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Disadvantages And Advantages Of Outsourcing Business Functions

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Question:

Explain On Disadvantages and Advantages of Outsourcing Business Functions?

 

Answer:

Introduction

In last two decades, the outsourcing function is recognized as one of the key element of the business operations and also a widely used practice in basically all types of organization except in Non-profit organisations. Earlier, all the companies used to perform their business activities by their internal resources but with the introduction of outsourcing these activities are accomplished by the external resources. Outsourcing is one of the continuously discussed and argued forms of subject matter in literature. There are numerous theorists and investigators who have analysed the key reasons behind the increasing use of outsourcing operations in the organisations. There are various benefits of outsourcing which the organisations try to attain by the implementation of outsourcing functions (Click and Duening, 2004). With these benefits there are number of challenges or disadvantages also which are associated with the outsourcing functions. At the time of gathering data and literature on the subject, there has been found vast literature available on outsourcing and other associated things which are the outcomes of the outsourcing functions. It comprises of the research gaps, similarities, motivators, benefits, risks and decision factors behind the outsourcing operations. The main aim of this study is double-edged. The initial phase of the study is the critical in-depth review of the enormous literature available on the outsourcing functions for analysing those suggestions and discussions which can provide adequate direction to the future managers and the investigators. And the later part of study is the critical analysis of the literature supported by the contents offered. The key aim is to recognize the various disadvantages and the advantages of outsourcing functions for the business organisations.

 

Literature Review on Disadvantages and Advantages of Outsourcing Business Functions

As per the views of Oshri, Kotlarsky and Willcocks, 2015, the outsourcing can be explained as an organisational practice by which the individuals or the companies, who manufacture and supply products, give their services to another company for doing the similar tasks which were earlier done by the company internally. For having benefited of saving huge expenses and costs, the companies use the outsourcing business functions.

                                                                                                (Source: Burkhart, 2016)

With the help of the outsourcing decision matrix, it can be assessed that whether a business organisation must outsource its business operations as well as what is the correct time for outsourcing the business activities. The matrix helps in analysing the two most essential factors before performing outsourcing operations i.e. operational performance and strategic importance (Ball, 2003). In the first quadrant which is of strategic alliance, there has been performed analysis of the strategic importance and operational performance of the outsourcing function. Usually there is high strategic alliance but from the operational point of view, it is not essential that the outsourcing partners deliver the similar kind of efficiency like the in-house resource. Therefore, in this quadrant, the organisation analyse whether the operational performances can also be achieved with the strategic alliance or not (Yang and Huang, 2000). In the second quadrant i.e. retain, there is performed critical analysis and if there is less operational performance in the outsourcing function, the companies retain the business operations in in-house only so that they can achieve improved operational performance. In the third quadrant, i.e. outsource, the organisation realized that there are high benefits attained through outsourcing operations. There is both high strategic alliance as well as operational efficiency; therefore the organisation decides to outsource the business functions. And in the last quadrant i.e. eliminate, it has been realized by the organisation the outsourcing functions are not offering such additional benefits which can make a significant difference in the company’s productivity or revenues. Thus, in this phase, the outsourcing partnership is eliminate or comes to an end (Kremic, Icmeli Tukel and Rom, 2006).

 

Significant benefits and advantages of Outsourcing

The rapid incorporation of the outsourcing strategy in the organisations is because of the several benefits which can be attained through outsourcing.  Fundamentally, the benefits of outsourcing are different for every organisation because of the fact that all the organisations are diverse in nature. The primary reason for outsourcing is to save the higher expenses and costs. But then also saving cost in private sector via outsourcing is not much advantageous than it is in the government and public organisations because of several reasons (Mol, et al., 2004). To describe and discuss all the benefits of outsourcing is not feasible but the main and the common benefits of business outsourcing functions can be discussed. The most common benefits of outsourcing which are accomplished by almost all the organisation comprises of saving of additional and higher costs, use of innovative technology and infrastructure, reduction in the capital expenses, increasing flexibility, capital infusion, quality improvement and high speed. Other benefits of outsourcing comprises of enhanced accountability and superior management, supportive legal compliance, effortless access to the competent workforce and human resource, free from the burden of complex organisational activities, reduced scrutiny pressure and increased number of employees (Power, Sharafali and Bhakoo, 2007).

