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Project Objective

Discuss about the Business Outsourcing Advantages and Disadvantages.

Due to globalization ways of doing business have changed across the globe. Globalization brought in changes by making the business market to go global and this has resulted in the changes in the business dynamics and it has increased the business competition. Moreover, with the emergence of third world countries as emerging markets and rapid development in technology and communication new models of business have come into existence. To grab the opportunities offered by the emerging markets and globalization, business organizations have started to focus on their core strengths or core business activities and outsourcing many of their services to other companies. In business outsourcing, the company outsources its number of services like maintenance, IT management, IT services, etc. to other companies which may reside in the same country or overseas. The business outsourcing offers advantages in enhancing the company core competencies, expanding the company market bases and increased revenue due to cost savings. But the business outsourcing is not an easy task and poses challenges which are to be dealt in a strategic manner to enjoy the benefits of this business model.  This work examines the advantages and disadvantages of Business outsourcing.

The objective of this work is to examine the business outsourcing advantages and disadvantages from the existing literature works

Business Outsourcing Definition & Motive

Business outsourcing is a business strategy where some of the operations or business processes which can be executed in-house by the organization are subcontracted to another organization for a given period of time. These tasks can be then performed on-site or off-site. Literature has various references to thedefinition of business outsourcing. According to Gantman, (2011), Business outsourcing is said to take place when a company transfers some of its activities to an outside company and this outsourcing is said to be offshore if these tasks are performed by the organization residing in some other country. Similarly, according to Gerbl et al. (2015), the business outsourcing is a management strategy by a business organization where in the organization outsources some of its non-core functions to specialized and efficient companies which act as the service providers.


The whole company and its businessare affected by the strategic decisionof business process outsourcing. There are many reasons for which the organization may outsource its business activities. Themostcommon motivation for business outsourcing is cost reduction. For others, it may be an opportunity to enhance the focus of the organization on the core business activities (Hanafizadeh et al, 2017).

Literature Review

According to Hen et al. (2013), the main reason for worldwidebusiness outsourcing is high-wage organizationscan take benefits of low market wage rates for example inoverseas countries where the labor rates are lower than the original country labor rates.

From the study of Alaghehband et al. (2011), it is found that reducing its working costs, and starting a worldwide presence and to become more strong and more competitive in the market are the main reasons which drive thecompany to adapt the business strategy of outsourcing.

Outsourcing is a method which is very demanding and needs proper monitoring while implementation. To confirmefficient business outsourcing there are seven steps of the life-cycle of outsourcing which must be regularly implemented by the company (Lacity et al., 2011). The seven steps are:

(1) strategic valuation; (2) requirement analysis (3) vendor evaluation; (4) cooperation and negotiation supervision; (5) launching of project and change; (6) correlation management; and (7) extension modification. Outsourcing is destined to failure if any one of the above seven steps is performed incompetently (Lacity et al., 2011).

Advantages:

Business outsourcing has proven to be a very advantageous business strategy in many cases. Due to business outsourcing, the company can redirect its attention to the core competencies of the company and thus can give enough time to enhance its core values and services. The other activities are managed by the company to whom the tasks have been outsourced. In 2003 Procter and Gamble outsourced its operations of facilities management support to the company and this provided the company a financial saving due to the lower international labor rates (Lacity et al., 2012). Apart from enhanced revenue outsourcing provided various advantages.

According to the research conducted by Mann et al. (2016), the various positive impacts of the outsourcing on any organization are as follows:

  1. Due to outsourcing, there is an increase in the benefits due to re-engineering.
  2. The company that outsources the tasks is able to earn cash back and have cost reduction due to outsourcing (Mann et al. , 2016).
  3. Outsourcing provides gain to world class capabilities, technology, and innovation
  4. Due to outsourcing, many company core resources can be used for other purposes that can be used to enhance the company services (Mann et al., 2016).
  5. due to outsourcing it is easier to have areevaluation of the problematic functions of the core company
  6. outsourcing enhances the company focus on core activities
  7. It becomes easier for the company to make capital funds be available for the company
  8. the overall operational costs are reduced due to outsourcing
  9. Risk minimization occurs due to outsourcing (Mann et al., 2016).

