Advantages And Disadvantages Of Outsourcing Business Functions: Literature Review Essay.

Literature Review Scope and Objective

Write a Literature Review on Advantages and Disadvantages of Outsourcing Business Functions.

This section of the research is the key section where the ideas of different authors will be discussed on the topic ‘Advantages and Disadvantages of Outsourcing Business Functions’. This section contains the secondary data which contains the views and opinions taken from various sources which will help in completing the research successfully. Outsourcing can be referred to the process which is used for reducing the costs of the business operations by transferring the business functions to outsiders rather than completing it internally. Outsourcing has been a topic of discussion from many years and it is often observed that it is used to achieve economies of scale. Different authors have given different views on the concept which will be discussed here as under.

The scope of the literature review is wide because Outsourcing is a wide topic which can be discussed thoroughly. The advantages and disadvantages of the outsourcing business functions will be discussed in different business areas and the thoughts of various authors will be discussed on the topic which can cover the benefits & harms of outsourcing to the business with the real life examples of the corporate world to make it clearer.

The main objective of the project is to identify the advantages and disadvantages of outsourcing business functions. This will be done by going through various articles, journals and web sources which provides a clear idea about what different authors think about the same. It also considers that how outsourcing has proved beneficial or failure for the real corporate giants.

According to Krstic and Kahrovic (2015), outsourcing of business functions improves the efficiency of the business and also provides the competitive advantage of the business. The author provides opinion that Outsourcing is now an important tool for the businesses and it provides the competitive advantage to the small or large scale businesses. There are many drivers for outsourcing which includes reduction of costs, savings, reduction in the capital investment, focus on core competence and flexibility.  In simple terms, it can be said that it is moving the processes of business from internal service providers to the external service providers in return of fee paid to the service provider. Similar to this, Iqbal & Dad (2013) added that the companies discontinue the production facilities of their own and handover these functions to other companies to seek better services, lesser costs and by this they can also pay attention to their core functions. It provides overall global cost advantages which is a the most important factor for outsourcing the business functions which cannot be ignored. As per the author, there are four reasons which are responsible for outsourcing the business functions. These reasons include improvement in the cash flow, improvement in the payment control, staffing and improvement in the overall business performance (Bajec & Jakomin, 2010).

Comparative analysis

As per Manning, Massini & Lewin (2008), outsourcing of business function has different views like Transaction- Cost view, Competence- Based view & Relational view. The author further adds that the global scenario is changing which is also bringing a change in the process of comp0leting the business functions. Outsourcing is important because it reduces costs and brings economics of scale. In the business, it brings technological advancements in the business and the business is able to access the global talent. Outsourcing helps business to focus on its core competencies and this is how it makes itself capable to provide improved services to the customers which improve the customer relationship. In contrast to that Tayauova (2012) suggested outsourcing can lead to the loss of managerial control from the managerial operations and can also provide threat to the security and confidentiality of the organisations. The disadvantages of the outsourcing of business operations include the hidden costs as well which ultimately increases the cost of the operations and can also create quality problems. The execution of outsourcing is difficult. When an organisation outsources the services, it expects better quality of services from the service provider which sometimes influences the satisfaction level of the service user. In addition to this, Soriano-Meier, Garza-Reyes, Lal & Rocha-Lona (2012) views that outsourcing of the business functions creates a fear of leakage of the confidential data of the company. It creates quality issues and problems or can also be slow in providing response.

In the opinion of Brcar (2011), Outsourcing of the business functions can ensure the competitiveness of the firm. The author conducts a research by collecting information through survey and finds that outsourcing business functions is a strategic decision which ultimately affects the entire organisation. It is taking advantage of the global markets and the stronger strategies which ensure competitive advantage to the company in the global industries. It is found that outsourcing will increase in future and the areas where it will be used the most will be HR, quality and after sales services. The author concludes that it is increasingly important for the success of the business organisations and this sector of outsourcing will grow in future.

According to Troac? & Bodislav (2012), outsourcing has evolved in the last two decades and is continuously rising. The author discusses the advantages and disadvantages of the concept of outsourcing. The advantages of the concept are that Outsourcing is the strategic tool use in the business which provides competitive advantage to the business. It helps companies to increase their level of savings from 10 to 15% on the total costs incurred on the processes which is because of the economies of scale. Besides financial advantages, there are other benefits of outsourcing like it helps the business in focussing on the core processes and in accessing the resources. But there are also some of the concerns with Outsourcing like specially when the organisation loses control from its operations and also loses the performance which ultimately affects the image of the firm in the market and reduces the profitability. The results of outsourcing the business functions are not immediate. When a business outsources its business functions, it loses the productivity of its labour because the time spent on the transfer of knowledge to the service provider could have been used in generating services by themselves (Marvin, 2011).

