Outsourcing: Benefits, Risks & Challenges

This assignment delves into the multifaceted world of outsourcing, examining its potential benefits such as cost savings and access to specialized expertise. It also critically analyzes the associated risks, including loss of control, communication barriers, and cultural differences. Students are encouraged to research various aspects of outsourcing, including decision-making factors, governance strategies, and best practices for mitigating challenges.

OUTSOURCING BUISNESS FUNCTIONS
OPORTUNITIES AND CHALLENGES
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LITERATURE REVIEW: OPORTUNITIES AND CHALLENGES OF OUTSOURCING
BUSINESS FUNCTIONS
INTRODUCTION
The process of contracting out or delegating work to people or agencies outside the business
premises is called outsourcing business function. It may evolve in carrying tasks, job, or any
operation where external third parties are contracted for significant time period (Riley, 2010).
The work outsourced can be performed in house or outside the firm. Outsourcing has gained
much importance with changing nature of businesses (Dendler, n.d.). In last decades, many
big and small organisations which are getting associated with globalisation, considers
outsourcing function as a positive approach. Geographical limitations are dealt with ease by
facilitating outsourcing business functions like manufacturing, customer support, in house
support, advertisement, etc. (ITONews.eu, 2017) The role of strategic management has
become important not only to look after business practice carried within organisations, but
also manage work that can be outsourced to get efficient work with cost reductive ways.
Since outsourcing itself is a complicated process, a company may face various challenges
while implementing it into business (Pellicelli, 2012). In this literature review opportunities
of outsourcing in business along with major challenges faced by it will be reviewed and
analysed with the help of research made by authors and researchers along with identifying
gaps between the studies.

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SCOPE AND OBJECTIVES BEHIND OUTSOURCING BUISNESS FUNCTION
Figure: Reasons to implement outsourcing function in business
Source: (Schaffhauser, 2005)
As shown in above figure, the reason to outsource work to external providers is various and
thus becomes necessary to introduce it in business. Depending on the nature of business the
outsourcing function may vary but the primary objective behind it lays the same i.e. cost
reduction or gaining efficiency in work (Kremic, 2006). For example, in large manufacturing
companies where great number of people is required like labours, designers, suppliers,
contractors, etc. outsourcing provides great help as requirement of hiring full time staff is not
necessary on outsourced areas. In manufacturing firms large number of parts are
manufactured by outsourced companies which could otherwise have been expensive or
difficult to manufacture by own. In customer service companies like call centres and BPOs,
large firms outsource their customer related services in order to reduce costs of making
separate department for them in house. Other human resource management tasks like

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employee training centres, payroll, staff benefit management, etc are largely outsourced in
order to get higher quality work from experts (Anon., 2011). Advertising plays a major role
to make enhanced sale of product or services in business. Outsourcing has given industries a
great backing here as large number of advertising companies and social media sites gets
outsourced by businesses and carries the work in lesser time. Therefore in some or the other
way business is largely depended on outsourcing function to expand their work area and
bring in efficiency. Work quality is improved by hiring experts along with enabling business
owners to give core efforts in major activities for development of the firm. Although
outsourcing is becoming centre in today’s business functions, the challenges to improvise
them are also increasing. Thus it becomes necessary on management part to understand the
key benefits and potential challenges behind outsourcing function in business (LLP, 2010).
OPPORTUNITIES OF OUTSOURCING BUSINESS FUNCTION
The opportunities relating outsourcing function is been developing and is considered to be
highly potential in business (Kremic, 2006). The advantages of it can be clearly seen in
running of organisations which is observed and described by different authors. The following
figure depicts major opportunity that can be gained by business while implementing
outsourcing function.

