Outsourcing is the process in which a company came into contract with another third party company to perform their function that can be done in the company itself. Most of the companies are using this process so that they can make their focus on other core activities of the company that needs more attention (Arias-Aranda, Bustinza and Barrales-Molina, 2011). Outsourcing results in contract between the two companies. The one company pays the other company to perform one of their functions. The process of outsourcing can only be successful if both the companies and the parties get ready to have mutual consent. There are many processes that can be outsourced which are not so important to be conducted in-house. Thus outsourcing those functions helps the company to invest their time and money solely on the activities that provides them large profit.
The major objective of this project is to analyse the advantages and disadvantages of business outsourcing functions. This is because outsourcing not only provides benefits but can also be harmful for the companies. Understanding the basic advantages and disadvantages from outsourcing helps the company to take better decisions. This study focuses on analysing the factors that support outsource and factors that are negative for outsourcing.
This study helps in understanding the basic concept of outsourcing and the reasons behind the same. This study can also provide the information about the factors that causes the organization to outsource some of their functions along with its advantages and disadvantages. The scope of the project is that the study can be used by the companies to make their outsourcing decisions by reducing its harmful effects an also allow the readers to analyse the disadvantages before outsourcing.
Outsourcing has become the major trends in the companies these days. This is the technique that helps the companies to transfer one of their functions to another company. This has helped in generating job opportunities or the people at large scale. Human resource is the major function that has been outsourced in most of the companies these days. This is because it is not the core activity of the organization (Lee and Choi, 2011). There are other functions that can be outsourced such as accounting functions, customer support functions; marketing functions etc. It is required by the company to ensure that the company they are choosing for outsourcing their function should be reliable. The company should contact the prior clients of that outsource company to take the reviews. Making the legal contract is another important requirement in order to have legal relationship with the outsourced firm. This is because legal interaction between the companies binds both the companies with some obligations that cannot be breached by them and no company can exploit each other. A company should contact all the companies that outsource the area that the company is looking for. This is to identify the availability of the companies. This information helps the company to bargain with the outsourcing firms. Investigation should be conducted for the outsourcing company so that any flaws of the company can be identified. The contracts should be made with all the clauses that are required (Gewald and Dibbern, 2009).
Outsourcing is the tool that is not only about legal contract between the companies, but it also involves trust and information sharing among the companies who came into contract. This relationship can be beneficial for the both the organizations. Some of the advantages of outsourcing the business functions are: (Appendix 1)
Reduction of cost: If any company outsource any of the function, they get specialists to work from them. Keeping those specialists becomes costly for them in their own companies because they may not be required every time. Hiring them can be expensive for the firm. Outsourcing firms can be used for the purposes as and when required. This reduces the operating cost of the company (Lin, Pervan and McDermid, 2007). The outsourcing firms are comparatively cheaper as well. The reason behind the low cost of outsourcing organizations is economies of scale. As the outsourcing firm conducts the single operation at high scale thus per unit cost of operations becomes low.
Concentration on core activities: every organization has some core activities that directly provide them profit. Outsourcing allows the organization to concentrate on those core activities. The organizations outsource some of the support activities to the specialist third party organizations and provide their full concentration on the major activities and functions. This helped them to improve their core activities so that they can earn more revenue (Kremic, Icmeli Tukel and Rom, 2006). The companies have to divide their time and money to all the activities of the company. If one or more activities can be outsourced than the main activities or functions of the company can be prioritize.
Increased flexibility: Removal of the support activity departments from the company results in conversion of fixed cost into variable cost. Flexibility can be increased in the organization such that the services from the outsourcing organization can be availed according to the demand. It is easier to close down the contract then to close down the whole department from the company. It also helps in cist saving because it is not necessary that all the services or the functions of the company are active whole year (Belcourt, 2006). Suppose if the company needs a legal advice from the advisor than it is not necessary for the fir to hire a legal advisor in the company but can contact the legal counsellor at the time of requirement. This saves the money of the company as it needs not to give salary to the legal advisor the whole year.
