Outsourcing: Advantages and Disadvantages

This assignment examines the multifaceted nature of outsourcing, exploring both its advantages and disadvantages. It delves into key success factors for successful outsourcing implementations, while also highlighting potential pitfalls and risks associated with this practice. Drawing upon real-world examples of both successful and unsuccessful outsourcing ventures, the analysis provides a comprehensive understanding of the complex implications of outsourcing for organizations.

RUNNING HEAD: Advantages and disadvantages of outsourcing business functions
Business Research
Advantages and disadvantages of outsourcing business functions

Advantages and disadvantages of outsourcing business functions
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Contents
Title:...........................................................................................................................................2
Introduction................................................................................................................................2
Project Objective........................................................................................................................2
Project Scope..............................................................................................................................2
Literature review........................................................................................................................3
Quality and Currency of the articles and sources used in the literature.....................................8
Identification of gaps..................................................................................................................9
Conclusion................................................................................................................................10
References................................................................................................................................11

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Title: Advantages and disadvantages of outsourcing business functions
Introduction
This project has been executed over the topic “Advantages and disadvantages of outsourcing
business functions” in which discussion will be made regarding the concept of outsourcing
and various advantages and disadvantages associated with the outsourcing of business
functions. Outsourcing is a crucial aspect of the present business environment. The term
outsourcing can be explained as the way or process adopted by the business for delegating the
function of the business to external vendors or companies (Sturgeon & Gereffi, 2011).
Figure 1: Outsourcing
Source: (Spiridon, 2017)
Project Objective
The objective of this project is to develop knowledge of the concept of outsourcing of
business functions and advantages and disadvantages of outsourcing of business functions.
The analysis will be done on different journals, articles, and sources available over the
internet for executing the project in a successful manner.

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Project Scope
Outsourcing is a very wide term which is creating a huge impact on the global business
environment. This literature review will focus on developing an understanding of outsourcing
and analyzing the advantages and disadvantages of outsourcing business function.
Outsourcing of the business functions forms an important part of the business environment
and its importance for the dynamic business environment will be discussed in the literature
review.
Literature review
Businesses are outsourcing the functions for enhancing the effectiveness of the business. It
has enhanced the competitiveness of the business by focusing on the core functions of the
business. Companies are focusing on different aspects while outsourcing the functions so as
to make sure that outsourcing is generating positive outcomes for the company. The main
motive behind outsourcing is devoting the time to important functions of the business.
Globalization has increased the role of outsourcing in the business environment. Outsourcing
has helped organizations by reducing the cost and enhancing the performance of the business
(Mirza, 2012). This is in contrast to the views of Spellman & Varrichio (2012), who have
stated that outsourcing is acting as a threat to the confidentiality of the data and security of
the data. Legal consequences may arise for the company due to non-compliance with the
legal rules and regulations formed in a nation.
Outsourcing is used by the businesses for reducing the efforts involved, costs involved and
resources involved in the execution of the operations of the business. Outsourcing can be
understood as using the outside resources in a strategic manner for performing the operations
which were previously handled by the internal employees of the company using available

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resources (Doval, 2016). There are various advantages and disadvantages of outsourcing of
the functions of the business. These advantages of outsourcing of the business functions are a
reduction in the cost involved in the operations of the business, increase the productivity of
the business, effective utilization of the available resources helps in establishing a balance
between the jobs, promotes flexibility and avoiding risks associated with the functions of the
business. Disadvantages of outsourcing of the functions of the business include increase in
the unemployment rates which affects the economy, negative impact on the quality of the
products or services which are outsourced, risk or threats due to lack of support from the
government, result in hidden cost, poor infrastructure facilities and impact of unstable fiscal
regulations (Pyzik, 2012).
As per the data presented in IT Business Edge (2010), there are few factors which determine
the chances of success of the outsourcing of the functions of the business. The first factor is
setting clear goals as the clarity of goals help in moving towards the right direction. The
second factor is an analysis of the strengths and weaknesses of the company for analyzing the
capabilities of business in utilizing opportunities and coping with the threats. The third factor
is to encourage internal stakeholders of the company to accept the changes so as to gain their
support for implementing the decision of outsourcing. The fourth factor includes considering
the intangible benefits associated with the decision of outsourcing taken by the business. The
fifth factor is managing the relationship as there is a need to establish healthy relationships
for executing the outsourcing function in an effective manner. The last factor is the
application of a structured transaction. For example, Procter & Gamble was facing issues due
to the fast changing business environment. For coping with these changing aspects of the
business environment, Procter & Gamble has outsourced the research and development
activities. Outsourcing of the research and development activities have resulted in
innovations in the products offered and enhanced the revenue of the company. The