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Figure: Opportunities/Advantages of outsourcing function in business
Source: (Kingsley, 2017)
Operation costs reduction: This is the most advantageous feature of outsourcing which helps
organisations to eliminate expenses of full time staff for executing operational or
manufacturing area. If manufacturing of parts that requires special machine or assistance of
special technicians is outsourced, it can reduce the requirement of setting those expensive
machines and hiring full time technicians (Crosby, 2017). Works related to internal
management area like legal, planning, product designing, etc. requires expert advices.
Outsourcing can provide scope for expert advice in cost effective manner as they may be
efficient in their work while giving services to many companies simultaneously.
Easier cost control: The role of management plays an important part to recognise cost curtail
in organisational functions as if outsourcing is done in proper and planned manner, it can
prove very effective in controlling overall costs of business. Like if a company’s work is
seasonal, the hiring of full time staff can increase the cost of project while outsourcing can

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minimise the costs, provided, the availability of staff is possible during peak season. In other
areas like cleaning and sanitizing, transportation, currier service, advertising etc. are normally
outsourced in large organisations in order to perform the task in effective and cost reductive
way (Simeoni, 2011).
Cooperation with specialist from narrow area: The requirement of advisors in legal and
administrative part of firms can prove expensive as the specialists charge higher rates if
engaged full time. Outsourcing these functions can provide engagement of experts in lower
costs as they work together for many companies and take charges in distributed way. Big
organisations prefer to hire full time staff for crucial jobs where important data is used
whereas small companies find it easier to outsource these functions and get expert advices in
nominal rates (McCray, 2012).
Process optimization and rising efficiency: Outsourcing gives opportunities to the companies
to get exposure to merchant specialized systems. By outsourcing work to them, efficiency is
increased along with gaining quality products. It also enables time optimization by
outsourcing time taking processes to outsiders (Simeoni, 2011). For example in restaurants
and hospitals where large quantity of food and vegetables along with other supplies is
required to be purchased on daily basis, outsourcing its marketing function to vendors and
supply agencies can get their work done in quicker way and on time.
Liberating capital for other purposes: While outsourcing work, capital of the firm is liberated
and can be utilized for other important areas. For example, outsourcing Social Medias for
advertisement or brand promotion will be easier for the company than to make provision for
brand promotion by them and invest in campaigning and door to door advertising.
Expenditure can be saved as Social Medias provide advertising function in cheaper and

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effective way. Thus saved expenditure can be utilised in other important areas like planning
and executing (Pellicelli, 2012).
Releasing internal capabilities: This function is also very important as many companies take
advantage of outsourcing to release themselves from tedious jobs for other important works.
In businesses large number of activities is carried and distributed among employees within
the organisation and some are delegated to outside agencies. The owners keep themselves
free for monitoring and executing confidential functions of organisations (Kremic, 2006).
This function not only saves time and energy of delegators but also helps them in sharing
risks with the outsourced agencies. While making contracts and terms, company’s mentions
the time and quality required and if the outsourced company fails to do that, they are entailed
to bear losses if the products are not appreciated by the customers (Crosby, 2017).
CHALLENGES OF OUTSOURCING BUSINESS FUNCTIONS
Although there are many benefits of outsourcing, there are many challenges also which are
faced by the companies. No matter how much planned or budgeted management is, there are
few challenges still met by them which have been identified by researchers (Wong, 2006). As
shown in the figure below, the major challenges faced by companies are considered and
discussed while giving suitable example.

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Figure: Challenges of outsourcing functions
Source: (Compare Infobase Limited, 2017)
Loss of control: One of the biggest challenges faced by business while outsourcing some of
its functions is losing significant control over the outsourced area. Since the external agencies
become responsible for task completion, they might not let the delegators to interfere while
the task is been performed (Arena Solutions, Inc., 2017). Thus before realizing the
possession; the owners lose control in those areas. Like in product manufacturing company,
the outsourced manufacturer may lose quality as they work for many companies altogether
and cannot look at each company with consideration and while they restrict the delegators to
interfere with their processes, it becomes challenging situation for the outsourcing
companies.

