Advantages And Disadvantages Of Outsourcing In Global Business Context

Introduction to Outsourcing

With globalization and increase in expansion of businesses to foreign countries, many organizations are unable to produce every required element of their own. Outsourcing proves to be one of the best solutions that allows organizations to focus on those activities which they are capable of and outsource the others which can be performed by others in cheaper, faster and superior quality manner. Outsourcing has also become a successful business trend whenever global business context is discussed, especially while managing businesses across border nations. According to Somjai, (2017), “Outsourcing is a modern management adopted in responding business units’ requirement of enhancing competitiveness” (p.157). Indeed, many experts believe that outsourcing provides with those managerial powers that enables growth in business in speedy and sustainable manner. However, few drawbacks behind implementing outsourcing function in core business activities can also be seen after analyzing practical business examples for which many companies lack confidence in accepting such kind of business concept. Therefore, this paper intends to find out such disadvantages and advantages outsourcing provides businesses along with finding out what role it plays in global context.

Tayauova (2012) have broken the word outsourcing into two parts- ‘out’ and sourcing in which the author describes that sourcing is an act in which organization’s transfers work and responsibilities to someone else. Companies sources work so that it can be performed in cheaper and faster way since the allocation of work also transfers the risk and responsibility behind performing the allocated work or service to another entity. Putting succinctly, outsourcing can also be defined as a business course of delegating business operations or responsibilities to third party, who performs the role more properly and in desired manner. Nevertheless, the level of control while performing outsourcing business functions can be separated on external and internal types. In internal outsourcing function, the business functions are reallocated for saving control over the overall performance. In external outsourcing function, the work performance is delegated to external agents who acts as a separate entity and undertakes sole responsibility behind performing the job under mutual understanding (Troaca & Bodislav, 2012). For example, external outsourcing may include joint servicing, cooperation, production, participation in capital. Internal outsourcing may include short-term and long-term partnership. Outsourcing can further be divided into two types depending upon the effective use of resources and risk allocation types i.e. full and partial outsourcing types. Full outsourcing involves delegation of set of functions separately to an outsourcing company after showing complete trust on it and providing full responsibility to complete the job. Under partial or selective type of outsourcing function, delegation of certain business activity is given to the outsourcer in which mutual related function is performed by the outsourcing company itself.

There are many reasons or advantages of outsourcing for which more and more companies are considering outsourcing in their core business operations and organizational strategies (Bera, 2017). In fact, they have started realizing that without outsourcing, to perform with excellence has become very difficult in this global competitive world and therefore companies decide to make fundamental changes in their businesses after outsourcing few activities to third party outsourcing agencies. The basic advantages that business gains due to outsourcing includes market competitiveness, cost reduction, access to superior class quality work, risk sharing, accumulation of resources and time saving. There are many areas that can also be developed in business by outsourcing like technology, productivity and quality. Productivity can be enhanced if an external provider is appointed through which activities can be measured and targeted. Only quality and experienced parties are generally selected for outsourcing job and thus gaining quality work and on time becomes more feasible. Specialized vendors and agents offer high degree work efficiency and so they also help in reducing cost of production or human resource management. By outsourcing, highly qualified staff can be hired who may not be available for client’s companies or exploiting the supplier’s investments, specialists’ capabilities and innovations (Dolgui & Proth, 2013). McDonalds is one fine example that proves how outsourcing can help business expand globally. Through outsourcing its supply chain activity, McDonalds achieve success over its competitors efficiently. The strategy used by the company shows that it outsources its supply chain activity by implementing franchise chain of restaurants in global countries. The company gives ownership to its franchise partners while the basic food recipe and name is kept with the company against commission basis. In this way, the company has established its chain of restaurants in more than 120 countries operating in nearly 1,50,000 chain of restaurants under one common name (Vitasek, 2016).

Advantages of Outsourcing in Global Business Context

Technology is certainly an advantage that is provided by outsourcing function. At some point of running, organizations have to make advancements in technological terms according to changing business demands. Getting new talent may become difficult or prove costlier for firms which they outsource IT or technology related function to vendors who specializes in such activities. The vendors, in return completes the work in more updated and cost-effective manner since they perform similar jobs for many companies simultaneously. Medium sized business owners are a great example that can be given here who are unable to hire technical experts for doing maintenance related job occasionally. Since the cost of hiring and training is very expensive in technological and engineering filed, they can outsource this task which will make it more cost-effective manner. Staff reduction is another advantage recognized by outsourcing since much of the work is outsourced, companies do not require hiring permanent employees for getting the job completed. Also, the companies will not have to face issues related to selection and recruitment or facing staff fluctuations due to market demands. Economies of scale can be achieved through outsourcing function along with job improvement as large-scale activity performed by outsourcing companies gradually decreases cost of production by saving human capital. Hiring and training costs are also being saved that can be utilized in other core development areas ( Gonzales, et al., n.d.).