In accordance with Sharma & Loh (2009), outsourcing is a contributing factor in the success of businesses and in the year 2009, it contributed US $172 billion in the industry. The main drivers of the outsourcing activities like cost efficiency was considered important and it has been found that the multinational companies are taking more part in the outsourcing of services and the developing countries like India and China will be much ahead than they are right now. There will be competition in future in relation to the outsourcing industry.  In US, the number of outsourcing companies doubled between 2005 to 2008 and 60% of the companies showed their willingness to expand their current outsourcing services in future.  It is also found that smaller companies are more apt for outsourcing their business operations to gain specialisation and expert services on the services. It is seen in the last few years that the labour cost is reducing due to the outsourcing of services and cost saving is the primary motive of any company for outsourcing their business activities (Gotzamani, Longinidis & Vouzas, 2010).  It was also found that the firms which outsource the services have saved up to 3.5 times more than their actual savings. The affect is different in different industries, like in manufacturing industries, there is no such positive affect is seen on the performance but the lead time of the processes increased because the outsourcing  helps the businesses to deal with the supply chain management (Smith, 2012).

As per Wang, et al. (2008), around 145 UK and US organisations have been surveyed and among these 56 per cent of the companies did not see any cost reduction benefits while 23% experienced cost benefits in their business. The author suggests that the companies should not underestimate their in-house production capabilities and should only adopt outsourcing facilities if it provides benefits to the business. The survey conducted by the author came to a conclusion that among several UK based companies which took part in survey, 350 companies were pulled out of the outsourcing contract and held of these companies said that the quality of the outsourcing services were poor and remaining half said that there were no cost savings which bought them back to the in-house production facilities.

According to Cowley (2004), JP Morgan in the year 2004 have cancelled the outsourcing contract of $5 billion with IBM and hired back the employees who were hired by IBM to process the functions. This shows that JP Morgan decided to start their operations in house instead of outsourcing them to IBM. IN house production facilities bought competitive advantage to the firm.

Outsourcing provides swiftness and expertise to the businesses which helps in completing the work faster and helps in giving better output. It also helps in sharing the risks between the service provider and service user. But on the contrary, there are some hidden costs and it also provides risks of leakage of confidential information (Suraju & Hamed, 2013). For e.g. there are many success stories of sousing the business activities and also the cases of failure. According to Muzychko (2015), there are many companies which have successfully used outsourcing services and created value in their businesses. For e.g. Procter & Gamble is a leading company for fast moving consumer goods which is successful across the world. The company was facing a challenge in the global markets due to rapidly changing market of technology and innovation; the company outsourced its Research and Development activities and it proved to be one of the best decisions of the company. Outsourcing its Research and Development function boosted the innovation activities. By 60 per cent and it created more than $10 billion revenue from its products. Today, more than half of the innovation for the company comes from an external source.  On the contrary there are some other real examples of failure of outsourcing of business activities. One of the examples is of Royal bank of Scotland. In June 2012, the software update of RBS failed which left millions of customers unable to access their bank accounts and they were unable to withdraw money from their accounts. Also, the bank was not able to carry n its transactions. The problem was converted huge backlog in the economy and it took several days to clear the mess up. It was all because of the IT vendor which was providing the software services to the bank and the bank did not have any back up plan which created the problems and it became worse.

With all these pros and cons discussed, it is advisable that the businesses should consider the type of services which should be outsourced and the benefits and harms related to it. The streams which are commonly outsourcing its services are Information Technology, Outsourcing of legal matters, web designs and recruitment services (Weske, 2012). There should be a consistent communication between both the parties for increasing the overall effectiveness of the outsourcing decisions taken by the company. Also, the long term relationships need to be established in order to maximise the benefits of outsourcing the business functions. The companies can also make a business plan for building an optimum model for outsourcing. It may reduce the costs of outsourcing, capabilities and results of outsourcing the business functions. The improvements in the business functions might enhance more when it is done with proper planning and execution (Chew & Gottschalk, 2013).

The quality of the research papers or other sources used for completing the literature review is high in quality which is helpful in conducting the research well. The sources used are supported with genuine references which show that these sources are valid. The references have the details of the author, year of publication, title of the source and from where the source has been taken. All the content which has been mentioned in the assignment is secondary in nature which means that it has been already used before.

By currency we mean the publication details of the material which has been used in the literature review. All the sources used in the literature review are recent. The sources used are of the year 2004 and after years. There are some recent researches which focussed on the uses of outsourcing of business functions and also the drawbacks of the business functions. Most of the researches are of the year 2012 and above. It depicts that the information used is not out dated and provides the latest information and views of different authors on the topic which helps in building up clear conclusion on the topic.

