Over the bygone years there has been a great amount of development in the world of business. It is noted that with a growth and modernization of companies, the management tend to outsource functions. Moreover, outsourcing is recognized as one the most crucial aspects that not only benefit start-ups, but also act as a helping hand to growing firms (Stanfield and Thompson, 2014, pp. 331-349). As compared to activities performed within an organization, the concept additionally provides several benefits. In addition to building up external relations with service providers, enterprises tend to enter into partnerships as well. With a growth of outsourcing in the corporate world, the feature is now recognized to be of strategic importance. Stanfield and Thompson (2014, pp. 331-349) also stated in their article that being a part of a company`s fundamentals, outsourcing also has certain requirements that needs to be fulfilled. However, outsourcing also tends to have several complications and issues that immensely affect the smooth functioning of a firm.
This particular project focuses on the various advantages and disadvantages of outsourcing business functions. In order to understand the concept in a detailed manner several journals, articles, books and other secondary sources have been used. Further, the report along with comparing and contrasting the previously published materials, also tend to focus on filling up literature gaps.
The principal objectives for this project are the following:
- To learn about the various advantages of outsourcing business functions.
- To learn about the various disadvantages of outsourcing business functions.
The aspect of outsourcing in the modern world is a widespread aspect and hence needs a careful understanding for analysis. It is noted that various reviewed sources such as journals, books and articles have been utilized for this matter. Additionally, the project tends to have a real life approach as well. In addition to depending on published works, the report concentrates on highlight important subtopics, getting a detailed insight and thereby come to a proper conclusion.
Literature ReviewAdvantages of Outsourcing Business Functions
As per Verma, Singh and Gupta (2013, p. 12), outsourcing functions in a business is of strategic importance. It is noted that the multi-dimensional aspect can be broken down into several individual parts. Further, benefits of the aspect can also be broken down into smaller categories depending upon the functions. Peck (2017, p. 173) summarizes the various pros of outsourcing into five parts: lowered production cost, tax evasion, relational rents, strategy oriented, and flexibility. On the other hand, the journal by Smogavec and Peljhan (2016, pp. 127-131), distinguishes the various benefits offered by the feature in the following manner:
- Expert Operations: It is with the help of experts that a company can achieve greater results. Outsourcing enables a firm to build up stronghold relationships with professionals of different field. In addition to a rise in capabilities, external service providers help firms with technical know-how and investments. Moreover, skill, competency, control and managerial efficiency also rise (Parlour, 2016, p. 89). With a planned and well coordinated outsourcing of function, enterprise become more competitive and gain stability.
- Cost Reduction: Unlike the work of Peck (2017, p. 173), the journal of Smogavec and Peljhan (2016, pp. 127-131) concentrates on a detailed discussion on this characteristic of outsourcing. It is noted that along with production expenses, there is downfall in operational costs. Apart from lowering working capital and unnecessary expenditure, outsourcing helps to develop tax efficiency of organizations. On the other hand, there is also a increase in employment and management capacities along with cut-down of process investments. It is noted that, the feature also ensures lowering of overhead costs as well. With a downfall of spending by the administration, there is a consequent rise in savings. However, Cromie and Zott (2013, p. 183), compares internally and externally carried out functions. In contrast to interior functions, outsourcing not only costs less but also integrates specialization. Outsourcing posses the capability to bring down economical costs by 20% - 50% (Szymczak, 2013, p. 59).
- Concentration on Core Business: Among the various operations in a company, there also exist functions that are unimportant and cause loss in the long-run (Lacity and Willcocks, 2015, pp. 237-245). Outsourcing practices significantly helps the management of a firm to differentiate core activities from the non-core ones and thereby draw focus to it. For example, organizations often outsource accounting practices and concentrate on manufacturing goods, thereby advancing towards a developed strategy that along with building competitive advantage factors help to serve customers in a better way. As per Molinelli and Paccagnella (2013, pp. 87-98), it is momentous that outsourcing practice facilitates companies to concentrate on core processes, access specialized skills and enjoy economies of scale.
