managerial control over one’s own employees (Herath, & Kishore 2009, p. 317). The fact that a loss to one company is a benefit to another clearly indicates that outsourcing is more advantageous.

Another most significant disadvantage under managerial control is the substantial cost of overhead required to control remote workforce and or to uplift complexity of operations (Barney 1991, p. 116). The duration and cost spent on documentation, extenuating the risks of cultural, management, and geographical differences, as well as miscommunication, can be too high especially for small projects thus leading to financial losses (Kumar, & Wilson 2009, p. 153).

In addition, the outsourcing business does not only find it difficult to manage the outsourcing service provider process but also it is likely to skip some potential hidden costs of outsourcing (Pouder, & Daly 2011, p. 7). For instance, the companies should not ignore the cost resulting from legalisation of the contract between them and the duration taken in such coordination.

Furthermore, the fact that “hidden and missed out costs of outsourcing are hard to predict” (Peng 2001, p. 822) makes the companies underestimate the overall costs. When the time factor and hidden costs are factored into the overall budget, the disadvantage does not induce any extra expenses. Hence, it serves no purpose than a theoretical statement (Ramingwong, & Sajeev 2007, p. 101).

Second, outsourcing and offshore outsourcing threaten security and confidentiality of the company (Amit, & Zott 2001, p. 500). For instance, if a company outsources business practices such as accounting, payroll, and even medical records to offshore destinations, there is likelihood that the outsourced service provider knows the secret information related to such practices (Kumar, & Wilson 2009, p. 155).

However, the existence of legally binding information stipulated in the contract bars the service provider company from disclosing or publishing such confidential information (Weerakkody, & Irani 2010, p. 616). Through proper mechanisms, a company identifies and chooses the business processes to outsource and those not to outsource (Rosenfed 2006, p. 1475).

Therefore, as long as the service provider is able to abide by the laid down procedure and rules and regulations, the threat to company’s security and confidentiality is null and void. Since security threats can be minimised, I can argue that outsourcing has more benefits than disadvantages.

Another risk of outsourcing occurs when the external service provider is dissolved or becomes bankrupt. Such risks hinder the smooth operation of the outsourcing business (Kumar, & Wilson 2009, p. 159). For instance, it compels the business that outsourced either to look for a new service provider or to render the process back to internal operations immediately.

Failure to take precautionary measures or lack of what to do in case of bankruptcy of the external service provider makes an organisation waste a lot of time and or even loose precious resources, which would otherwise jeopardise its business as observed by Peng (2001, p. 825).

Finally, outsourcing and offshore outsourcing reduce flexibility in handling adjustments related to business conditions (Herath, & Kishore 2009, p. 319). Due to the negative staff impact, the business looses focus in dealing with internal and external customers (Tadelis, 2007, p. 269).

In fact, “increase in the staff turnover, potentially significant brain drain, and the loss of team spirit” (Amit, & Zott 2001, p. 506) are inevitable outcomes of outsourcing. Since not every employee views outsourcing positively, some see no hope due to knowledge loss that characterises outsourcing. Hence, they seek new employers.

Notwithstanding, losing team spirit itself drastically reduces the productivity besides inflicting important financial pains on an organisation (Weerakkody, & Irani 2010, p. 627). Although outsourcing and offshore outsourcing can limit company’s operation if not well strategised, the available advantages associated with the outsourcing outweigh the disadvantages.

Advantages of outsourcing

Improves living standard

The challenges of outsourcing may be painful to people and companies. However, they form a very important part for innovation, increased productivity, and efficiency (Barney 1991, p. 114). Organisations consider outsourcing as providing both an immediate and lasting solutions to business operation problems (Rosenfed 2006, p. 1488).

Although economists look at the long-term effect of outsourcing, non-economists consider the short-term impacts associated with outsourcing (Peng 2001, p. 819). Since less-skilled jobs are outsourced to the developing economies, outsourcing will improve the living standards of people in the developing countries.

Otherwise, a long-term advantage of outsourcing is the improvement of economies of developed nations and the expansion of economies of budding countries because of the influx of employments for both semi-skilled and skilled workers (Herath, & Kishore 2009, p. 320).

Another long-term benefit accruing from outsourcing to the consumers from developed and developing countries is the availability of affordable high quality products with better customer services (Amit, & Zott 2001, p. 515). By creating more jobs for the middle class citizens and the production of cheap quality consumer goods, outsourcing enhances the living standards of people (Pellicelli, & Meo-Colombo 2011, p. 278).

In addition, outsourcing does not only help individual businesses but also benefit the whole economy by creating more jobs besides cutting down the costs of high-tech goods thus speeding up the adoption of new technologies.

According to Pouder, and Daly (2011, p. 12), outsourcing businesses through collaborating with local entrepreneurships is advantageous for production facilities in developing countries to produce goods and services at a lower cost. Unlike disadvantages, the advantages of outsourcing are both of social, political, economical, cultural, and geographical nature.