Research gap is the missing or insufficient information which hampers the conclusions of the research. It also affects the ability of decision-making of the practitioners. It can also be referred to the gap between the existing research and the research to be done. It shows the missing information in the collected data for the research which could have been used to generate the final conclusions. The research conducted above covers the concept of outsourcing and the advantages & disadvantages of same for the businesses of today. It has also been covered that how outsourcing has been proved success and failure for different business organisations. The research does not cover the drivers of the outsourcing of business functions and the critical success factors of the same. The ideas of different authors have been compered on the basis of similarities and differences in their views for outsourcing business functions.

Conclusion

It can be concluded from the literature review that Outsourcing business activities is a strategic tool for the business. It depends on the type of business and its internal capabilities that it needs outsourcing or not.  Outsourcing business functions is both beneficial and harmful for the businesses. On one hand it may improve the effectiveness of organisational functions and the decision making and also minimise the business risks. On the other hand, it contains hidden costs and also risks the confidential information of the company. The literature review discusses the real life examples of the businesses which show how outsourcing can be success and failure for the business.

Outsourcing business functions brings competitive advantage to the companies. For having benefits from outsourcing the business functions, the companies should consider the risk factors, their outsourcing partners and also the cost of outsourcing and should compare it with the benefits it gets from the same. The comparative analysis will let the company know that whether it should go for outsourcing or should develop in house capabilities

References

Bajec, P, & Jakomin, I 2010, ‘A make-or-buy decision process for outsourcing’, PROMET-Traffic&Transportation, 22(4), 285-291.

Brcar, F 2011, ‘The Perspective of Business Process Outsourcing in Slovenian Organizations’, Organizacija, Volume 44.

Chew, E, Gottschalk, P 2013, ‘Knowledge Driven Service Innovation and Management IT Strategies for Business Alignment and Value Creation’, IGI Global.

Cowley, S 2004, ‘ Update: J.P. Morgan cancels $5B IBM outsourcing deal’. [Online] Available at: https://www.computerworld.com/s/article/95933/Update_J.P._Morgan_cancels_5B_IBM_outsourcing_dea l.  (Accessed 17 August 2017).

Garland, A 2015, ‘Five of the biggest outsourcing failures’, ITproPortal.

Gotzamani K, Longinidis P, Vouzas F 2010, ‘The logistics services outsourcing dilemma: quality management and financial performance perspectives’, Supply Chain Management: An International Journal, Vol. 15, No. 6, pp. 438–453.

Iqbal, Z & Dad, A M 2013, ‘Outsourcing: A Review of Trends, Winners & Losers and Future Directions’, International Journal of Business and Social Science, Vol. 4 No. 8.

Krstic, B. and Kahrovic, E., 2015. Business process outsourcing as a tool for improving enterprise efficiency. Ekonomika, 61(3), p.31.

Manning, S, Massini, S & Lewin, A Y (2008), ‘A Dynamic Perspective on NextGeneration Offshoring: The global Sourcing of Science and Engineering Talent.’ Academy of Management Perspectives, Vol. 22 Issue 3, p35-54.

Marvin, K T 2011, ‘Global Trends in Outsourcing and their Impact (Doctoral dissertation, Worcester Polytechnic Institute)’.

Muzychko, A 2015, ‘5 Successful Stories of Outsourcing’, LinkedIn.

Sharma, A & Loh, P 2009, ‘Emerging Trends in Sourcing of business services’. Business Process Management Journal., Vol. 15 No. 2.

Smith, A 2012, ‘The Pros and Cons of Outsourcing’.

Soita, S & Gichinga, L 2016, ‘Factors Influencing Strategic Outsourcing Practice in Airline Industry: A Case Study of Kenya Airways’, The International Journal Of Business & Management, Vol 4 Issue 3.

Soriano-Meier, H, Garza-Reyes, J A, Lal, J S & Rocha-Lona, L 2012, ‘An Investigation Exploring the Advantages and Disadvantages of Outsourcing the Development of New Products in the Indian Pharmaceutical Industry’, Proceedings of the 2012 International Conference on Industrial Engineering and Operations Management Istanbul, Turkey, July 3 – 6.

Suraju, R & Hamed, A B 2013, ‘Outsourcing Services as a Strategic Tool for Organizational Performance: An Exploratory Study of Nigerian Food, Beverage, and Tobacco Industry’, Journal of Management Policies and Practices, 1 (1).

Tayauova, G, 2012, ‘Advantages and disadvantages of outsourcing: analysis of outsourcing practices of Kazakhstan banks’,  Procedia-Social and Behavioral Sciences, 41, pp.188-195.

Troac?, V & Bodislav, D 2012, ‘Outsourcing. The Concept’, Theoretical and Applied Economics Volume, XIX (2012), No. 6(571), pp. 51-58.

Wang, L, Gwebu, K L, Wang, J & Zhu, D X , 2008, ‘The Aftermath of Information Technology Outsourcing: An empirical Study of Firm Performance following outsourcing Decisions’. Journal of Information Systems, Vol. 22 Issue 1, p125-159.

Weske, M 2012, ‘Business process management – concepts, languages, arhitectures’, Springer.