Outsourcing refers to the practice in which service is outsourced in an organisation to provide it with specialized work along with cost reduction. In business there are several works which are not possible to be done in house and can prove to be expensive. It is then outsourced in which the task or manufacturing part is performed by others according to the conditions made by the outsourcing company. In recent years many companies have adopted the practice of outsourcing instead of making partnership with others and save themselves from sharing profits and also keep ownership to themselves. Outsourcing possess qualities like cost reduction, professionals engagement with the firm, time efficiency and quality improvement. (Riley, 2010) Large companies like Construction Company, Big manufacturing units, shipping companies, Big Hotels, etc. are few examples which outsources large part of their function which also provides employment to the people indirectly along with creating efficiency within the organisation. Smaller companies mostly outsources to refrain themselves from heavy expenditure and to involve experts without the need for hiring full time staff. There are many advantages reviewed in literature by researchers which are taken into consideration while outsourcing business function. But at the same time few disadvantages are also been observed like loss of control, risk of quality maintain, complex nature and time consuming. The decision regarding outsourcing must be taken carefully so that it gives positive effect to the business.
Objectives Of Outsourcing
In order to improve capabilities and bring proficiency in its processes, organisations look for ways in which the work can be done in a superior way along with minimum expenses. Outsourcing is the aid which provides specialised service and enables enhanced business performance at lower cost. Since the service provider’s deals with many companies at a same time, they become specialists in their work and in analysing the process required in the firm and thus deliver the agreed work efficiently. The reasons behind outsourcing can depend on factors like improvement in efficiency, business optimization and strategic transformation. Improvement in efficiency is a lengthy process and requires change in working of organisation but is very useful in providing optimum utilization of resources with the help of outsourced professional advisors. (Anon., 2013) Strategic transformation focuses on benefiting from external expertise in which change is made strategically to change the present working criteria of the business. It not only involves in sharing risks with outsourcing firms, but also involves experts as partners. (Pine, 2017
Scope Of Outsourcing
The purpose or scope of outsourcing is various depending on the nature of the business and work required. The commonly outsourced service which has gain much popularity is IT enabled service or BPO. There are many organisations which provide financial services like Merchant banking, Underwriting, Payroll preparation, Account maintenance etc. Advertisement is another popular service which is outsourced to advertising agencies for designing and building up their service or product for gaining customer attraction and create awareness. (Anon., 2011)Organisations whether big or small are largely depended on currier service to deliver large quantity of parcels and hence require outsourcing courier service. Customer services like telex-calling services, messaging, sending emails, providing after sales service are related to customer services provided to the organisations which is also one of the most important function outsourced by big companies. (Crosby, 2017) Along with it there are many services which are outsourced in business like transport service, labour, web designing, software designing, legal consultants, managerial experts, etc.
Advantages And Disadvantages Of Outsourcing Functions
The reasons for outsourcing function in business are many which make it as an inevitable part of business, although consideration of risks involved after its implementation is also very essential. To further look about advantages and disadvantages outsourcing function involves, a brief literature review has been made and evaluated accordingly. With its increasing demand and requirement, it has become a common topic for discussion among researchers. An outsourcing function may have optimistic or pessimistic impacts on business performance. In both cases the overall impact depends on the ways the company handles it and support it receives from the management or owners. (Meehan, 2017) For example, before signing contract, if the company does not go through the papers and blindly believes on the projected benefits, the results might get appalling and can result in drawback. Similarly if the outsourcing project goes fine, it can improve the business performance by allowing company to centre its attention on other important work which cannot be outsourced or requires confidential involvement. By allowing experts to the firm, it brings in work efficiency along with cost reduction. While if the outsourcing project goes incorrect, the work might become out of control and can even led to its termination. The effects are sometimes such bad that many companies have to face severe debts and even result in its shutting down. (Patricia, 2014)
External agencies provides services in many companies which otherwise may not be possible for them to maintain by their own. Outsourcing saves money by providing economy of scale as cost per unit goes down when volume increases. For example, in manufacturing firm’s large investments is required to purchase manufacturing machines for production of spare parts or parts that needs special machines. If an external vendor provides the similar product in lower cost, the requirement to make additional investment will not be essential any more. With the help of outsourcing manufacturing work to external agency, efficiency and fast availability of products is possible without investing further capital. Economies of scale must be measured before making decisions of outsourcing as sometimes it may not exist i.e. if the unit cost does not drop; the reason behind outsourcing is not accomplished and should be eliminated from the firm on manufacturing part. (Slowik, 2016) Secondly, outsourcing helps in sharing risks in corporate with the help of diversification in portfolio. In big companies investment in a particular product or service makes company portfolio smaller and if the market goes down, the effect will be led entirely upon it. By outsourcing other company’s brands and products, the chances of fallback becomes less as if market for specific product is diminishing, the rest of the portfolio can still be on high. Thus by outsourcing products from different companies, the overall risk is shared and the risk of investment in single stock is taken care off. (Anon., 2017) For example, in biotechnology industry, the investors outsources manufacturing of drugs which are still needed to be approved but required to be produced in order to gain approval. The manufacturing firms are outsourced by bio-tech firms during clinical trials and drug development process. Thus by outsourcing manufacturing part, the cost of setting new infrastructure is avoided and if the experimented product is of no use, the risk is shared across other pharmaceutical firms in which the experiments were made. (Horacio Soriano-Meier, 2012) On the other hand it is also necessary to look into legal contracts and terms of agreement while making contracts with other experts. At the time of financial hit, if the outsourced company does not come up, the reason behind outsourcing can become disadvantageous and unpleasant. (Sen, 2009)
