Discuss about the Advantages and Disadvantages of Outsourcing Business Function.
Outsourcing is defined as a work or a part of business function which is delegated to another entity or person by a company. It can involve delegation of a service or a part of a manufacturing process or any other aspect of a business (Yeboah, 2013). The processes or segments of work which are outsourced to a firm may be carried on the site, i.e. within the premises of the organisation, such as in case of heavy equipment handling ; or outside the business area according to the contracted conditions. The primary factor encouraging outsourcing is cost reduction and flexible terms (Pellicelli, 2012).It can involve simple processes such as packing of goods, transportation services or more complex aspects like manufacturing spare parts, handling of IT support, or marketing. Companies from diverse sectors like telecom, e commerce, transport companies, law firms, food chains, restaurants, and many others outsource some of their work to keep their costs under check while focussing on their main segment. The process of outsourcing has been gaining popularity with time, despite some of the uncertainties related to it. For example outsourcing companies may let down during tight schedules and any delay can result to be costly for a firm. There are many conservative organisations that prefer an integrated approach and refrain from outsourcing. With the help of research done, analyses have been made for business owners regarding pros and cons of outsourcing function in business. (Iqbal, 2013)
Outsourcing is fast becoming a regular feature for any business regardless of its size. Increasing number of organisations is choosing to outsource one or many parts of their work which has enabled them to utilise their manpower and expertise for their core task. It is emerging as a regular summit in the business community and has become a point of discussion for researchers (Kahrovi?, 2015). The need for outsourcing may arise due to a variety of factors which vary from business to business. The major motivating factors for outsourcing are time saving, cost efficiency, and business strategy of the company. Small or big businesses are motivated commonly due to the time and cost factors. (Anon., 2017) Any small or medium organisation are susceptible to cost fluctuations as they do not possess economies of scale , so they have to opt for outsourcing whenever a supplier’s costs for a particular service is competitive and quicker than the current alternative. In today’s connected economy, one cannot limit its scope to a small region, a company has to deploy strategic management skills which can help them to grow their business and outsourcing provides the most effective answer. By eliminating hiring of managerial personnel, a company can significantly reduce its fixed expenses (Sonfield, 2014).Even when outsourcing is being vastly adopted by many organisations, it must be deployed with caution as if an outsourcing job is not carried correctly, it may cause loss of face and even customer loyalties; therefore there is no assured success when a company outsources its tasks (Kremic, 2006). Sometimes heavy cost cutting results in cost escalations later on. Thus, research literature and academic theory has to be employed to review the scenario correctly, so that it can generate the desired results for companies and their products/services.
People are getting more attracted in getting in house value added services along with strategic management due to which outsourcing has gained much popularity nowadays. Various service sectors like law firms, doctors, hospitals, colleges, etc. are adopting outsourcing for delegating works to others and maximise their use of expertise. Business sectors which provides outsourcing are IT firms that outsources its technical supports to other firms, labour contractors provides labour to factories and related firms, transportation companies provides transport to many companies, lawyers provides legal advice to the companies etc. In currier company’s, lots of people are required as the parcels or product needs to be delivered in many areas, sometimes to other countries also (Bucki, 2017). Outsourcing its work to firms in other cities and countries reduces its cost of setting its firm in those areas and also provides efficiency in service. Call centres and computer based programming services are outsourced by business companies to reduce costs. Human resource tasks are one of the functions which are also outsourced by large number of companies which provides employees benefit program and payroll function. In computer manufacturing firms, parts are purchased from another sources and then assembled. Outsourcing of components can provide cost reduction in parts which would otherwise prove expensive for the company to manufacture of its own along with reasons for higher quality purchase (Robe, 2017). IT department services which earlier were managed in house by self employed staff like Cloud computing, software designing, web designing, online shopping are few examples of IT services that are outsourced by the companies nowadays which provides them with the enhanced computer service tool along with better efficiency. Therefore it can be said that in some or the other way each business firms are depended on each other and has to outsource few of its function as it is not possible for a single owner or firm to be good at everything. (Pine, 2017)