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productivity of Procter & Gamble has increased by 60 %. This is in contrast to the views of
Mourdoukoutas (2011), outsourcing results in a rise in the competition. This increase in the
competition has affected the pricing policies and profitability of the business. Another
important issue which must be considered while outsourcing the business functions is the
quality which may get affected due to lack of proper control. For example, US Navy and
Marine Corps has outsourced the voice, video, network, desktops and system training
program for their personnel to EDS. For winning the contract EDS did not analyze the full
scope of the project. The project included integration and replacement of the 10000 legacy
applications. This indecision of EDS has resulted in the loss of $153 million in the third
quarter of 2004 (Garland, 2015).
Smith (2012), stated that the scope of outsourcing increasing at a very fast speed. There are
various reasons behind the decision of business for outsourcing the functions of the business.
Business analysis these reasons so as to analyze the impact of this decision on the
performance of the business. Outsourcing involves hiring the third party for performing the
functions of the business. Further, it is added by Dolgui & Proth (2013), there are various
benefits of outsourcing of the business functions and these benefits of outsourcing include
saving money by reducing the labor cost, enhances the chances of efficiency and profitability
and availability of resources in a better manner. On the other hand, Brewer, et. al. (2014), has
discussed various aspects which adversely affect the decision of company for outsourcing.
These aspects due to which companies are against the decision of outsourcing include to have
full control of business on the operations, for the elimination of issues or conflicts with other
companies, impact on the customer services and depleting quality of the services or products
offered. For example, Acer has outsourced the functions of the business which were acting as
a challenge for the company. It has outsourced functions including manufacturing for the
purpose of focusing on its core functions which are branding and marketing. This step taken

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by Acer has resulted in rising in the sales of the company and enhanced the market share of
Acer (Muzychko, 2015).
Outsourcing is an effective activity of the contemporary world which has gained much
importance in this changing business environment. Different countries have used the concept
of outsourcing for gaining a competitive advantage over the competitors. Advantages of
outsourcing include the saving of cost, enhancement in the performance, better flexibility and
focusing on the core activities of the business. On the other hand, few disadvantages of
outsourcing are a loss of control on the operations, lack of confidentiality, decrease in the
quality, hidden cost involved and dissatisfaction among the employees (Tayauova, 2012). In
the contrast to this Rhett (2015) stated that negative impacts of outsourcing have been
analyzed on the businesses. Negative impacts of outsourcing include an increase in the
unemployment, loss of the competitiveness and reduction in the income level. Companies are
losing managerial control over the operations of the function which has been outsourced.
According to Sturgeon & Gereffi (2009), private and public organizations both are adopting
outsourcing practice. Outsourcing is considered as a strategic move among the different
businesses. Different researchers have supported the decision of outsourcing. The situation of
outsourcing can be explained as the transfer of a task to the outside vendor or supplier.
Further, it was added by Meier, et. al. (2012), benefits of the outsourcing include
restructuring of cost, shifting focus on the core activities, increasing flexibility, use of
advanced technology, gaining skill, knowledge, and expertise in the field and contract.
Negative impacts of outsourcing are chances of leakage of data, slow response, depleting in-
house capacity, issues related to quality and lack of control.
According to Zhou & Ren (2010), with the changing business environment and globalization,
there has been a rise in the number of companies outsourcing their operations. There are three
areas which determine the decision of business for outsourcing. These areas include concern

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related to the quality of the services, information related to the outsourcing and planning of
capacity and coordination with the suppliers. In the words of Ding (2014), companies are
focusing on the advantages of outsourcing for gaining a competitive advantage over the
others. Companies may consider outsourcing as a measure for cutting the legal and financial
obligation which increases the cost of the company. For example, Unilever has successfully
utilized the concept of outsourcing for enhancing the performance. Unilever has outsourced
its development process of ERP system as it was lacking in IT solutions. This decision of
outsourcing of Unilever has resulted in an increase in the annual savings on the operational
activities of Unilever to € 700 million (Muzychko, 2015). On the other hand, Galetic, et. al.
(2011), Companies are keeping tight control over its operations and different functions for
ensuring that the actions are going in the right direction. While choosing to outsource,
organizations move towards downsizing of the employee base of the organization. The
downsizing of the business creates a negative impact on the performance and reputation of
the business. Outsourcing increases the employee turnover rates, use of temporary
employees, losing efficient and effective workforce and increase in dissatisfaction among the
employees. All these aspects increase the cost of the company. For example, Queensland
health department has outsourced the development process of an application which is used
for administering payroll for the department to IBM. Initially, IBM stated that the project will
cost $6 million. IBM faced technical challenges and stated that the cost of the project will be
$27 million. At the end of the project cost of the project was $1.2 billion which was way
more than the estimated cost. Due to this, Queensland banned IBM from working on the
government projects and the case was filed against IBM for the recovery of the loss suffered
(Garland, 2015).

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Figure 2: Outsourcing
Source: (Spiridon, 2017)

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Quality and Currency of the articles and sources used in the literature
For ensuring the quality of the information presented in the literature review, quality sources
have been used. The sources which have been used for collecting information have been
properly referenced and cited in the research program so as to maintain the authenticity and
reliability of the program. Only those references have been used which are of after the year
2009 for presenting the current information. All the references which have been used contain
details such as publication year, authors, and relevance to the research topic. All the
information presented in the literature review is based on the information provided in the
different sources which are included in the reference list of the research.