Another important advantage of outsourcing is to minimise variation in employees count during peak season of business. In every business there are times when it faces peak or low throughout the year. By outsourcing staff, expense of hiring full time staff is saved and if availability during peak season is met by outsourcing agencies the company might handle the peak season with ease. If the peaks are continuous, hiring full time can prove to be more economical while if they are occasional, contractors can save money even if cost per person is higher. (Meyer, 2005) Outsourcing can help in development of internal staff also if managed strategically. For example, less interesting or menial works and works related life risks can be outsourced to contractors which liberate internal staff to pursue new and developed opportunity. But the contractors who are outsourced shall never be given new work which is growth oriented and internal staff with obsolete works. It will result in denial of employee learning opportunities and make the firm depended on the outsourced agency. The outcome can also effect in companies overall professional growth if outsourced without looking into the negative impacts of external agencies. There are many training centres who can train the present employees with fresh and innovative ideas. Thus by outsourcing training methods, efficiency among employees is increased along with procuring new ideas. (Kahrovi?, 2015)
Outsourcing is also adopted by business owners to make them free from chorus works i.e. work which does not involve any risk or can be performed by subordinates. It allows organisations focus on their core business and improve their expertise. (Kremic, 2006) For example, in a grocery shop, if the owner wants to add florist department, it can outsource that division to florist or an expert of that field. If the owner focuses on its new part the main division may get hampered and can lose the core business i.e. grocery, therefore outsourcing becomes positive approach for the owner and helpful in expanding its operation. By outsourcing product or service, chances of getting improved quality becomes high as the agencies mostly use specialised process. Like cleaning service required in hospitals, hotels, clinics, universities, etc. needs special treatments and by outsourcing cleaning function, hiring full time staff along with purchasing special cleaning equipments is saved. Thus trained experts help in getting quality control and avoid inconvenience during sanitary inspections. While there are few examples also which shows disadvantage in this area as outsourcing agencies sometimes lack quality control when they become more focussed on profit making. Large agencies which outsource its service to many companies simultaneously are more prone to not providing superiority product or service and lead the company lose quality control. (Reddy, 2016)
In literature, risk related to outsourcing is not limited to quality control only but also lack of methodology causes outsourcing failures. There are chances that the suppliers perform superior work in the beginning of agreement to make good impression, but gradually losses its quality check. If the management does not monitor and manage the outsourcing functions precisely, the result can again be negative. (Kahrovi?, 2015) This problem usually happens if the management is not trained and lacks skill in it which makes future calculation mistakes regarding outcomes of outsourcing. The management or the outsourcer also requires gaining knowledge about present market so that it outsources current and latest technology or product rather than outdated one. (Anon., 2013) Usually cost curtail tendency makes the owner or management to make wrong decisions as they get attracted easily without looking into its hidden costs. They get cheated by the agencies hidden costs which are not discussed properly at the time of signing contracts and thus overall expense becomes higher than expected. (Stevenson, 2009) For example, in a computer manufacturing company, large number of parts is manufactured, few parts are outsourced so that requirement for special manufacturing machines is avoided and hence is outsourced. If the outsourcing agency provides with the parts in lower costs but the quality is not good, the reason behind outsourcing is not fulfilled. If the quality requirement is clearly mentioned in the agreement, the outsourcing company can charge the agency for breach of agreement. On the other hand if the agreement does not contain condition regarding quality check, the outsourcing company may face lack of quality control along with getting cheated on legal part. (Mukherjee, 2014)
While making a research on outsourcing, it is seen that if an organisation wants to stay ahead in competitions, it requires focusing on core competencies along with adopting latest technologies and methods which is possible vastly by outsourcing. Cost reducing factors along with getting work done faster is also an important advantage outsourcing possesses. With the help of professionals and experts, outsourcing helps in gaining innovative development which otherwise would have been limited in organisations. On the other hand, disadvantages of implementing professional assistance can risk safeguarding of important data and expose company’s secrets and formulas. (Anon., 2017) Loosing customer morale is also probable as customers may lose faith in the company’s capability and sometimes outsourcing from foreign countries is unaccepted by them. (Riggins, 2017)
On concluding note it can be said that outsourcing is a strategy utilised by organisations to fulfil their requirement in areas where they lack expertise, by contracting their business functions to external agencies. With growing in demand and necessity, outsourcing has become core in business operations which is being taken up by many firms to reduce costs, risk, operational costs, etc. Although there are few business areas in which outsourcing is not accepted due to traditional problems or poor management. Vastly, the advantages of outsourcing confirm its needs in present conditions and reasons for its implementation in business. If outsourced with awareness, it can prove to be better than performing in house function along with scope of expansion (Kremic, 2006). The future of outsourcing seems to be intense and positive as clear indication in broadening confidence among outsourcing companies can be seen along with its acceptance whether in strategic area or work performance part. Thus after analysing both advantages and disadvantages it can be said that outsourcing can prove advantageous only if done with proper management and planning otherwise can prove to be disadvantageous.
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