Benefits And Drawbacks Of Outsourcing Business Functions

Swiftness and Expertise

Question:

Discuss about the Advantages and Disadvantages of Outsourcing Business Functions.

Outsourcing is an allocation of particular business process to a specialist external service provider. Many a times, the organizations are failed to handle all aspects of a business process internally. Moreover, some techniques are temporary and the organization does not intend to hire in-house professional to implement the tasks. When the task is outsourced to the service provider, the service provider will take the responsibility of performing the tasks as well as maintaining organization’s assets. The existing studies indicate that outsourcing is a known practice among both private and public organizations and it is treated as the major aspect of business strategy. As put forward by Tayauova (2012), the process of the outsourcing can be looked upon as the strategic move among the business. The authors claim that this technique could attempt and decrease the total cost of maintaining or maximizing the productivity.

The studies indicate that outsourcing could allow the organization to focus on the fundamental activities of the business. For last two decades, the researchers have supported this phenomenon as one of the significant ways for minimizing the cost; nonetheless, the total impact of this practice remains explained conundrum. In order to conduct the literature review, some specific journals on outsourcing have been selected. However, this selection has been done based on the theme found in the literature.

As put forward by Liu and Wang (2014), the outsourcing usually known as offshoring carries some advantages and disadvantages but in most of the cases, the benefit overshadow the drawbacks of outsourcing. The existing studies have discussed about the following advantages and disadvantages of outsourcing.

Swiftness and Expertise-In many cases, the business activities are outsourced to vendors who are specialized in their field. The outsourced vendors also have some particular equipments as well as technical expertise, which are better than those at the outsourcing organization are. Hence, the business activities are effectively completed with a better quality in short time.

Focus on the core instead of the supporting ones- Outsourcing the supporting processes provides the organization with more time to strengthen their fundamental business process. This means the organization could outsource its supporting services, and put special attention to fundamental aspects of the business.

Risk-Sharing- As put forward by Dolgui and Proth (2013) one of the significant factors determining the consequence of an organization is risk-analysis. This means outsourcing certain aspects of the business process helps the organization to shift some particular responsibilities to outsourced vendors. Hence, the outsourced vendor is a specialist, they could develop the plan of risk mitigating the factors more effectively.

Minimized Recruitment Costs

Minimized operational and recruitment costs- It is observed that outsourcing elude the need to hire individuals in-house, here recruitment and operational costs can be reduced to a large extent (Jensen 2012). This is one of the significant advantages of offshore outsource.

The studies claim that the major disadvantages of outsourcing are the managerial control over the outsourced operations, threat to security, confidentiality, hidden cost, quality issue as well as reallocation of the existing team. In this context, Sass and Fifekova (2011) commented that the major disadvantage is related to the loss of control over the outsourced operation stems from the reason that manage the external source needed for particular skills. On the other side, Nassimbeni,  Sartor and Dus (2012) commented that almost every outsourcing contract has the terms of security as well as the confidentiality; however, the implementation and the audit always remain difficult. Particularly, in financial services, the requirements keep information known to investment bankers away from the traders, brokers and other individuals who try to use such insider information. The studies have discussed that outsourcing organization will be motivated by profits. As the contracts will fix the price, a significant way for business organization to increase profit is to decrease the cost. Hence, Liu and Wang (2014) mentioned that even though the outsourcing organizations gain the benefits from such business practices, the organizations always cannot the expected result; this is because of the communication gap is the major factor.

Likewise, Al-Mutairi and Al-Hammad (2015) commented that one significant reason to outsource can be treated as the expectation of receiving better services from the outsourcer than from internal organizational staff. The studies claim that outsource has to be selected in a specific manner to ensure that there is no negative influence on quality of products and services manufactured, else the organization could lose its position on the market. Apart from all these drawbacks, studies have emphasized on the fact the organizations could sign a contract with the outsourcing organization that could cover the details of the service that will be providing. Hence, anything not covered in the contract will be the fundamental for the organization to pay additional charges. For instance, it is observed that an analyst could purposely exclude costs to favor one decision such as selecting one provider versus another, selecting in sourcing over outsourcing. While digging into the fact that the outsourcing is often related to firing employees’ mind and it is a significant issue for the organization’s top management team to decide about the relocation of existing employees.