- Enhanced Innovation: The shift of focus from non-core practices to core processes greatly helps the management of a business to develop competitive advantage factors. Similarly based on the idea of Smogavec and Peljhan (2016, pp. 127-131), Oshri, Kotlarsky and Willcocks (2015, p. 89) in their book states that the outsourcing acts as a helping hand to reallocate resources from domestic activities to innovation. It is noted that the feature enhances creativity within the organizational structure that further leads to a rise of production and performance levels.
- Time Pressure Management: Every enterprise is confronted with an issue of managing time-sensitive functions (Szymczak, 2013, p. 59). It is noted that outsourcing helps the management to perform effectively and deliver results timely. On the other hand, Bowman (2016, pp. 215-231) takes into consideration the case of peak seasons when a firm has to deal with exclusive orders to enjoy an increased level of profit. It is the outsourcing functions breaks down pressure and ensures fulfilment of targets.
Despite of a detailed analysis in the journal of Smogavec and Peljhan (2016, pp. 127-131), it fails to takes into consideration the case of the several other advantages of outsourcing functions in case of a small or newly start-up business. Based on the book of Hill (2015, p. 310), a few more benefits of the aspect can be identified as follows:
- Risk Sharing: A standout amongst the most essential factors in any venture is risk assessment and investigation. It is by outsourcing procedures on to specialists that a firm profits from their increased knowledge and mitigate potential dangers.
- Geographical Dispersion: The rise of digital technology has enabled companies to outsource activities over these mediums. In addition to lower costs and timely delivery of the services, firms are able to operate on holidays as well (Mol and Brewster, 2014, pp. 20-34).
- Simplifies Project Management: It is noted that the use of online channels and social mediums for professional work is common in the modern world. The outsourcing of processes using specialized websites enables a simplified management of the activity.
- Simplifies Work Relationship: Outsourcing of business functions tends to build up contractual bonds between an organization and service providers. Bowman (2016, pp. 215-231) contradicted that the presence of informal relationship between employees leads a rise in production levels. However, it is only with the downfall of unofficial bonding and rise of professional that acts a helping hand to any firm.
Disadvantages of Outsourcing Business Functions
In the words of Garrigos-Simon, Gil-Pechua?n and Estelles-Miguel (2015, p. 274), like any other feature in an organization, outsourcing also has its own set of disadvantages that limits its success in the corporate world. On the contrary, Vitasek, Ledyard and Manrodt (2013, p. 518) states that it is only with the use of calculated metrics in the process of outsourcing functions that will not only help to evade complications, but also shall ensure a smooth flow of operations. Mol and Brewster (2014, pp. 20-34) in their work identify five major drawback of the concept: hollowing out, transaction costs, opportunistic behaviour, reduced learning and creativity. It is noted that unlike Smogavec and Peljhan (2016, pp. 127-131), factors like innovation, expanded scopes, and operation costs are recognized as major cons of outsourcing by Hill (2015, p. 310).
On the other hand, the various disadvantages identified by Mosca and Bordelon (2017, pp. 81-132) after a detailed investigation into the field are as follows:
- Failure of Internal Expertise: An increased outsourcing of functions tends to escape training and development of employees in a firm. Further, an interactive environment would also lead to downfall of motivation among the workers which leads to degraded performance levels. However, Peck (2017, p. 173) suggests that outsourcing of human resource functions such as recruitment, training, performance management, compensation, mentoring, coaching, corporate reallocation and employee communication would help to build up internal expertise.
- Degraded Management Control: Outsourcing activities directly leads to the loss of managerial control on the processes and its outcomes. Moreover, an excess of dependability on external service providers might also result in confinement to definite operational arrangements. Similarly Jefferson (2013, p. 398) also believes that, outsourcing functions contributes towards breaking down administrative control and limits development of a competitive edge. With a diminished rule on delivery of activities, a company`s liability exposure seem to increase.