In organizations, there are many roles that are performed and managed by employees. By outsourcing few tedious work and routine work, talented workforce remains free and can concentrate on core activities along with achieving excellence in completing tedious works on time. Financial security is also achieved by outsourcing that enables flexible cash flow in the company. By making partnerships with other firms or outsourcing risk-oriented tasks, the company not only gains cash flow but also minimizes risks through the times of uncertainties taking place in businesses. Acquisition of global talent is one advantage that is recognized by outsourcing function. ‘Global talent’ not only motivates firms in maintaining global competition but also helps in acquiring offshore talent in cost effective manner. A remarkable outsourcing business strategy is provided by Apple Inc. in which the company outsources most of its manufacturing to different countries like China, Korea and Japan. The company do not own any production facility or manufacturing unit rather, every hardware materials are brought from third party countries and assembled in another country. Outsourcing allows Apple to reduce its production cost along with providing work more efficiently through global workforce and in time effective manner. Since the company do not have to look after manufacturing part, they concentrate more on developing their marketing, branding and other critical strategies (Pineda, 2017).

According to Bacea & Borza (2015), outsourcing comes with various disadvantages also along with advantages. The main disadvantage includes threat to security, reduced managerial control, issues related to quality, hidden costs and repeated use of allocated teams creating similar kind of work. The first disadvantage mentioned related to security issues which organizations have to face while outsourcing its business activities. Almost every outsourcing company makes a contract under which mutual agreements are made and signed by both the parties and has few confidential statements spelled out. However, execution and maintaining official secrets become very difficult and thus organizations usually have to face security breach under many cases. For example, while outsourcing accounting work to accountancy specialists’ firms, the company have to share confidential data like financial records, profit statement and other crucial matter. All the information requires to be secured from vendors, brokers and especially business competitors. If any leakage of information is done or information provided to the outsourcing agency is not maintained properly, it is possible that the company have to face severe break downs or loses due to the loss of valuable information.

Disadvantages of Outsourcing

Secondly, the loss of managerial control while outsourcing business function makes many companies hold back from outsourcing its work to outside parties. Although required talent and specialists are acquired, but sometimes they take advantage of their expertise for which organizations have to face hindered negotiations and delay of work. Companies outsources work to receive superior quality work from outsourcing agencies than they receive from internal staff. Outsourcers are usually selected after analyzing various factors so that utilizing their name with company does not hampers organization’s overall reputation and work quality. However, any bad impact faced by outsourced agency or degradation of work quality may hamper reputation of outsourcing company also (Gonzales, et al., n.d.).

Kremic, Tukel & Rom (2006) underpins that many factors have been identified in literature that makes outsourcing activity fall adversely for businesses. The first one, according to the authors is complexity in nature that makes organizational surroundings very difficult to understand or interact with new variables. For example, any complex business research made by third party related to science may become difficult in understanding for an employee dealing in another expertise area. Often it becomes unknown to the organizations what needs to be sought after first for which expected outcomes may get delayed. Since outsourcing is a service that is purchased from outsourced agency under a contract, it is normally assumed that both parties understand what is required to be done or delivered according to the terms made in contract. Articulation of terms may again prove to be a complex function especially when the agreement is made between global companies situated at diversified places and for those who lacks expertise in the outsourcing function’s field (Quandt, 2012).

Integration of activities is another area of concern especially while making outsourcing to foreign companies. Integration here refers to those function that links each organizational system and communication to maintain relationship and smooth flow of activity in between both outsourcer and outsourcing companies. Moreover, if any party is unable to portray or convey actual picture of requirement to the other one, the whole concept or purpose behind outsourcing may be lost and go fuddled (Iqbal & Dad, 2013). The disastrous outcome of Deloitte, a global consultancy firm that involved IT function outsourcing in the year 1996 is one of the biggest examples of outsourcing failures. The company hired Massachusetts State Legislature that built computer systems for mass number of State courts. The project took more time than expected i.e. approximately 4 times than it was planned initially. A colossal plan was made in which the project was supposed to be completed within 5 years but instead the whole project took almost 19 years. Since the industry experts received delayed IT projects, the overall budget gone beyond limits and therefore, Deloitte had to face delayed deliveries to its client’s more than often. The tax collection system installed by the company was also plagued with around 1000 defects and unemployment claims went delayed for around 2 years. Due to ineffective outsourcing, the company faced multiple errors and ran a huge amount over the budget (Daxx, 2017).

The above paper identified the significance of outsourcing in global business context and how it enables businesses expand globally and efficiently. There is no doubt that outsourcing has become one of the most prominent business practices throughout the globe, however, before implementing outsourcing into core business strategies, making a thorough research about it can be recommended after analyzing several case studies related to outsourcing. Although outsourcing helps business in providing work in cost effective and superior quality manner, its drawback like security breach and delay of work sometimes shall also not be ignored. From discussion made in the above paper, it can be concluded that outsourcing is not similar for every company, particularly in IT and financial industries. Manufacturing and service related companies also adopts outsourcing largely so that they can focus more upon core competencies and global expansion strategies. The above paper discussed both advantages and disadvantages behind outsourcing and at the end it can be said that outsourcing provides businesses with many benefits provided the companies are able to analyze its drawbacks before implementing it into their core business activities.

References 

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