Focus on Core Activities

As put forward by Narayanan et al. (2011), outsourcing consists of different activities as many frameworks that are implanted in different theoretical approaches could describe well as each phenomenon. Many studies on outsourcing have usually been affected by three different approaches namely resource-based view, core competency approach as well as transaction cost theory. It is studied that resource-based view in outsourcing develops from a propositions that an organization that lacks significant organized resource and capabilities could seek for a provider from the external environment to overcome the weakness. As put forward by Çiçek, and Ozer (2011), the most significant use of resource-based theory in outsourcing technique remains as the perception stage for defining the decision making framework.

Hence, Kang et al. (2012) mentioned that organizations should plug gaps in resource and capabilities in most cost-effective way to maintain a distinctive product as well as its competitive edge.  The existing studies have claimed that a core competence can be considered as a cluster of attributes that an organization possesses that in turn enables it to gain competitive edge. However, if the organization is to focus on its core competence as the fundamental basis of its sustainable competitive advantages, the activities that do not constitute a core competence for the organization can be given to outside companies who can provide these at much lower cost.

On the other side, the transaction cost theory has been established to facilitate an analysis of the comparative cost of planning and monitoring the task completion with the help of alternative governance structure (Plugge,  Bouwman and Molina-Castillo 2013). The unit of analysis in transaction cost theory is considered as transaction, which occurs when a service is transferred across an isolated interface. However, the decision maker should weigh up the production as well as the transmission costs included with the execution of the transaction within their organizations.

In the literature review, the advantages and disadvantages of outsourcing functions have been covered. In addition, to understand other facts related to outsourcing business process, outsourcing business theories have been covered in the literature review. The areas that have been covered in the literature are comprehensive, as each piece of information has been provided with the evidences. It is comprehensive because the evaluation of the papers has been done keeping the major focus of the study in mind, which is the evaluation of benefits and drawbacks of outsourcing. In order to conduct the review of literature, 10 journals related to advantages and disadvantages of outsourcing. However, the selection of journals are limited to more recent materials; this means in order to increase the relevancy of the discussion, only recent studies have been considered. In addition, the review of literature does not focus on the methodological approach or any quantitative approach. Nonetheless, the search for literature related to discipline has been broadened.

Risk-Sharing

The objectives of the literature revolved around examination of benefits and drawbacks of outsourcing business functions. Thus, considering the purpose of the study, the following objectives have been formed.

• To establish an understanding about outsourcing business process
• To critically evaluate advantages and disadvantages of business outsourcing
• To analyze the potential impact of outsourcing on business

Many studies have been performed on the advantages and disadvantages of outsourcing business functions and each of the study consists of different themes; however, the major focus of the studies remains same. For example, the study conducted by Kang  et al. (2012), includes the theories of outsourcing and how they can be applied to business context. On the other side, the study conducted by Çiçek, and Ozer (2011), focuses on the advantages and disadvantages of business outsourcing. Likewise, the research conducted by Al-Mutairi and Al-Hammad (2015), revolves around the issues of business outsourcing. However, all studies selected for the literature included the themes that are relevant to or related to the recent contexts. If outsourcing business can be implemented effectively to the real-context, the business will be more profitable. This is compared to the businesses that use internal strengths to conduct the supporting activities  

The quality and currency of literature sources utilized in the perception of review is ascertained to be high of high quality and recent as possible.

Quality of the paper selected for the literature

The sources selected for the literature review carries the highest standard and the authors with years of experience write the papers not only in business but also in business writing. Most of the articles referred to the review are well-known international business journals. The authors have conducted several journals in the same context hence to known to produce desired quality. For example, Çiçek and Ozer) stayed the supervisor for global MBA students at Manchester Business School and Al-Mutairi and Al-Hammad stayed as the lecturer in an African University also. Such exposure enables the production of very high quality work.