According to Lacity  et al (2014), the four advantages of strategic partnership due to business outsourcingdefined by these four advantages are as follows;(1) enhancing knowledge management ; (2) external visibility enhances; (3) internal coordination is easily provided; and (4) intervention and accountability is maintained

Massini et al. (2012),emphasize the (1) hiring good professional skills; (2) choosing partnerships can be done; and (3) external solutions integration as the main positive impacts of outsourcing.

Thus the overall advantages of the business outsourcing from various literaturecan be presented as follows:

Operating costs (control and reduction). Rather than employing specialist expensive employees for particular tasks that may be for a small duration thus making the employee be ideal for rest of the time, in such scenario outsourcing proves to be a beneficial option. Outsourcing firms are cheaper because they provide similar kind of services to many companies parallel and thus get benefits from those companies. By outsourcing the companies are able to get labor at lower rates and are relieved from the burden of hiring the expertise for a particular task. By doing so the company is able to have financial gains (Mihalache et al, 2012).

Advantages

Improved flexibility:Fixed costs are changed into flexible costs by removing departments from the staff payroll and buying in services when needed. Improves the working and conditions according to the growth of the organization.  And contracts can be canceled if demand falls much more rapidly than closing down whole firms maintained and controlled by the business.

Improved company focus: By outsourcing ‘peripheral’ actions the management of a business can focus on the main and beneficial aims and reliableresponsibilities of the business (Mihalache et al, 2012).

Allowing the better services andincomes that are not available within the firms to be used. Some outsourcing firms hire good specialists that small to medium size In other areas the inner resources are freed: For improving customer services if the human resource department of an insurance company is closed and the functions bought in, then computer services and resulting office space can be made available (Mihalache et al, 2012).

Disadvantages

Business outsourcing poses severe challenges to the company and thus requires a degree of caution before the strategy is implemented. Moreover, regular monitoring of the implementation is required to ensure that the outsourcing takes place smoothly and its benefits are utilized. But some of the disadvantages are as follows:

From the studies and research by Willcocks et al. (2011), business costs, hollowing out, opportunistic behavior and reduced learning etc. are the main disadvantages identified due to theoutsourcing of the business. The hollowing out is described as the losing of knowledge about the employees which are merely controlled and owned by the company. Sometimes hollowing become the main cause of non-attracting of the good and talented workers to the company. It becomes very difficult when the vendor of the company obtains the knowledge-process of the helping clients, the changing costs to return back to the in-house action.  Hollowing can also lead the opportunistically motivated actions of the vendor towards its clients about decreasing of service levels and pricing a contract renewal. If delays or legal process can happen then renewing of the contract, establishing, monitoring the agreement and transaction of costs would affect the whole business of the organizations.Lastly, the external service provider can take whatever the learning and innovation take place (Lacity et al., 2014).

Customer conflict: Itcan take numerousmethods.To understand foreign operators overseas telephone call centers have controlled to criticism about incapability. Over dependability and quality of the products, bought-in functions and workings can raise many doubts in the mind of thecustomer (Massini et al., 2012).

Disadvantages

Security issues: Business outsourcing makes use of other companies and thus trusts and security issues are amajor concern. In thecase of information technology based outsourcing, there is a risk of losing important business data and this may lead to the loss of reputation of the business (Schmeisser, 2013).

Ethical worries: If outsourcing isstarted by organizations in other countries with improper human rights andservice rights records, it can be inexpensive for the business that has outsourced – and shall have ethical issues like labor rights, respect, equal employment opportunity etc (Nieto et al, 2011).

Lack of jobs in the business: A loss of job safety and decreasing motivation are faced by the workers which are directly employed by the firms.Negative publicity can result from redundancies, mainly when the business is responsible for hiring very low-wage employees in other parts of the world to change the jobs lost. The organization'smoralvaluesmight be examined.Relocation of business overseas canmake potential dismissals for a company and the workers might show alack of interest or lack of excellence at work (Moon et al, 2010).


Outsourcing the communication-related difficulties is one of the major issues faced by firms. According to the study, the bestappropriate contractor lives on the other part of the world. So, one does not gets a chance to talk to them as thesimilar way the things occur in the organization with the team members. Talking or chatting on Skype or any other similar web app can help both the contractor for overcoming this problem easily and gently but still communication. But there might be differences in cultural issues and the style of working differences which may pose challenges of difference in management and control. This if goes unmanaged may lead to the failure of the partnership and loss to the outsourcing company (Weigelt et al.,2012).

