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Outsoursing Definition, Its Advantages and Disadvantages Research Paper

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Updated: Nov 20th, 2019

Outsourcing refers to an act of transferring an organization’s business activities carried out locally to an external source. The need to improve on efficiency and reduce the operation costs has forced many organizations to specialize in specific businesses. As a result, many organizations have been able to outsource some of their activities previously carried out locally (Miller 1).

Currently, the increasing prevalence of outsourcing among local and international companies has attracted attention from business stakeholders and academia. According to some business experts, outsourcing is one of the oldest business ideas. Since the 1950s, outsourcing has improved over time from peripheral business activities to more critical business activities (Miller 1).

More often, outsourcing has forced companies to dismantle their traditional structures of organizations. Employees have been transferred to external suppliers leading to change of their terms and conditions (Miller 1). Through these initiatives, outsourcing has not only become very useful, but also developed into a complex issue among several organizations.

In numerous organizations, outsourcing has opened new platforms for innovation changing on how tasks are done. For example, cloud computing is changing the manner in which developers test new applications (Fan 6). In the past, the process could take several weeks. Currently, the process takes a few minutes. This paper seeks to highlight the advantages and disadvantages of outsourcing to business organizations and government institutions.

In developed countries such as the US, UK, and Germany, organizations and government institutions have increasingly outsourced their service related activities to the developing countries (Fan 4).

As a result, outsourcing has attracted contrasting reactions from numerous organizations, business leaders, politicians, employees, and unions (Miller 1). For instance, business stakeholders consider outsourcing as a great tool to improve on business efficiency. On the contrary, unions consider outsourcing as a threat to employees’ terms and conditions.

Advantages of outsourcing

Business analysts argue that if outsourcing is managed and evaluated appropriately, it will equally benefit the providers and clients. As such, outsourcing has enabled companies to focus on core functions, save on costs, improve on their quality services, and increase their flexibility (Fan 4).

Based on transaction theory, every organization seeks to economize on its transaction costs. In this regard, outsourcing reduces transaction costs, in turn, reducing the size of the firm making it more productive. According to the economic advantage theory, outsourcing enables its providers, regardless of their geographical locations, to function more productively than their client firms do.

Through this, the client firm will focus on what they do better than their competitors and their provider firm. Most of the outsourcing organizations have created networks of products and service providers specializing in their own distinct area of expertise. As a result, organizations have greater chances to improve their services through outsourcing since professionals will handle their services effectively (Fan 6).

Another advantage of outsourcing is that it enables organizations to access world-class technology at lower rates (Rosenthal 1). Currently, the world market is experiencing numerous innovations and technologies. Consequently, it is becoming hard and costly for several companies to keep up with these new technologies.

As a result, companies are opting to outsource most of their activities to external companies with adequate resources and expertise (Fan 4). Organizations save on operation time and cost through such practices. Similarly, outsourcing organizations can have access to skilled work forces at reasonable prices. It is estimated that organizations spend many resources to recruit, train, and maintain their staff members (Fan 7).

Organizations should adopt outsourcing as an alternative to reduce on these costs. According to economic experts, the initiative will not only reduce on their cost, but also improve on their productivity. For example, in the year 2003 Delta Airlines reduced its operating cost by 25 million by outsourcing more than 1000 jobs to Asian countries.

In the United States, outsourcing has become a trend in most organizations (Rosenthal 1). Many corporations have resorted to outsourcing their customer services, telemarketing, IT positions, and other sales services to companies in developing countries.

Through these, India and China have benefited greatly being the most preferred recipients. As a result, more jobs have been created in Indian and Chinese markets rather than in the American markets (Rosenthal 1). According to the current US business survey, most organizations in the US have greatly benefitted from outsourcing.

As a result, most business organizations interviewed during the survey were planning to outsource most of their services in the future. According to the research, 73% of the US based companies were planning to outsource some of their tasks while 22% were planning to outsource all their activities that do not fall under their core functions (Rosenthal 1). Most organizations interviewed, reported that they were able to focus their attention on core functions and save on operation costs through outsourcing.

