Advantages And Disadvantages Of Outsourcing Business Function

Literature Review

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.

Scope of Outsourcing in Business

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)

Companies utilize outsourcing function in order to reduce its time and money by delegating few of its work to others. Along with it there are many services like information provider service, labour, financial consultants, manufacturing parts, etc. which are provided through outsourcing. (Syluancia, 2009) Outsourcing benefits companies with constant growth along with improvement according to present scenario provided the outsourced firm is not outdated, and hence is essential part to keep the company in flow with today’s market. Many companies outsource in order to release some of its internal function which can be utilized for further development of the company and also save time and energy. (Riley, 2010) With the growth of business, risks also rise and can sometimes prove to ruin the entire firm or the owner. In order to avoid its fallback on one person or entity, the risks are shared with the outsourcing firms and thus help in dividing concentration risks among them. The reasons behind outsourcing are many and therefore it is sometimes adopted by firms without looking into its drawbacks which results in its failure. Thus in order to have successful outsourcing function in a business, all the advantages along with disadvantages must be keenly observed. (Kremic, 2006)

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)

Objectives of Outsourcing

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)

Disadvantages of outsourcing are also necessary to be looked at while implementing it in business without which the expected result may become unfavourable. Since it delegates its work to outer agencies and people outside the firm, it results in loosing owner’s control over few of its business parts. After delegation, the performance of the work is controlled by others and chances of its fall back become high if the delegated agency is suspicious. The most important disadvantage which lies in delegation of work is that sometimes the freelancers or external agencies gets motivated for their profits only. (Stevenson, 2009) It then reduces the overall quality of work or job as they are engaged with many firms and does not concentrate in enhancing quality. Outsourcing agencies can also cheat by making the delegating team sign contracts which are unfavourable. Mostly the documents are lengthy with fine prints, it affect the business delegators’ in getting ripped off. Another disadvantage outsourcing has that it might have hidden costs which are not made clear before handed and thus creates a fallback in business if not recognised properly while making decisions. Thus the management needs to tread cautiously before reading contracts and signing it to outsource functions to others (Riggins, 2017). Outsourcing increases security risks as personal data is often shared while outsourcing internal managerial areas which also lead in risking safekeeping of data. Few agencies or professionals do not maintain timeline and delay’s the work by not synchronising time schedules with the delegator’s and remains busy with other clients. Outsourcing business functions to other countries is another major problem which mostly results in loosing public morale and thus taken negatively in many countries. Along with it other disadvantage outsourcing has that it sometimes becomes very complex and lengthy and can consume lot of time and entails unnecessary time consumption. From the entire disadvantage mentioned in the research it is clearly understood that although need for outsourcing is increasing; the disadvantages related are also becoming well-known and should be taken into consideration to avoid fallback. (Mol, 2009)

Conclusion

Outsourcing has become core in today’s business world and cannot be exempted. Although there are few companies who still believes in working under its own area and restricts outsourcing, but then the chances of their diversification and social engagements becomes less. (Slowik, 2016) With the growing competencies, it has been taken as a positive approach by researchers which can help business grow in shorter period of time. But then consequences are also important to be recognised to avoid adverse affects and hence require deep concentration. If outsourced with proper detection, benefits can be recognised and the proprietors’ are freed to reinvest their time and energy for other important functions in the business. With a team of skilled professionals, the work becomes more strategic and in flow along with cost control by reducing full time staff. Thus with the help of analysis, it can be concluded that outsourcing if done with caution can prove to be advantageous and is unavoidable function of business.

References

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