Outsourcing is defined as the process in which a corporation delegates its secondary or non-core business activities to third-party companies to reduce cost and improve their efficiency. The transfer of secondary tasks assists firms in focusing more on their primary practices which improve their performance and profitability. Modern companies outsource various practices relating to legislative, accounting, call center, IT and data analysis. The benefits of outsourcing an activity include enhancement in quality, high level of customer satisfaction, reducing expenses and distribution of risks. There are several drawbacks of outsourcing as well such as lack of control over management, bad publicity, threat of data breach, risk of new competition and many others. This report will evaluate various drawbacks and merits relating to outsourcing a business activity. Further, the report will examine various companies’ perspective to understand disadvantages and benefits of outsourcing.
The main objective of this report is to analyse various advantages and drawbacks of outsourcing a task by reviewing several kinds of literature. The secondary goal of the report is to understand various corporations’ perspective regarding outsourcing and evaluating its impact on their business.
The report will take the example of companies such as Apple, IBM, and Teleperformance to understand the benefits and shortcomings of outsourcing business activities. The report will include several theories provided by different experts on the topic to understand its challenges and rewards.
According to Lacity, Khan, and Willcocks (2009), outsourcing is defined as the practice of delegating or transferring secondary activities of a corporation to third party organisations; it allows companies to increase their focus on primary practices to improve their performance. Organisations transfer various practices to third-party firms such as customers support, legislative, accounting, data analysis, and information technology (Figure 2). As per Chow et al. (2009), modern corporations use outsourcing method because it provides numerous benefits to an enterprise such as reduction in operating costs, expertise service, distribution of risks and improvement of customer support. Many corporations have effectively implemented the outsourcing strategy to gain a competitive advantage such as IBM, Google, Slack, Whatsapp, and many others.
In recent years, many modern organisations use the method of outsourcing to delegate their secondary activities to third-party corporations. Kuruvilla and Ranganathan (2010) depicted that the popularity of globalisation allows companies to easily delegate their task in developing countries since it reduces their cost and provide them superior quality (Figure 1). Following are few examples of outsourcing benefits receive by modern firms.
Thouin, Hoffman, and Ford (2009) provided that a corporation can reduce its operating expenses by outsourcing its non-core functions to third-party companies. The expenses relating to activities such as recruitment, training, and supervision are considerably high in developed nations. Therefore, organisations delegate their practices in developing countries to gain cost benefits. The labour cost in countries such as China, India, Malaysia and Indonesia are relatively cheaper that compared to other nations such as United Kingdom, United States, and Singapore (Figure 3). Kaya and Ozer (2009) mentioned that the cost of material in developing countries is also cheaper than compared the developed nations which improve the efficiency of firms. IBM has used this strategy to reduce their operation cost; the company uses this policy reduce the operations cost of customer support practices. The firm has gained a competitive advantage in the industry by using this strategy.
As per Kotlarsky, Scarbrough, and Oshri (2014), the corporations can improve the quality of their work by outsourcing its functions since most of the outsourcing firms provide expert quality. The companies which perform the outsourcing activities usually hire experts and professionals in the field to attract a large number of international firms. According to Sako (2014), the cost of hiring employees and providing them training is considerably high in developing countries; therefore, corporations prefer to delegate their work in developing countries because they can get expert quality work without spending extra resources. Tesco PLC is a good example; the firm uses outsourcing services to reduce their operations expenses which assist them gaining a competitive advantage. IBM use outsourcing to improve the quality of its customer support department to ensure that its customers receive high-quality services (IBM, 2017).
Yang, Wacker, and Sheu (2012) stated that outsourcing secondary tasks allow corporations to enhance their focus on primary activities; it assists in increasing the quality of firm’s primary functions. The enterprises have the option to increase efficiency in their operations by outsourcing its non-core activities to other firms. As per Ali and Green (2012), outsourcing a function allows employees to increase their focus on main functions rather than wasting their time in mundane tasks; it assists in increasing the overall performance a corporation. IBM outsources its customer support department to ensure that its employees focus on other primary activities of the firm.
Rost (2016) depicted that the large corporation’s operations are divided into various departments; each division performs different tasks to ensure that company is able to achieve its organisation objectives. It is difficult for a corporation to maintain a high level of efficiency in each division and workload of secondary department affects the quality of primary activities. IBM primarily focuses on manufacturing technology hardware components; the firm improves its quality by outsourcing secondary functions such as customer support department. It is beneficial for both corporation and customers since it reduces cost and improves quality of operations.
For modern corporations, outsourcing secondary activities resulted in providing various benefits, but there are several disadvantages as well. The corporation has to face various challenges while outsourcing their functions to third-party firms. Following are few examples of shortcomings relating to outsourcing business functions.
Generally, multinational corporations outsource its activities to third-party firms situated in developing countries because the cost of material and labour is considerably cheaper in such countries. Khan, Niazi, and Ahmad (2011) provided that the management did not have the option to control of the daily operation of firms situated in foreign countries. The management face difficulty in implementing new strategies and policies into the outsourcing company which makes it difficult for them to operation its everyday functions. According to Gewald and Dibbern (2009), the firms are known for their premium quality services, and they prefer to ensure that the corporation that they outsourcing their functions are also performed on these objectives, but due to lack of managerial control, it is not possible for them to control.