Outsourcing is not limited to the business operations or activities but also can be perform of the labour, services, human resources, technology, etc. Human resource outsourcing is one of the mostly used outpouring strategies in the current scenarios as it allows the companies to get more competent and skilled workforce without any restrictions because of the various geographical barriers. The human resource outsourcing supports the organisation by having possession of more competent and knowledgeable employees which is surely a competitive advantage for the companies (Gospel and Sako, 2010). Other benefits of the outsourcing of human resource comprises of decrease in the dependency over the in-house workforce, increased employee development and efficiency because of lower work pressure and enhanced organisational productivity (Schniederjans, Schniederjans and Schniederjans, 2015). There are number of developing nations as well as under-developed countries where this abundance of labours but there is increasing level of unemployment. This becomes advantageous for the foreign companies which are in search for cheap but skilled labour which can perform their operations at a very low cost compare to the domestic individuals. It helps the business organisation in saving huge costs incurred over the employees and human resource (Han, Lee and Seo, 2008).Through outsourcing operations, it becomes flexible to make the work performed through these labours and that too at a lower cost.

The continuous and rapid technological integration and growth are also considered as the key benefits of outsourcing. Ackermann, Miede, Buxmann and Steinmetz critically evaluate the challenges as well as advantages of outsourcing and evaluated that the benefits are much more significant in comparing with the issues associated with outsourcing (Ackermann, et al., 2011). The investigators elucidate the technological benefits of outsourcing business functions as via increased technological integration, the business organisations can have access to the pioneering solutions and can also get benefitted from development of improved synergy as the outsourcing partner also possess various technological innovations. The businesses are also able to perform the business activities in a squat time because of the improved and innovative technologies. It is true that an organisation does not possess all the competencies for undertaking all kinds of activities and operations (Heywood, 2001). There are times, when the internal resources of the organisations are not much competent to complete some of the complex or non-core activities. In such situations, to diversify the operations, the organisations are much depended upon the outsourcing functions. B y taking use of the outsourcing business operations, the organisations achieve several competitive benefits too as outsourcing functions provide access to the competent, skilled and potential workforce who can  perform the complex activities in an efficient way (Broedner, Kinkel and Lay, 2009).

 

Risks and challenges associated with Outsourcing business functions

There is also in-depth discussion of the several risks and challenges associated with the outsourcing strategy in the literature. Number of researchers have discussed on one of the primary challenges with the outsourcing function i.e. power shifting. In outsourcing functions, there is shifting of power and authorities to the supplier i.e. the outsourcing partner. There are various issues related to suppliers which can cause the organisations a big threat such as poor operational performance, unhealthy relationship, limited use of superior technology and human resource talent and opportunistic behaviour (Weidenbaum, 2005). According to Dinu, the primary risk is of security. The outsourcing partner can easily disclose all the confidential data and info shared by the organisation with the supplier. It is probable that the outsourcing partners for attaining higher profits can surpass the information to the competitors (Dinu, 2015). For most of the business organisations, outsourcing is not an evident strategy or tool and so the organisational executives do not have adequate knowledge of the pros and cons of outsourcing and so it becomes a huge risk for the companies undertaking outsourcing operations. It has been critically analysed that usually in the initial phase, the benefits of outsourcing are exaggerated because of the lack of research results of the numerous outsourcing failures. The similar viewpoints is supported by Kremic, Icmeli Tukel and Rom, who proposes that the outsourcing failures are not primarily because of the internal issues rather they are the outcomes of the scarce directing methodology and researches for the business managers (Kremic, Icmeli Tukel and Rom, 2006).

The risk of innovation is another outsourcing challenge which the organisations face. Tayauova argues that there is increased risk of innovation because of sharing of information with the outsourcing partners, by the means of technological integration as well as synergy, there is a potential risk that the supplier can take covert use of all these things and can achieve process innovations and in future give competition to the organisation only (Tayauova, 2012). Another challenge of outsourcing is that in many countries like United States etc. The workforce in the governmental and public sector companies are not that much competent to have effective managing and controlling of the outsourcing business operations (Massini and Miozzo, 2012). Several other risks of outsourcing functions are still unrevealed such as incompetent outsource partner, hidden costs, lower flexibility and unrealized savings. Many researchers have also mentioned various other cons of outsourcing functions in their studies such as increased competitors, skill erosion, conflict of interest, legal issues, irresponsible behaviour, lower morale of in-house employees, etc.