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Coverage: In larger companies where many tasks are outsourced, it becomes difficult on
management part to cover entire area monitoring in regular basis. Challenges relating
outsourcing done in house are exempted from this factor, while others like manufacturers,
advisors, advertising agencies, transport agencies, training experts, etc. are difficult to get
covered under monitoring system of management. For example, in hotel business, where
large number of activities takes place like cooking, cleaning, sanitising, marketing, etc. lots of
people are engaged and many works are outsourced. Thus can become challenging for the
management to look after all areas with concentration (Gammelgard, 2017).
Employment Inefficiency: While work is outsourced, it may sometimes result in losing morale
of employees and reduce their work quality. This is another challenge faced by organisations
and to overcome it the management needs to consider outsourcing from employees view
point (Sethi, 2011). For example if an important or growth oriented program is outsourced
and employees are given only tedious and directive work, they might lose faith in their
capabilities and thus reduces work performance and efficiency.
Many stakeholders: Stakeholders are the ones who are directly or indirectly related to the
firm commercially. When work is outsourced, more people and agencies get attached to the
company and thus becomes an integrated part of the firm. To some extent company becomes
liable to them as if their reputation is hampered; the affects might also be faced by the
company. Thus outsourcing involves many stakeholders who bring in risks for delegators.
This challenge is normally faced by big organisations where huge activities take place in
speckled and global ways. While the organisations work is delegated in dispersed way and
sometimes to other countries also, they become liable for many stakeholders (Whitebox
Buisness Solutions, 2012).

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Dispersed locations: Most companies outsource work to agencies in dispersed areas and
sometimes to other countries also (of-shoring). While the work is scattered it becomes
challenging on the management part to deal with them at the time of difficulties (Whitebox
Buisness Solutions, 2012). For example, agriculture functions for producing food crops are
outsourced in food industries where the organisations are unable to do of their own. Since it
requires large area and sometimes even outsourced to other countries favourable for
producing required crops, the challenge of dispersed location is faced. Other challenge faced
by organisations while dispersing its activity to other countries is challenge of culture and
language diversification which makes difficult for organisations to tackle while trading
product and service related issues.
Budget inadequacy: Sometimes the outsourcing companies are unable to understand and
figure out the difference in costs between self working and outsourcing. If made without
proper planning, outsourcing can sometimes prove ineffective function with increased cost
expenditure. The challenge faced here is to make proper planning for the outsourcing
function so that budget is not disturbed. On the other hand where the business has got limited
number of administrators, outsourcing becomes necessary and the budget for it can
sometimes prove inadequate for them (McCray, 2012).
Know how: This challenge has two meanings in literature. One reveals the challenge of
getting knowledge about the quality of outsourced work while other reveals the knowledge
about method used for doing the work. For example, firms relating manufacturing of
medicine outsources manufacturing of some medicines which requires special machines and
is difficult for them to purchase. While the manufacturing is outsourced, sometimes the
product delivered by the agencies can be of inferior quality and made under unhygienic
conditions. This can become dangerous and even lead to shutting down of outsourcing

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companies. Thus a very crucial challenge faced by organisations is getting informed about the
procedure of outsourced work (Wong, 2006).
CONCLUSION
To understand the opportunities and challenges while outsourcing in business is very
important as to outsource work in business has become extremely important in today’s
business world. In fast developing countries, globalisation in organisations has gained
significance which could be facilitated by outsourcing (Anon., 2011). The key opportunities
that lie in outsourcing like cost reducing way and work efficiency are the reason why most
companies prefer outsourcing their business function (ITONews.eu, 2017). The gaps that are
identified in this study are knowledge about proper method and technique with which
successful outsourcing function can be obtained. Although researchers and authors have
provided many important information’s for the company’s who have or are planning to
implement outsourcing function in their business, still the effective procedure for outsourcing
is required so that it becomes easier for managers to improvise it with ease. In this research
paper the analysis between opportunities and challenges of outsourcing business function
have been made after making a brief study about outsourcing in order to attain utmost
information (Simeoni, 2011). While outsourcing, opportunities like cost effectiveness is
gained along with increased efficiency on the other hand the company tends to lose control
over significant areas. Engagement of experts gives opportunities to firms in gaining expert
advices while security risks relating important data are also possible. Time saving is probable
if the work is done correctly or else could result in adverse affects. Although the managers
are released for other significant growth related works, the quality of the outsourced work is
sometimes hampered (Simeoni, 2011). Therefore after analysing, it can be rightfully said that

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gaining opportunity of outsourcing is possible only after getting profound knowledge and
talent to manage its challenges.

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