Currency of the selected journals

The secondary information for conducting the literature review is recent, with articles and publication is not later than 2011. Therefore, this criteria ensures the kind of information used in the study is up to date and relevant to the research context.  However, the paper by Narayanan et al. (2011) is the oldest of all that have been used in the analysis with the context being discussed from it is not being dynamic in the recent business trends.  

The sources used for the implementation of the literature review are certainly reliable as exemplified by the sort of quality authors whose have been cited. The discussion on the recent themes makes the papers valid and they can be relied upon because of the fact that some papers used in the present study have also been cited in other literature review in the field of outsourcing business activities.

Loss of Managerial Control

Based on the literature developed in the study, it can be mentioned that existing papers lacks the discussion on the interaction between outsourcing and its impact on the business in the recent time. The existing literature review have emphasized on the benefits, drawbacks and theories of outsourcing but the studies did not focus on how those benefits and drawbacks are affecting the organizations. Most of the articles cited in the literature review lead towards the process about how the advantages can be gained outsourcing. The contribution found in the literature was the article conducted by Al-Mutairi and Al-Hammad (2015) on the advantages and disadvantages of outsourcing.

Conclusion

In conclusion, it can be mentioned that the advantages and disadvantages outsourcing in business have the explored the depth in the literature review. The advantages of outsourcing revolve around the time saved for focusing the core activities of the business. This means the outsourcing organization can develop their fundamental business by outsourcing the supporting activities; this helps them to save additional cost and time.

References

Al-Mutairi, A.O. and Al-Hammad, A., 2015. Advantages and Disadvantages of Maintenance Outsourcing in Manufacturing Companies: With Special References to Jubail Industrial City–KSA. European Journal of Business and Management, 7(20).

Çiçek, I. and Ozer, B., 2011. The effect of outsourcing human resource on organizational performance: the role of organizational culture. International journal of business and management studies, 3(2), pp.131-144.

Dolgui, A. and Proth, J.M., 2013. Outsourcing: definitions and analysis. International Journal of Production Research, 51(23-24), pp.6769-6777.

Jensen, P.D.Ø., 2012. A passage to India: A dual case study of activities, processes and resources in offshore outsourcing of advanced services. Journal of World Business, 47(2), pp.311-326.

Kang, M., Wu, X., Hong, P. and Park, Y., 2012. Aligning organizational control practices with competitive outsourcing performance. Journal of Business Research, 65(8), pp.1195-1201.

Liu, S. and Wang, L., 2014. Understanding the impact of risks on performance in internal and outsourced information technology projects: The role of strategic importance. International Journal of Project Management, 32(8), pp.1494-1510.

Liu, S. and Wang, L., 2014. Understanding the impact of risks on performance in internal and outsourced information technology projects: The role of strategic importance. International Journal of Project Management, 32(8), pp.1494-1510.

Narayanan, S., Jayaraman, V., Luo, Y. and Swaminathan, J.M., 2011. The antecedents of process integration in business process outsourcing and its effect on firm performance. Journal of Operations Management, 29(1), pp.3-16.

Nassimbeni, G., Sartor, M. and Dus, D., 2012. Security risks in service offshoring and outsourcing. Industrial Management & Data Systems, 112(3), pp.405-440.

Plugge, A., Bouwman, H. and Molina-Castillo, F.J., 2013. Outsourcing capabilities, organizational structure and performance quality monitoring: Toward a fit model. Information & Management, 50(6), pp.275-284.

Sass, M. and Fifekova, M., 2011. Offshoring and outsourcing business services to Central and Eastern Europe: Some empirical and conceptual considerations. European Planning Studies, 19(9), pp.1593-1609.

Tayauova, G., 2012. Advantages and disadvantages of outsourcing: analysis of outsourcing practices of Kazakhstan banks. Procedia-Social and Behavioral Sciences, 41, pp.188-195.