 

Conclusion

There is high significance of critically analysing the literature so that there can be evaluate the similarities, research gaps and research patterns in the outsourcing related studies. Primarily the researches related to outsourcing are usually more of theoretical in nature and have discussions related to the advantages, challenges and risks of outsourcing. There are several literatures which have their consideration on the challenges of outsourcing. The studies evaluates that the lack of adequate knowledge of the supplier and the outsourcing functions results in the occurrence of numerous challenges in the outsourcing business. It has been analysed and concluded the key reason for indulging in the outsourcing operations is cost saving and the organisation such as non-profit which do not have such aims are not much involved in such business associations. There are both benefits as well as disadvantages of outsourcing business functions as discussed in the review. Number of researchers have argued that there potentiality of the advantages is more in comparison with the risks associated with outsourcing. The outsourcing decision matrix developed by the theorists argues that there is equally importance of operational efficiency just like strategic alliance and of the outsourcing functions does not offer the operational efficiency to the organisation then the business organisation restricts itself from involving in the outsourcing operations. The research gaps analysed are that firstly there is no adequate tool or research results which can evaluate the results of outsourcing functions, secondly, still the organisations do not possess adequate knowledge of the pros and cons of outsourcing which further results in outsourcing failures and third there is less or no involvement of non-profit organisations in the outsourcing functions due to their diverse purposes and objectives. The literature gives adequate knowledge of the advantages and disadvantages of outsourcing functions but there is shortage of information in regards with outsourcing business decisions.

 

References

Ackermann, T., Miede, A., Buxmann, P. and Steinmetz, R., 2011. Taxonomy of technological IT outsourcing risks: Support for risk identification and quantification.

Ball, D., 2003. A weighted decision matrix for outsourcing library services. The Bottom Line, 16(1), pp.25-30.

Broedner, P., Kinkel, S. and Lay, G., 2009. Productivity effects of outsourcing: new evidence on the strategic importance of vertical integration decisions. International Journal of Operations & Production Management, 29(2), pp.127-150.

Burkhart, E., 2016. When to Outsource: Key Ecommerce Considerations. Accessed on: 29th April, 2017. Accessed from: https://chargeback.com/outsource-key-ecommerce-considerations/

Click, R.L. and Duening, T.N., 2004. Business process outsourcing: the competitive advantage. John Wiley & Sons.

Dinu, A.M., 2015. The risks and benefits of outsourcing. Knowledge Horizons. Economics, 7(2), p.103.

Gospel, H. and Sako, M., 2010. The unbundling of corporate functions: the evolution of shared services and outsourcing in human resource management. Industrial and Corporate Change, 19(5), pp.1367-1396.

Han, H.S., Lee, J.N. and Seo, Y.W., 2008. Analyzing the impact of a firm's capability on outsourcing success: A process perspective. Information & Management, 45(1), pp.31-42.

Heywood, J., 2001. Outsourcing dilemma: the search for competitiveness, the. FT Press.

Kremic, T., Icmeli Tukel, O. and Rom, W.O., 2006. Outsourcing decision support: a survey of benefits, risks, and decision factors. Supply Chain Management: an international journal, 11(6), pp.467-482.

Massini, S. and Miozzo, M., 2012. Outsourcing and offshoring of business services: challenges to theory, management and geography of innovation. Regional Studies, 46(9), pp.1219-1242.

Mol, M.J., Pauwels, P., Matthyssens, P. and Quintens, L., 2004. A technological contingency perspective on the depth and scope of international outsourcing. Journal of International Management, 10(2), pp.287-305.

Oshri, I., Kotlarsky, J. and Willcocks, L.P., 2015. The Handbook of Global Outsourcing and Offshoring 3rd edition. Springer.

Power, D., Sharafali, M. and Bhakoo, V., 2007. Adding value through outsourcing: Contribution of 3PL services to customer performance. Management Research News, 30(3), pp.228-235.

Schniederjans, M.J., Schniederjans, A.M. and Schniederjans, D.G., 2015. Outsourcing and insourcing in an international context. Routledge.

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

Weidenbaum, M., 2005. Outsourcing: Pros and cons. Business horizons, 48(4), pp.311-315.

Yang, C. and Huang, J.B., 2000. A decision model for IS outsourcing. International Journal of Information Management, 20(3), pp.225-239.

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