Advantages and Disadvantages of Outsourcing: A Comprehensive Analysis

Advantages and Disadvantages of
Outsourcing
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TABLE OF CONTENTS
Literature Review............................................................................................................................1
Definition of outsourcing and its type.........................................................................................1
Advantages and disadvantages of outsourcing............................................................................2
Further impact of outsourcing on organizational performance...................................................5
Challenges faced by outsourcing.................................................................................................6
Decisions related to outsourcing..................................................................................................7
References........................................................................................................................................8
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Literature Review
Definition of outsourcing and its type
Definition
According to Willcocks et.al.(2017) Outsourcing can be defined as the business practice that has
gained heights in the few decades majorly in business processing and information technology
outsourcing. In general terminology, it can be defined as an act of taking services from various
external sources. With the greater emphasize on information technology, outsourcing can be
defined as selling IT assets, activities and people to third party supplier to gain payment as per
the time period on the basis of mutual decision. Outsourcing from other point of view is
explained as buying of services from external organization or sources that an organization
currently offers.
As the word indicates ‘out as well as sourcing’ refers to the practice of transferring the work and
right of taking decision to some other sources. Reason of outsourcing by many of eh large and
small scale organizations is that they can get the work done in a better way at cheaper rates. The
process allocates risk as well as responsibility for the various function and services to some other
external entities. Therefore, to accomplish the work at faster and cheaper rate, outsourcing is
highly beneficial.
A recent survey conducted indicates that 42% of communication business, 37% of semi
conductor organization as well as 40% of computer manufacturer have high focus on outsourcing
their business activities (Oshri et.al, 2015). This is due to lack of communication expertise. In
addition to communication systems, payroll, database functions, inventory, etc are the areas that
are outsourced. Major of the firms revise their priorities and utilise their resources for selected
procedures and activities. The result was increase in outsourcing activities which segmented the
performance metrics into productivity, market ratio, cost efficiency, profitability, productivity,
and cash management. These metrics lead to understand the financial characteristics of an
organization that undertakes outsourcing.
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Types
According to Morschett.et.al (2015) the control and performance over outsourced function, it can
be divided into internal and external outsourcing. Internal outsourcing can be defined as the
practice in which the current organization concentrates on its own business activities and
transform internal resources into separate business entity to take decisions in favour of business
growth. External outsourcing on the other hand is defined as allocation of performances of
functions that are mutually related or separated to external organization or outsourcer. For further
explanation of external outsourcing, an example of Alibaba.com can be looked upon which
outsourced website development to well known firm in US to establish its internet organization
acting as one of the largest IPO these days. Reason of outsourcing was internet restriction in
China as well as lack of skilled resources.
Single partnerships, long term partnerships as well as short term partnerships are an example of
internal outsourcing while on the other hand centres concept, capital participation, joint
servicing, cooperation are an example of division of joint procedures in external sourcing.
Outsourcing is further divided into full type and partial type of outsourcing as per the utilisation
of resources as well as reallocation of responsibility and risk. Partial outsourcing is defined as
delegation of some functions or activities, to outsourcer while certain set of related functions are
undertaken by an organization itself. Full outsourcing irrespective of partial outsourcing is the
process which outsources major of its business processes to some other organization or source
with entrusting with responsibility for performance of functions.
Advantages and disadvantages of outsourcing
As per Virtaluoto.et.al (2016) Outsourcing in past was referred as off shoring and was considered
as the beneficial business concept for major of the industries practicing it. However, it has many
advantages and disadvantages that highly impact the business activities in positive and negative
manner. In the current scenario, countries like USA and Japan who are trading partners have
adopted the concept of outsourcing in major of their business units with an expectation of
increase in competitive advantage, enhancement of business core competencies, as well as
reduction in production cost. Along with the benefits, both the nations suffered from various
issues like compromising on quality of good or work, delaying in delivery, as well as less skilled
labours.
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