Discus about the Advantages And Disadvantages Of Outsourcing For The Contemporary Business Organizations.
In the present business scenario, contemporary business organizations have to consider various aspects in competing in the intensely competitive market. With the entry of more and more business organizations in the market, the price is becoming a more determining factor for gaining competitive advantages for the business organizations (Wagner III and Hollenbeck 2014). All of these organizations are trying to offer their products and services in more competitive prices. With having more options in the market for the customers, the price elasticity of the products or service is showing increasing trend. Thus, contemporary business organizations are trying to initiate various strategies and policies to reduce their cost of production in order to provide more cost effective offerings to the customers.
One of the key strategies for the contemporary business organization to reduce their cost of production is outsourcing (Schniederjans, Schniederjans and Schniederjans 2015). In the recent times, more and more organizations are opting for outsource their partial business activities to any third party vendors. According to the concept of outsourcing, business organizations delegate their business activities to any expertise organizations which on the behalf of the former accomplish the assigned job. The key advantage in this concept is the cost effectiveness (Vaxevanou and Konstantopoulos 2015). This is due to the fact that, the vendors whom the task is being outsourced are generally belongs from any developing countries or have their operational facilities in the developing countries. Setting up the operational facilities in the developing countries helps in having the access to large number of skilled employees in lower cost.
This report will discuss about the advantages and disadvantages of outsourcing for the contemporary business organizations. Critical analysis will be conducted in order to determine the effectiveness of the concept of outsourcing for the business organizations. Critical analysis of this concept will help to identify the advantages and disadvantages of outsourcing. Accordingly, recommendations will be provided in this report which will help the business organizations in having effective strategies for outsourcing.
There are various researches have been done in order to determine the effectiveness of the concept of outsourcing. Researchers have identified the merits and demerits of outsourcing along with the challenges that have to be faced by the organizations in outsourcing their business activities. However, Oshri, Kotlarsky and Willcocks (2015) stated the most clear and precise definition of the concept of outsourcing. According to them, in the present business scenario, majority of the organizations are operating in the global market and thus they have to maintain and consider various aspects in order to effectively drive their operations. It becomes difficult for them to maintain all the aspects at a single time. According to Oshri, Kotlarsky and Willcocks (2015), this factor leads to the initiation for the outsourcing of their activities. This helps them in reducing their responsibilities and burden which helps them in allocating more time and resources on the existing activities along with their key corporate affairs. Oshri, Kotlarsky and Willcocks (2015) also stated that, another influencing factor for the outsourcing of their activities is the driving force for having cost effective production process. According to the authors, the third arty vendors who are having expertise in accomplishing the particular task can perform the task in much cost effective way then the parent organization. Thus, large multinationals specially from the developed countries are opting for outsourcing of their partial business activities which are helping them offering their products or services in more competitive prices.
Researchers such as Sparrow (2012), further classified the utility and alternative uses of outsourcing strategies by the business organizations. According to him, outsourcing is not only limited to the delegation of the core business activities or the manufacturing process but also the front office and customer handling process. According to Sparrow (2012), the growth trend for the global outsourcing scenario is more concentrated to the delegation of the information technologies to the third party vendors. Majority of the business organizations have outsourced their customer service activities. This is helping them in providing more effective customer service with incurring less cost. Thus, Sparrow (2012) revealed that the outsourcing of information technologies is having the highest growth rate in the global market in the present scenario.
According to Chang and Gurbaxani (2012), the outsourcing of the information technologies is not only benefiting in delivering effective customer service, but also helping them in gaining competitive advantages in the market. This is due to the reason that, outsourcing of information technologies is enabling the organizations in having the expertise in the customer service. Thus, providing effective customer service is becoming easier which helps them in gaining more goodwill from the market. Chang and Gurbaxani (2012) also stated that providing effective customer service helps in generating positive word of mouth among the customers which further helps the organization in operating in the market more effectively. Thus, the competitive advantages for the organizations are going to increase due of the initiation of outsourcing of the information technology.
However, authors such as Orberg Jensen and Petersen (2012) have also thrown the light on the outsourcing of the manufacturing activities. According to them, various organizations are also outsourcing their manufacturing activities to the third party vendors in order to gain competitive advantages. According to Orberg Jensen and Petersen (2012), this is due to the reason that, outsourcing of the manufacturing activities will help the organizations in having their manufacturing activities done more effectively by the expertise third party vendor. Moreover, due to the outsourcing of the manufacturing activities, the parent organization can concentrate more on the after sales services along with the sales and marketing aspects. Thus, all the activities of the organization ca performed effectively. Orberg Jensen and Petersen (2012) also stated that, outsourcing of the manufacturing activities will also help in reduction of the cost involved and risk involved in the process. This is due to the reason that, majority of the outsourced manufacturing facilities is being located in the developing countries especially in China and India. These countries are having huge supply of skilled employees and the cost of the employees is lower than that of in the developed countries. Thus, the jobs are being done in more effective manner with a lower cost. The risks involved in the production process also get reduced for the parent organization due to the reason that the parent organization will not have to take the responsibility of any aspect of the production process. It will be looked after by the third party vendors.