The research study indicated that most of these companies are not after outsourcing their services to cheapest providers, but rather to the providers that provide quality service within the allotted time. According to Pegasus Capital Advisors Company, outsourcing their entire human resource processes to ADP enabled the company to save on its time, and focus on its strategic tasks (Rosenthal 1).

Disadvantages of outsourcing

All business organizations operate in risks decision environments. This implies that all advantages stated in favor of outsourcing have probabilities of occurring. One major disadvantage of outsourcing to an organization is the loss of managerial control. When organizations outsource part of their task, they are allowing the outsourcing providers to take full control of these tasks (Rosenthal 1).

As a result, companies may incur additional costs because there is no way for their managers to asses and control costs. For instance, some outsourcing contracts allow providers to purchase items for their clients without approval. Consequently, the providers may leave their clients at risks of material cost escalations.

Another major disadvantage of outsourcing is its negative implications on an organization’s human resource (Fan 6). Those who are against outsourcing assert that when some tasks in an organization are outsourced, employee morale drops remarkably. When parts of the employees’ tasks are outsourced, employees believe that they will eventually lose their jobs to the outsourcing providers.

For this reason, employees will compromise on their productivity, loyalty, and trust, all of which are necessary for the growth of a healthy business. Equally, during the outsourcing procedures, organizational restructuring may result in dislocations and additional social costs for employees. In addition, an organization may earn a bad reputation when its employees lose their jobs to outsourcing providers.

Through outsourcing, threats to security and confidentiality are eminent. Every business has secret information that keeps it running. By outsourcing part of their duties, these organizations share part of their information with outsourcing providers compromising on their privacy.

For example, when organizations share their employees’ payroll, medical records, product formulas, and drawings there are higher chances of compromising on the organizations’ privacy. This implies that organizations must evaluate their outsourcing companies to ensure that their data is secure, and their contracts have penalty clauses in case privacy infringement occurs.

In the year 2009, the state of Indiana and IBM sued each other over a failed outsourcing contract. Ten years before, the state had a signed a $1.34 billion contract with the computer firm. According to the state officials, the outsourcing provider, IBM, mishandled their welfare claims.

Before the signing of the outsourcing contract, the state noted that its welfare claims were at 4.4 %. However, when the contract was awarded to IBM, the welfare claims climbed to 18.3%. Because of these unexpected results, the state sued IBM for non-performance. The states spokesperson claimed that IBM’s efforts were worthless. This example affirms that there are organizations that are disadvantaged by outsourcing.

Conclusion

In the US, government officials have been divided on the issues of outsourcing. Some of the government officials and politicians have heavily criticized organizations involved in outsourcing part of their services to foreign companies.

According to these critics, outsourcing has increased the number of unemployed individuals in the US. On the other hand, those who support outsourcing argue that through outsourcing American firms can manage to compete with other international firms. In this regard, it is upon organizations to evaluate and adopt the best outsourcing companies to maximize on their profits since outsourcing has advantages and disadvantages (Fan 8).

Works Cited

Fan, Liang. “Outsourcing In Business .” Outsourcing Center. Version 2. Routledge, 9 July 2010. Web.

Miller, Brandon . “The Effects of Outsourcing: Does it Hurt the American Workforce? Yahoo! Voices – voices.yahoo.com.” Yahoo! Voices – voices.yahoo.com. Version 1. Yahoo, 17 Sept. 2009. Web.

Rosenthal, Beth. “How a Money Management Firm Benefited from Outsourcing Its HR to a PEO | Article | Outsourcing Center.” Outsourcing Center – The Resource for Actionable Business Insight . Version 1. No Publisher, 4 Jan. 2004. Web. <>.

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IvyPanda. (2019) 'Outsoursing Definition, Its Advantages and Disadvantages'. 20 November.

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