In brief, advantages of outsourcing can be said as a tool which helps in freeing of cash, facilities, personnel, and time factor in business. Advantages of outsourcing can be various and to understand it precisely various theories have been provided by researchers to explain the uses and factors that are related while deciding upon an outsourcing function. (Konstantopoulos, 2014)Transaction Cost Economics is the theory in which decision regarding task to be outsourced is made. This theory assigns its execution function at the management phase and at change phase. (Bucki, 2017) The useful aspect of the theory is that it can be utilised for the selection of outsourcing convention, which sometimes proves to be complicated. Agency Theory is another theory in which company hires other company agency to perform particular part of work. This helps to reduce time of performing those works in a company and with the help of expertise agency, increases efficiency. For example, in big hotels, cleaning and delivery department is mostly done by outsourcing agencies and thus the hotel saves its energy and cost of hiring full time staff for it. By engaging more people, the work becomes completed faster. Economy of Information Theory is another important theory in which the company engages expert advisors in their management and with the help of their intellectual gets benefitted with enhanced management. Core Competencies Theory is another popular approach in academic literature which is related to utilizing technology in the firm. With its help company can outsource its work to online websites for technological guidance or advertising purpose which is very necessary in today’s business (Shah, 2016). Again, sharing tangible and intangible materials is very necessary to overcome difficulties in smooth running of business. With the help of Social Exchange Theory, human interaction is created and inter-connectivity among business organisations is made which helps in sharing technologies and resources among each other. These are few among other theories which can justify the advantages of outsourcing in business. (Smith, 2012)
In any business time is an important factor which requires to be given into the business and with the help of outsourcing, self liberty is developed which can be utilised for its core development. The risk sharing advantage gives moral support to the owners as it helps in sharing risks at appalling times, thus provides assurance of hold. It can also benefit in cost saving from taxes, labour cost, and reduction in cost of production. By outsourcing managerial part to professionals, efficiency increases along with scope of diversification and expansion of business. Company can also outsource to avoid government regulations by outsourcing legal advisors and hence saves taxes without breaking business moral code. (Niccolls, 2016)
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Kremic, T., 2006. Outsourcing decision support: a survey of benefits, risks, and decision factors. [Online] Available at: https://ankara.lti.cs.cmu.edu/11780/sites/default/files/Outsourcing-Survey.pdf [Accessed 16 August 2017].
Mol, M.K.a.M.J., 2009. OUTSOURCING AND FINANCIAL PERFORMANCE: A NEGATIVE CURVILINEAR EFFECT. [Online] Available at: https://wrap.warwick.ac.uk/3254/1/WRAP_mol_110610-outsourcing_and_financial_performance_v_jpsm_final.pdf [Accessed 16 August 2017].
Niccolls, C., 2016. 7 Examples That Explain Government Outsourcing. [Online] Available at: https://www.thebalance.com/government-outsourcing-examples-2553107 [Accessed 16 August 2017].
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Riley, J., 2010. Q&A - Explain what is meant by outsourcing. [Online] Available at: https://www.tutor2u.net/business/blog/qa-explain-what-is-meant-by-outsourcing [Accessed 16August 2017].
Robe, E., 2017. What are examples of outsourcing? [Online] Available at: https://www.quora.com/What-are-examples-of-outsourcing [Accessed 16 August 2017].
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Sonfield, M.C., 2014. Outsourcing Strategies for Small Businesses. [Online] Available at: https://www.sbij.org/index.php/SBIJ/article/viewFile/206/160 [Accessed 16 August 2017].
Stevenson, D., 2009. What are the disadvantages of outsourcing? [Online] Available at: https://it.toolbox.com/blogs/original-thinking/what-are-the-disadvantages-of-outsourcing-35808 [Accessed 16 August 2017].
Syluancia, L., 2009. The Objectives of Outsourcing. [Online] Available at: https://ezinearticles.com/?The-Objectives-of-Outsourcing&id=3188795 [Accessed 16 August 2017].
Yeboah, A., 2013. The Relationship Between Outsourcing And Organizational Performance. [Online] Available at: https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.735.2183&rep=rep1&type=pdf [Accessed August16 2017].
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