- Succession Planning Risk: Based on the work of Vitasek, Ledyard and Manrodt (2013, p. 518) it can be said that outsourcing may result in varied and low quality results. In addition to affecting future plans of a firm, external functions might not be a long term source of competitive advantage. Further, service providers who have no knowledge of a company`s objectives will act as a liability. It is the adequate balance between the motives of a firm and targets of outsourcing that lead to effective outputs.
- Proprietary Data Risk: It is noted that rise of confidentiality concerns are one of the most important factor that affects outsourcing. Moreover, outsourcing also act as a threat to intellectual capital thereby affecting the management`s decision to approach external service providers.
However, in conflict to Mosca and Bordelon (2017, pp. 81-132), the published material of Peck (2017, p. 173) states that the advantages and disadvantages of outsourcing tends to balance each other. On the contrary, Jefferson (2013, p. 398) recognizes several other limitations of outsourcing business functions, which are as follows:
- Existence of Hidden Costs: As compared to internally performed activities, outsourcing is likely to be cheaper. Conversely, there exists various hidden cost in the process that severely affects its smooth operation. The complicated contracts between organizations and big service providers often include various unexpected costs that are harmful for any SME (Stanfield and Thompson, 2014, pp. 331-349)
- Share Financial Trouble: Even though inviting expert agencies for performing internal activities tend to cut down risks, it often leads to a dangerous situation by bonding the two financially. It is noted that service providers do not intend to take part in any loss of a firm.
- Public Backlash: As opined by Verma, Singh and Gupta (2013, p. 12) people with a moral belief regarding externalisation of activities do not prefer firms that involve in such affairs. However, there is no such mention in the work of Mosca and Bordelon (2017, pp. 81-132).
- Loss of Information: Among the several problems, the transfer of lengthy data governing complex processes is a hard task. It is prominent that the exchange of information to overseas freelancers or external agencies results in a loss of data, thereby creating confusion.
Based on the above project it can be inferred that the notion of outsourcing business function has been a topic of debate for business professionals in the bygone years. However, with the modernization of the business world, the aspect has gained importance. It is noted that like every other aspect in a company, outsourcing also tends to have its individual benefits and drawbacks. Additionally, there has also been a growth of service provider agencies that particularly focus on operating in this particular field. As compared to internally carried out activities, outsourcing processes provides a firm with several exclusive advantages. On the other hand, the presence of complications and challenges not only affect emprises, but also greatly impact the aspect. However, it can be understood that it is only with building up of effective plans, coordinating objectives, and expanding control that would minimize negatives of outsourcing. Furthermore, as compared to the drawbacks of the concept, the numerous advantages tend to be of greater significance that plays a major role in leading and guiding business organizations towards success.
Bowman, A. (2016). What a waste: Outsourcing and how it goes wrong. Manchester: Manchester University Press, pp. 215-231.
Cromie, J. and Zott, L. M. (2013). Outsourcing. Detroit: Greenhaven Press, p. 183.
Garrigos-Simon, F. J., Gil-Pechua?n, I., and Estelles-Miguel, S. (2015). Advances in crowdsourcing. Cham: Springer, p. 274.
Hill, C. W. L. (2015). International business: Competing in the global marketplace. New York, NY: McGraw Hill Education, p. 310.
Jefferson, A. (2013). Business process outsourcing: 23 most asked questions : what you need to know. Brisbane, Australia: Emereo, p. 398.
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Mol, M.J. and Brewster, C., (2014). The outsourcing strategy of local and multinational firms: a supply base perspective. Global Strategy Journal, 4(1), pp. 20-34.Bottom of Form
Molinelli, F. E., and Paccagnella, L. S. (2013). Economics of regulation and outsourcing. New York: Nova Science Publishers, pp. 87-98.
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Oshri, I., Kotlarsky, J., and Willcocks, L. P. (2015). The Handbook of Global Outsourcing and Offshoring: The Definitive Guide to Strategy and Operations. New York: Springer, p. 89.
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