Various other authors have concentrated on an important aspect of the outsourcing that the majority of the outsourced job are being delegated to the developing countries. Thus, it is important to determine the reasons or drivers for which the outsourcing industry is thriving in the developing nations. According to Kite (2012), countries such as India and China are the most beneficial countries from the initiation of the concept of outsourcing. According to him, this is due to the reason that India and China are the two most populous countries in the world. Thus, supply of employees will not be an issue their moreover the employees rate is much cheaper than that of in the developed countries due to the oversupply of employees. In addition, the employees in these countries are skilled enough and are comfortable in speaking English. Thus, these influencing factors along with rapid improvement in the domestic infrastructure are driving the growth rate of outsourced jobs in these countries. Thus, organizations outsourcing their activities in these countries are having the access of highly skilled human resources at a cheaper price. This leads to the fact that the organizations from across the world are gaining cost effective service by outsourcing their activities.
However, it is also true that though outsourcing is proving beneficial for various organizations in the current business scenario, it does have several disadvantages as well. Various authors have reviewed the demerits of outsourcing for the business organizations. According to Caruth, Haden and Caruth (2013), managing the human resources in the case of outsourcing may pose challenge for the parent organization. Though the parent organization do not have the responsibilities in managing the human resources in the process, however, the activities of the human resources in the outsourced organization will have the direct impact on the performance of the parent organization. According to Caruth, Haden and Caruth (2013), this is due to the reason that, in the case of outsourcing of the customer service, the customer handling is being done by the third party vendors. However, the customers are not having the idea of the outsourcing and thus they will have the perception about the organization by the extent of the effectiveness of the customer service. However, according Caruth, Haden and Caruth (2013), this can be a challenge for the organizations in managing the human resource in the third party vendors. The employees in the outsourced and outsourcing organizations are having different approaches and both the organization will follow different organizational culture. Thus, matching up he approaches of the parent organization will be difficult and it may have negative implication in the long run.
Another disadvantage stated by Dinu (2015) regarding the outsourcing of the business activities. According to him, in case of outsourcing of the business activities, the managerial controls of the parent organization over the business activities will be lower or negligible. This is due to the fact that, in the case of outsourcing, the activities will be controlled by the third party vendors. Thus, any issues in the business process may get generated due to this concept. Thus, it can be concluded that outsourcing of the business activities will have advantages as well as disadvantages for the organizations.
Another aspect for outsourcing that is generating in the recent years is the challenges being faced by the organizations in initiating the outsourcing of their business activities. The current political scenario in the global market is a major contributor in posing challenges for the outsourcing of the business activities. Author such as Levine (2012) stated the political challenges faced by the organization in initiating the process of outsourcing. According to him, due to the process of outsourcing, rate of unemployment in the developed countries are increasing. This is due to the reason that, major organizations in the developed nations are outsourcing their jobs to reduce their cost of production which further reducing the employment of the home country employees. Due to this factor Levine (2015) stated that government of United States has came up with legislations in order to check the rate of outsourcing. The stringent rules and regulations disallow the organizations in outsourcing their jobs to the developing nations as well as sourcing of cheap employees from outside the country. This has been done to maintain the rate of employment in the home country. Thus, according to the author, organizations from the developed countries are facing the heat in outsourcing their business activities.
Due to these challenges being faced by the organizations, they are initiating various others options to bypass the rules and regulations. Author such as Owens (2014) stated that off shoring is one of the effective ways of bypassing the challenges being faced by the organizations due to outsourcing. According to him, off shoring does not involved delegating the task to the third party vendors, rather than it refers to the concept where the parent organization shifts their manufacturing facilities to the country having lower cost of resources. However, the key difference of outsourcing with that of the off shoring is the presence of the third party vendor. Owens (2014) stated that in the case of off shoring, organizations have the full control in the business activities in the host country. The manufacturing facilities in the host country act as their subsidiary. Thus, it helps the organization in having the lower cost of production due to the fact that the manufacturing facility is being shifted to the country having lower cost of production. Moreover, the control of the business activities will also be with the parent organization unlike the outsourcing.