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Identification of gaps
This research has been executed for the analysis of the various advantages and disadvantages
of outsourcing of the business operations. During the execution of this research program, few
gaps have been identified which are the research problems not covered in the research
program in a proper manner. This research program has discussed the advantages and
disadvantages of outsourcing and various examples of the successful outsourcing and failed
to outsource. This research program has not covered the factors which promote the
companies for moving towards outsourcing. This research has not covered proper discussion
of the concept of outsourcing of the business functions.

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Conclusion
Thus, from the execution of this research project, it can be concluded that outsourcing of the
business functions enhances the functioning of the business as well as provide various other
advantages to both the companies engaged in the outsourcing process. This research program
has considered the arguments of different authors or researchers for analyzing the impact of
outsourcing on the performance of the business as well as on the economy. This literature
review has discussed the various advantages and disadvantages which outsourcing is
providing to the business. From the analysis of the different journals, it can be stated that
outsourcing is an important aspect of this changing business environment.

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References
Brewer, Wallin & Ashenbaum, 2014, “Outsourcing the procurement function: Do actions and
results align with theory?” Journal of Purchasing and Supply Management, 20(3), pp.186–
194.
Ding, P., 2014, “Offshore Outsourcing: Its Merits, Its Drawbacks, and Its Future”, Business
Administration.
Dolgui, A. & Proth, J.-M., 2013, “Outsourcing: definitions and analysis”, International
Journal of Production Research, pp. 1-9.
Doval, E, 2016, “Is Outsourcing A Strategic Tool To Enhance The Competitive Advantage?”,
Review of General Management, Volume 23, Issue 1.
Galetic, L., Aleksic, A. & Klindzic, M., 2011, “Outsourcing and Downsizing As Modern
Organizational Trends in Croatian Companies”, The Business Review, Cambridge, Vol. 17,
Number 1.
Garland, A., 2015, “Five of the biggest outsourcing failures”, IT Pro Portal. Accessed on: 17
August 2017. Retrieved from: http://www.itproportal.com/2015/12/19/five-of-the-biggest-
outsourcing-failures/.
IT Business Edge, 2010, “Six Key Success Factors for Outsourcing”, IT Business Edge.
Meier, H. S., Reyes, J. A. G., Lal, J. S. & Lona, L. R., 2012, “An Investigation Exploring the
Advantages and Disadvantages of Outsourcing the Development of New Products in the
Indian Pharmaceutical Industry”, Proceedings of the 2012 International Conference on
Industrial Engineering and Operations Management Istanbul, Turkey.
Mirza, A. A., 2012, “The Impacts of Outsourcing on the organisation and economy- A
critical Look on Ericsson Transformation Planning Outsourced to India”, Blekinge Institute of
Technology.

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Mourdoukoutas, P., 2011, “The Unintended Consequences of Outsourcing”, Forbes.
Muzychko, A., 2015, “5 Successful Stories of Outsourcing”, Linked in. Accessed on: 17
August 2017. Retrieved from: https://www.linkedin.com/pulse/5-successful-stories-
outsourcing-anna-muzychko.
Pyzik, K., 2012, “The Pros and Cons of Outsourcing”, The Internal Auditor, 69(2), p.21.
Rhett, R., 2015, “Outsourcing: The negative effects”, Linked in.
Smith, A., 2012, “The Pros and Cons of Outsourcing”, UNLV Theses, Dissertations,
Professional Papers, and Capstone.
Spellman, J. & Varrichio, J., (2012), “"Bad Reputation?: The Potential Negative Impact of
Outsourcing on the Legal Profession”, Hofstra Labor and Employment Law Journal, Vol. 29,
Iss. 2, Article 8.
Spiridon, S., “7 Things About Outsourcing To Romania You’ll Want To Know”, Thecon.
Accessed on: 17 August 2017. Retrieved from: https://thecon.ro/en/7-things-outsourcing-
romania-youll-want-know/.
Sturgeon, T. & Gereffi, G., 2009, “Measuring success in the global economy: international
trade, industrial upgrading, and business function outsourcing in global value
chains”, Transnational Corporations, 18(2), pp.1–35.
Sturgeon, T. & Gereffi, G., 2011, “Measuring Success in the Global Economy: International
Trade, Industrial Upgrading, and Business Function Outsourcing in Global Value
Chains”, Survey of Current Business, 91(2), pp.33–59, 61–66.
Tayauova, G., 2012, “Advantages and disadvantages of outsourcing: analysis of outsourcing
practices of Kazakhstan banks”, Procedia - Social and Behavioral Sciences, pp. 188 – 195.
Zhou, Y. P. & Ren, Z. J., 2010, “Service Outsourcing”, University of Washington.