Lowers capital expenditure

The main reason why organisations do outsource is the reduction of the overall expenditure of a business process. As such, businesses strive to strengthen their competitive positions by cutting labour costs as low as possible in order to maximise profits. Therefore, outsourcing creates more capital funds as it “reduces the need to invest capital in non-core business functions thereby freeing capital to invest in profit-making aspects of the business” (Barney 1991, p. 109).

For instance, outsourcing lowers the capital expenses of the company by making the external service provider responsible for purchasing the expensive hardware and software required to complete the business process. Since external service providers are also responsible for regular maintenance and or upgrading of the hardware and software, it rewards the businesses that outsource because they do not incur the costs of upgrades (Peng 2001, p. 808).

Moreover, offshore outsourcing reduces the operational and recruitment costs hence promoting cost savings. It avoids the in-house functions hence minimising the costs for recruitment and operations (Amit, & Zott 2001, p. 518). Companies reduce their worker levels and any other related costs of staffing, training, supervision, salary, benefits, and other human resources’ costs.

Consequently, a company outsourcing a capital-intensive task also “…reduces the costs of equipment obsolescence and depreciation” (Herath, & Kishore 2009, p. 324). While outsourcing vendors have limited control of the benefits, the outsourcer receives part of the savings thus learning how to handle dealers undertaking the provided role hence passing the gain from volume procurement and effective leasing (Pellicelli, & Meo-Colombo 2011, p. 277).

Competitive Advantage

The main advantage of outsourcing is based on the fact that it enables the business to minimise costs and expenses in order to stay ahead in competition by competing favourably (Herath, & Kishore 2009, p. 318). Therefore, businesses often identify the lowest-cost situations that help them to become more competitive and efficient.

Several advantages result from competition of the customers and businesses. As customers benefit from cheap and quality products and improved services, businesses count gains arising from sales of their produce (Pouder, & Daly 2011, p. 8).

In addition, due to “state-of-the-art technology” (Barney 1991, p. 119), outsourcers only spend time and funds on the modern equipment and on worker training in order to remain competitive. Outsourcing thus enables businesses to receive the most efficient services and the most recent technologies for a particular function.

A company only enjoys significant competitive advantage over a number of other vendors if it is able to sustain good relationships with its clients. Otherwise, without undertaking initiatives to support the satisfaction of customers, realising the competitive advantage becomes extremely difficult (Peng 2001, p. 823).

Due to constant competition, organisations tend to outsource irreversible non-core business processes. This integration of ‘Business Process Outsourcing’ has enabled companies to compete globally in a bid to increase profitability thus making them keep a tight focus on their core business while letting best-in-class service providers to take on the day-to-day management of non-core functions (Kumar, & Wilson 2009, p. 157).

Competition also compels companies to strategise towards a steadily inclusion of multiple activities beyond non-core business processes. Building a business relationship is therefore an important aspect for the company to stay ahead of competition.

Improve Quality Production

Outsourcing enables businesses to acquire a large number of skilled, swift, and motivated workforces who ensure improved productivity (Herath, & Kishore 2009, p. 323). For instance, when a company outsources a task to specialised vendors, the dealers effectively complete the tasks faster and with better quality output because the outsourced vendors have better and specific tools and practical expertise in relation to those at the outsourcing business.

Besides, specialist vendors enable an “organisation to shift certain responsibilities” (Tambe, & Hitt 2010, p. 65) to them so that they can plan business risk-mitigating factors better. Producing quality products has a great positive impact on the business income and image. Production of high quality goods often enhances business sales besides maintaining existing customers and attracting prospective buyers (Pouder, & Daly 2011, p. 5).

In addition, since companies that outsource are able to provide customers with relatively high quality and affordable products and services, they possess higher chances of beating their competitors. Organisations also pursue performance improvement through better use of supplier capabilities, outsourcing strategies, and technology to create a flawless coordinated supply chain and production process.

As such, supply chain incorporates efficient processes among partners to enhance customer service in an attempt to achieve a sustainable competitive advantage (Peng 2001, p. 817). However, the irregularity in the revenue flow from the sales of goods often leads to an indecisive and incoherent financial performance.

Lessens Management Worries

Outsourcing shifts business management thus lessening management worries (Pellicelli, & Meo-Colombo 2011, p. 276). The external service providers hire and supervise personnel who will be responsible for effecting the business processes (Kumar, & Wilson 2009, p. 148). Outsourcing gives businesses the ability to acquire skilled and trained workers to perform management tasks at some reasonable fee (Barney 1991, p. 106).

Since outsourcers are new business partners, they desire to ensure that the company operates at its maximum potential by detailing task and attention to elements and introducing additional outsourcers to help in implementing organisational goals.