IBM faces similar issues while outsourcing its functions; the company outsources its activities in countries such as Malaysia, India, and Indonesia and they have to comply with various government regulation. The firms are not able to ensure that the outsourcing firm is performing the way they want them to perform and government regulation stops them from implementing strict regulations (Mourdoukoutas, 2017). Therefore, many firms did not prefer to outsource its functions because they lose their managerial capacity on their secondary functions.
In recent years, a large number of firms use outsourcing strategy to reduce their costs and improve the quality of their practices. Ren, Wang, and Wang (2012) stated that the growing number of outsourcing corporation creates new competition in the market because many companies prefer to gain competitive advantage through outsourcing strategy. For example, Hewlett-Packard and Dell are the main competitors of IBM; all these companies outsource their IT business to third-party corporations, and it creates new competition on outsourcing market. The growth in competition increases the cost of outsourcing which resulted in creating a highly competitive market environment in which only large corporation can survive.
Aundhe and Mathew (2009) provided that outsourcing a business function can be detrimental to a company’s reputation in its domestic market. Many people and organisations did not support outsourcing strategy because the outsourcing firms are giving local jobs to foreign enterprises. As per Khidzir, Mohamed and Arshad (2010), outsourcing a function leads to increase in unemployment because many people have to lose their jobs. In countries such as Australia, the rate of unemployment is growing rapidly and outsourcing contributes to the growth. Therefore, people and association protest against corporations which outsource their functions to a foreign country; it decreases the reputation of a company in the market. Many people protest against the company by not using its products and services which result in causing financial loss to the firm (Ohm, 2017). Due to the risk of bad reputation, most corporations avoid outsourcing its activities.
While outsourcing secondary activities, corporations have to deal with various regulations from different countries. They have to comply with various employment, labour, workplace and management regulations to ensure that they did not exploit the labours. Reitzig and Wagner (2010) stated that the rapidly changing market condition of developing countries also has a significant impact on company’s outsourcing activities. Any substantial political, economic, social or environmental change can have a significant impact on a corporations business. Therefore, firms are required to assess various laws and regulations to ensure that they did not affect them adversely.
For example, any substantial change in political parties can close the outsourcing business of international corporations in India because the new political party might disapprove with outsourcing regulation. According to Norman (2009), the increase in tax rates can also result in increasing the operating cost of outsourcing business. In India, the economy is constantly changing which also affects the business of companies which outsource their activities to Indian outsourcing firms (Figure 4). Therefore, the international corporations have to assess various regulation and law which apply to them to ensure that they are safe from future changes.
Mahmoodzadeh, Jalalinia and Nekui Yazdi (2009) stated that outsourcing requires corporations to transfer its functions to third-party firms, and firms have to share their information to ensure that they effectively perform their operations. The companies share sensitive data with third-party companies relating to various operations such as customer details, legislation, accounting, financial records and many others. The lack of managerial control makes it difficult for companies to protect their data from external breaches. The risk of data breach and data leak increasing during outsourcing of business functions. For example, Apple Incorporation outsources its smartphone manufacturing activities to factories in China and they implement strict regulation to ensure that workers did not leak the data. But, a prototype of their product leaked in the market each year because it is difficult to maintain security while outsourcing a business function (Kelly, 2017).
Usually, firms outsource their functions in foreign countries such as China, Japan, India, Indonesia and many others. As per Hawk, Zheng, and Zmud (2009), the corporation faces various cross-cultural related difficulties during outsourcing because of language barriers. The outsourcing corporation hire local labours at cheaper costs and most of them did not have appropriate knowledge or understanding of English. The language barriers make it difficult for managers to implement effective organisation strategies because workers did not understand their instructions. In case of IBM, the company primarily operates in the United States, but it outsources its customer service department in countries such as Malaysia and India. The customers from the United States can call on company’s helpline number and can get frustrated by the accent of customer support executive which reduces corporation’s reputation. The manager also faces difficulty while talking with local employees because they find it difficult to understand their instructions.
Conclusion
From the above observations, it can be concluded that modern corporation can benefit hugely by outsourcing its secondary function to third-party firms. The main advantages of using outsourcing include reducing in operating cost, expertise work, efficiency in functions, focus on primary tasks, and improvement in the quality of customer support. Many multinational corporations have successfully implemented the outsourcing strategy to gain a competitive advantage in the industry. There are several disadvantages of using outsourcing strategy as well, and corporations have to implement strategies to address such challenges. For example, lack of managerial control, increase in competition in the industry, bad publicity of the firms, risk of data breach or leakage, language barriers, and employees dismissals. Modern corporations have to assess the shortcomings to ensure that they did not affect the firm’s operations and implement appropriate strategies to tackle the issues. The firms can effectively use outsourcing activity to gain competitive advantage and sustain their future growth.
References
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