Quality matters. The Internal processes of thefirm will be supervised by the firm’s own quality check system. If the outside contractors are performing important functions of the firm then it will not be good for the growth of a firm. There is a need of clear contract with least service-level contracts. And also ensuring the product quality and customer services standards by the quality assurance staff (Willcocks et al. 2011).

Conclusion

Business outsourcing is said to take place when a company transfers some of its activities to an outside company and this outsourcing is said to be offshore if these tasks are performed by the organization residing in some other country. The whole company and its business are affected by the strategic decision of business process outsourcing. There are many reasons for which the organization may outsource its business activities. The most common motivation for business outsourcing is cost reduction. For others, it may be an opportunity to enhance the focus of the organization on the core business activities. But it can lead to loss of reputation of the business and pose severe threats to the security and privacy of the data of the company.

References

  1. Gantman, S., (2011). IT Outsourcing in the Public Sector: A Literature Analysis. Journal of Global Information Technology Management. 14, 2 (Apr. 2011), 48--83.
  2. Gerbl M., Mclvor,R.,Loane,S.,Humphreys, P. (2015). A multi-theory approach to understanding the business process outsourcing decision. Journal of World Business. Volume 50, Issue 3, July 2015, PP. 505-518.
  3. Hanafizadeh, P., ZareRavasan, A. (2017). An investigation into the factors influencing the outsourcing decision of e-banking services: A multi-perspective Journal of Global Operations and Strategic Sourcing.
  4. HEN, J., HONG, H., JIANG, W. and KUBIK, J. D. (2013) Outsourcing Mutual Fund Management: Firm Boundaries, Incentives, and Performance. The Journal of Finance, 68: 523–558. doi:10.1111/jofi.12006
  5. Alaghehband, ,Rivard, S., Wu, S. and Goyette, S. (2011), “An assessment of the use of transaction cost theory in information technology outsourcing”, Journal of Strategic Information Systems, Vol. 20 No. 2, pp. 125-138.
  6. Lacity, ,Willcocks, L. and Khan, S. (2011), “Beyond transaction cost economics: towards an endogenous theory of information technology outsourcing”, Journal of Strategic Information Systems, Vol. 20 No. 2, pp. 139-157.
  7. Lacity, M. and Willcocks, P. (2012), Advanced Outsourcing Practice: Rethinking ITO, BPO, and Cloud Services, Palgrave, London.
  8. Mann, L., & Graham, M.(2016). The Domestic Turn: Business Process Outsourcing and the Growing Automation of Kenyan Organisations. The Journal of Development Studies. Vol. 52, 4.
  9. Lacity,M., Willcocks,L. (2014) "Business process outsourcing and dynamic innovation", Strategic Outsourcing: An International Journal. Journal of Global Operations and Strategic Sourcing. 7 Issue: 1, pp.66-92, https://doi.org/10.1108/SO-11-2013-0023
  10. Massini, S. and Miozzo, M. (2012), “Outsourcing and offshoring of business services: challenges to theory, management, and geography of innovation”, Regional Studies, Vol. 46 No. 9, pp. 1219-1242.
  11. Mihalache, R., Jansen, J.J.J.P., Van Den Bosch, F.A.J. and Volberda, H.W. (2012), “Offshoring and firm innovation: the moderating role of top management team attributes”, Strategic Management Journal, Vol. 33 No. 12, pp. 1480-1498.
  12. Moon, ,Swar, B.,Choe, Y. , Chung, M. and Jung, G. (2010), “Innovation in IT outsourcing relationships: where is the best practice of IT outsourcing in the public sector?”, Innovation: Management, Policy & Practice, Vol. 12 No. 2, pp. 217-226.
  13. Nieto, M. and Rodríguez, A. (2011), “Offshoring of R&D: looking abroad to improve innovation performance”, Journal of International Business Studies, 42, pp. 345-361.
  14. Schmeisser, B. (2013), “A systematic review of literature on offshoring of value chain activities”, Journal of International Management, Vol. 19 No. 4, pp. 390-406
  15. Weigelt, C. and Sarkar, M. (2012), “Performance implications of outsourcing for technological innovations: managing the efficiency and adaptability trade-off”, Strategic Management Journal, 33 No. 2, pp. 189-216.
  16. Willcocks, , Cullen, S. and Craig, A. (2011), The Outsourcing Enterprise, Palgrave, London.
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