Thus, from the above critical analysis of the concept of outsourcing, various advantages and disadvantages are being identified. Advantages of outsourcing include lower of cost of production (Shephard 2012). Outsourcing of the business activities will help the organizations in reducing their cost of production due to the fact that the third party vendors will accomplish their task at a much lower costs. Another advantage that has been identified is the reduction of the business risk involved. In any type of business activities, risks and uncertainties are being involved for the organizations. However, in the case of the outsourcing the risk is being transferred to the third party vendors (Kaplan and Mikes 2012). Thus, the parent organizations do not have to bear the risk in their business activities. Due to the reason of the outsourcing, the organizations are gaining competitive advantages in the market due to the lower cost of production and effective customer service.
In terms of the economic growth, outsourcing helps in enhancing the economy of the developing nations. Due to outsourcing, more and more foreign direct investments are being attracted to these countries (Moran 2012). Thus, it helps in enhancing the domestic economy of these countries. Countries such as India and China are rapidly developing due to the factor of outsourcing. Majority of the outsourced jobs are being delegated to these two countries and thus outsourcing is one of key contributor in enhancing the GDP of these countries (Cai and Vairaktarakis 2012). Outsourcing also helps in transferring of the technologies and expertise in the global market. Thus, the difference between the developed and developing countries will get lower in the due course.
Though there are various advantages of outsourcing, however, disadvantages are also present in this concept. One of the key disadvantages for outsourcing is the lack of control of the parent organization (Goetsch and Davis 2014). As discussed earlier by various authors, in the case of outsourcing, the outsourced business activities are looked after by the third party vendors and thus the parent organizations do not have the direct control over the activities (Pyzik 2012). Thus, any issue in the business activities will have major impact on the performance of the parent organizations. Another disadvantage for the outsourcing is the difference in the organizational culture of the parent organization and the third party vendors (Alvesson 2012). This is due to the reason that the both organization are different entities and they follows different organizational culture. Thus, it may have adverse impact on the business activities of the organization.
Increasing rate of unemployment is another disadvantage for outsourcing (Caggiano, Castelnuovo and Groshenny 2014). This is due to the fact that, outsourcing helps in increasing the rate of employment in the developing nations but at the cost of unemployment in the developed countries. The jobs from the developed countries are being transferred to the countries having lower cost of employees. Thus, the economies of the developed countries are being badly affected (Hellier and Chusseau 2012). The dependency of the developing nations over the developed nations also does increase in the case of outsourcing. This is due to the reason that the jobs transferred to the developing countries are the jobs of the developed countries and thus, the rate of the having jobs in the developing countries will be dependent on the demand of the customers in the developed countries. Thus, due to the factor outsourcing, the dependency of the developing nation on the developed nations is getting increases.
Thus, considering the advantages and disadvantages of outsourcing and the challenges that are being faced by the organization in outsourcing their activities, recommendations will be provided in order to help the organization in effectively implement the strategy of outsourcing (Kang et al. 2012). Business organizations opting for outsourcing of their business activities should first determine the legislations of their home country and the country to be being outsourced. It will help the organizations in designing their outsourcing strategy accordingly along with adhering with the legislations.
In initiating the outsourcing strategy, organizations should determine the political relationship and the trade agreements between their home country and the country for outsourcing. This is due to the reason that it will help the organizations in understanding the political risk involved for them. The more will be the favorable relationship between the two countries, the more will be the effective process of outsourcing (Gilpin 2016). Off shoring can be an effective option to avoid the challenges being faced by the organizations. In the case of off shoring, the organization does not have to delegate the control power to the third party vendors rather than they will control their business activities (Goos, Manning and Salomons 2014). Moreover, the cost of production will be lower due to the fact that the manufacturing process is being shifted to the country having lower cost of production.
Conclusion
Having analyzed the various aspects being involved in initiating the process of outsourcing, it can be concluded that outsourcing is one of key strategies for the contemporary business organizations in order to gain competitive advantages in the market. Outsourcing helps the organizations in reducing the cost of production and providing cost effective services to the customers. Critical analysis has been done in order to determine the opinions of various authors regarding the concept of outsourcing. Critical analysis helped to identify the challenges being faced by the organizations opting for outsourcing.
It is been identified that the current political environment in the global market is one of the key barriers being faced by the organizations. Due to this factor, more and more stringent rules and regulations are being initiated by several countries to prevent the loss of jobs due to outsourcing. Thus, contemporary business organizations have to maintain these aspects in order to effectively carrying out the outsourcing process. However, recommendations are being provided in this report in order to help the organizations in effective implementation of the outsourcing strategies. Thus, it is being expected that proper implementation of the recommendations being given in this report will help the organizations in effectively managing the strategies of outsourcing.
References
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