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Managerial Accounting Decisions: Outsourcing Essay

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Updated: May 12th, 2022

Introduction

Outsourcing is the process of seeking services from other external firms and is aimed at improving quality and efficiency, reducing cost, and taking advantage of new technology. At times it is cheaper to buy goods, and source services from businesses with comparative advantages (Bajec & Jakomin, 2010, pp. 285-291). This is due to high expertise as well as knowledge of operations exhibited by the company providing the services. However, a company needs to consider the benefits of buying over those of making. Outsourcing is characterized by merits such as reduced operating costs, better business focus, resource concentration to other functions, as well as reduced risks (Işıklar, Alptekin, & Büyüközkan, 2007, pp. 3701-3714). Decisions concerning outsourcing important operations are crucial to an organization because they affect the firm’s production methods, working capital, and competitiveness.

Factors considered on a ‘buy-make’ decision

Management accountants may find that some operations need to be outsourced to reap the benefits as well as utilize spare capacity more profitably. Factors that lead to a decision on whether to buy or make include:

  1. The implication of outsourcing for the attainment of strategic goals: The decision to make or buy influences the company’s achievement of long-term objectives. In this view, it is important to consider the impact the decision will have on the organization’s structure in addition to strategies.
  2. Business capabilities: These give the aspect of competitive advantage over other firms in the same industry. The decision-maker should assess how the choice will affect the company’s growth, development, as well as quality assurance. Manufacturing abilities and innovative technology are important in the process. Hence, a company well versed with these skills will opt to make instead of buying to utilize its own capacities (Jain & Natarajan, 2011, pp. 294-322).
  3. Goal consideration: This is the determination of the reasons behind the company’s wish to outsource. The company needs to highlight the goals it wishes to accomplish from the decision in order to critically analyze the available choices and make the best decision.
  4. Cost consideration: This is meant to give a detailed analysis of the monetary benefits that would accrue to the company for either deciding to make or buy. In this analysis, the management accountant needs to estimate opportunity cost foregone in each case (Holcomb & Hitt, 2007, pp. 464-481). Relevant costing is of great assistance to analyze what needs to be outsourced as well as the impact on the company’s revenues.
  5. Current operations: This analysis gives a clear motive as to the need to outsource or continue operating as a present. If there is a need to improve performance, then outsourcing may be of assistance to the company.

Importance of outsourcing risk assessment

  1. Security concerns: An organization is accountable for the actions of its employees. Thus, it is important to consider the legal implications of outsourcing where employees are expected to act upon the instructions of the service provider.
  2. Possibility of litigation: In cases where suppliers engage in unlawful activities when in the business premise, it creates a threat of legal action. Such acts like fraud also ruin the reputation of the business (Harland, Knight, Lamming, & Walker, 2005, pp. 831-850).
  3. Risk of being locked up: This should be considered to allow the company makes a sound decision on whether to inbuilt or outsource in terms of the contract.
  4. Need to understand the quality of services: Outsourcing does not always guarantee quality. This necessitates the need to consider available options to make a sound decision.
  5. Effects on staff morale: In a decision to outsource functions, employees may be laid off to accommodate new expertise. This makes other staff lose morale due to fear of demotion.

Conclusion

Identifying the operations as well as expertise to conserve over the ones to subcontract requires cautious thoughtfulness and planning. An organization may plan to outsource services wholly or partly.

References

Bajec, P., & Jakomin, I. (2010). A Make-or-buy Decision Process for Outsourcing. PROMET-Traffic&Transportation, 22(4), 285-291.

Harland, C., Knight, L., Lamming, R., & Walker, H. (2005). Outsourcing: assessing the risks and benefits for organisations, sectors and nations. International Journal of Operations & Production Management, 25(9), 831-850.

Holcomb, T. R., & Hitt, M. A. (2007). Toward a model of strategic outsourcing. Journal of operations management, 25(2), 464-481.

Işıklar, G., Alptekin, E., & Büyüközkan, G. (2007). Application of a hybrid intelligent decision support model in logistics outsourcing. Computers & Operations Research, 34(12), 3701-3714.

Jain, R. K., & Natarajan, R. (2011). Factors influencing the outsourcing decisions: a study of the banking sector in India. Strategic Outsourcing: An International Journal, 4(3), 294-322.

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