Outsourcing also leads to flexible management styles. Flexibility in managements is a very important driver that enables organisations to respond to customer requirements quickly. Outsourcing is a smart way to accomplish flexibility (Peng 2001, p. 804).

Through proper process design and right outsourcing strategies, organisations can control the critical factors of production management. Besides, they can maintain flexibility and adaptability within each process hence focusing on supplier management and performance improvements.

Improves Business Concentrations

Outsourcing enables organisations to concentrate more on their core capabilities and to rationalise and strengthen their business processes thus leading to effective and efficient management (Amit, & Zott 2001, p. 507). Focusing on the core business activities is inevitable for effective management where there is a proper time planning in directing business strategies in order for an organisation to be successful and profitable (Herath, & Kishore 2009, p. 322).

Therefore, to avoid wasting too much time thinking on how to manage and perform certain administrative or ancillary functions, outsourcing provides a better solution to the management team.

Moreover, by signing contracts to outsource, an organisation needs to concentrate on obtaining stable pricing and eliminating future needs to shop around (Sharma, & Krishan 2001, 401). The stable pricing gives a company an opportunity to plan and “budget operating expenses and capital purchases more accurately while potentially preventing the likelihood of surprise expenses” (Tambe, & Hitt 2010, p. 67).

Therefore, an organisation will only be concentrating on how to maximise sales and profits as well as how to effectively and efficiently improve productivity. Consequently, the organisation assumes a better market position where it can maintain lower rates with better service besides outsourcing to countries with lower tax rates in order to enjoy increased savings due to tax benefits (Kumar, & Wilson 2009, p. 158).

Conclusion

Even though there are several business processes being outsourced, the market for outsourcing is expected to increase swiftly in the near future due to its numerous advantages (Amit, & Zott 2001, p. 503). The number of external service providers must also increase proportionately to create the competitive advantage of outsourcing.

Outsourcing has its advantages and disadvantages (Herath, & Kishore 2009, p. 314). The fact that outsourcing has more pros than cons and that more and more organisations improve their productivity and maximise gains as a result of outsourcing, is a clear evidence to support that the benefits of outsourcing and/or off-shore outsourcing outweigh the disadvantages (Wee, & Wee 2010, 2089).

However, before an organisation chooses to outsource its business processes, it should study all the factors carefully in order to avoid any regret that might result from outsourcing.

References

Amit, R & Zott, C 2001, ‘Value Creation in E-business’, Strategic Management Journal, vol. 22 no. 6, pp. 493-520.

Barney, J 1991, ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17 no. 1, pp. 99-120.

Herath, T & Kishore, R 2009, ‘Offshore Outsourcing: Risks, Challenges, and Potential Solutions’, Information Systems Management, vol. 26 no. 1, pp. 312-326.

Kumar, S & Wilson, J 2009, ‘A manufacturing decision framework for minimising inventory costs of a configurable off-shored product using postponement’, International Journal of Production Research, vol. 47 no. 1, pp. 143 -162.

Pellicelli, M & Meo-Colombo, C 2011, ‘Outsourcing Strategies, How to Formalise and Negotiate the Outsourcing Contract’, Annals of the University of Oradea, Economic Science Series, vol. 20 no. 1, pp. 276-287.

Peng, M 2001, ‘The resource-based view and international business’, Journal of Management, vol. 27 no. 6, pp. 803-829.

Pouder, R & Daly, J 2011, ‘The Impact of Outsourcing on Firm Value: New Insights’, SAM Advanced Management Journal, vol. 1 no. 1, pp. 4-13.

Ramingwong, S & Sajeev, A 2007, ‘Offshore outsourcing: the risk of keeping mum’, Communication of the ACM, vol. 50 no. 8, pp. 101-103.

Rosenfed, J 2006, ‘Organised Labour and Racial Wage Inequality in the United States’, Quarterly Journal of Economics, vol. 121 no. 1, pp.1460-1502.

Sharma, A & Krishan, R 2001, ‘Value creation in markets: a critical area of focus for business-to-business market’, Industrial Marketing Management, vol. 30 no. 4, pp. 391-402.

Tadelis, S 2007, ‘The Innovative Organisation: Creating Value through Outsourcing’, California Management Review, vol. 50 no. 1, pp. 261-277.

Tambe, P & Hitt, L 2010, ‘How Off shoring affects IT Workers’, Communications of the ACM, vol. 53 no. 10, pp. 62-70.

Wee, H & Wee, P 2010, ‘Modelling of outsourcing decisions in global supply chains. An empirical study on supplier management performance with different outsourcing strategies’, International Journal of Production Research, vol. 48 no. 7, pp. 2081-2094.

Weerakkody, V & Irani, Z 2010, ‘A value and risk analysis of offshore outsourcing business models: an exploratory study’, International Journal of Production Research, vol. 8 no. 2, pp. 613-634.

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