Quality service: As discussed that the outsource firm are specialists in their functions. Thus, outsourcing one of the functions to the third party firm provides quality services to the companies. On the other hand, if the company conduct that operation in their own firm then it requires them to have knowledge about that function along with the person or the employees to handle such functions. It may be possible that they fails to hire such efficient human resource and the function get affected.
Outsourcing not only provides benefits to the companies but some of the harmful effects are also faced by the companies because of outsourcing. This is because the whole function is being handover to the different company and it is very important to identify the There are many disadvantages of outsourcing the functions as well. Some of them are discussed below:
Loss of jobs: As the company outsource one of its functions that mean the people or the employees who were earlier working on that function has to leave their jobs. This results in bad image of the company as the employees cannot trust the company for job security (Harland, Knight, Lamming and Walker, 2005). This also leads to bad publicity of the company and can increase the employee turnover as the employee cannot fell safe at the company.
Quality issues: As far as the company’s internal functions are considered, it has been analysed that these functions can be evaluated and monitored by the company’s management time to time. But, these functions if outsourced from another company then the company does not have the access to monitor the same frequently. Thus, the contract of outsourcing should be made with the policies that allow the company to monitor the working of the third party timely.
Customer resistance: it is very difficult to rely on third party for some kind of work such as customer support. Most of the companies outsource their customer support function to third party (Harland, Knight, Lamming and Walker, 2005). This may lead to issues such as the executive does not understand the foreign access or the language. Customers may resist dealing with the third party and needs specialists to resolve the issue.
Loss security: It is the major risk that the company faces in order to outsource the function. This is because outsourcing also requires the company to share some of their private information to the third party company. Sharing of information is a biggest threat to the loss of security. It is required by the company to have legal contract with the security clauses that the company can take any legal action if the third company practice any of the unethical and illegal action by leaking the private information or sharing it to any other competitors.
Ethical concerns: it is required by the company to have ethical relationship with the third party company. Even the third party company also has to maintain such ethical relationship with the company. This can be a major risk when a company comes in contract with the outsource firm.
Difficult to reverse: If a function of the company is outsourced, it becomes very difficult for the company to establish it back in-house in the company. This is because breaching or breaking the contract from the outsourcing firm requires cost and implementing the process again in the organization also requires large amount of cost (Mani, Barua and Whinston, 2010). Reversing the outsourced process requires the company to invest a lot in hiring, establishing system, training etc. as all the systems and the functions in the organizations are inked with each other thus implementing a new function back to the company results in disturbance to all the other function as well.
Outsourcing affects the company in both the positive as well as negative way. It is very difficult to deal with such situations. The companies have to take many initiatives to have secure outsourcing because the thus party that is selected outsource the function can misuse the information provides to them in order to make the function effective and efficient. Outsourcing at the one hand helps the company to reduce its cost on the other hand raise many risks of security. Any information if released or leaked by the third party may results in great harm to the company. Thus making the legal contract is a very important part of this process.
It has been concluded from the above discussion that outsourcing is the process used by the company in order to save the cost of extra activities that can be outsourced frim another company which is specialised in the same area. This helps the company to reduce its cost and get efficient work from the specialised people. It also helps the company to have flexibility of using the services. The company can use the service at the time of requirement and pay according to that. there are some other disadvantages of outsourcing functions of business such as focus on the core and major functions of the company, reduction in the overall cost, saving time and energy, etc. along with all these advantages, the company which outsources their functions also have to deal with some of the disadvantages and risks. The major risk is security. This is because the company has to share their internal information with third party thus trust is the major element of outsourcing relationship. Some of the other disadvantages that the company faces are ethical issues, legal breaching of the contract, inefficient working of the third party, leak of information, loss of trust by the employees, lack of monitoring etc.
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