Effect of Outsourcing on Firm's Production in Industry - Literature Review

Literature review 1
Effect of outsourcing in firm’s production in industry
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23rd April 2018

Literature review 2
Literature review
Introduction
In order to understand the empirical truth of the study topic the study will employ ‘narrative
review approach’ that uses theories and empirical data in to explain relationship and
connectedness of the study variables. It will be worthy for the study to begin by describing the
concept of outsourcing and firm’s production, and later provide empirical studies to explain the
contribution of outsourcing to firm’s production in an industry.
Concept of outsourcing
Understanding the concept of outsourcing will provide a theoretical framework for the study.
The study argument begins by stating that tremendous growth in businesses as led them to
employ outsourcing in its operations in order to reduce costs and capitalize on profits.
Outsourcing represents a firm decision to delegate non-core activities to an external firm to
perform it. Bakhtiari (2015, p.34) states that ‘firms employ outsourcing by contacting other firms
to perform functions they initially performed internally.’ For effective outsourcing to take place
it requires the client and the supplier to sign a contractual agreement for provision of goods and
services. That is supported further by Bakhtiari (2015, p.34) who opines that ‘ outsourcing
represents a legal binding agreement that is result oriented and creates a mutual relationship
between the firm (client) and external independent provider of the product and service
outsourced.’
The term outsourcing is further illustrated by explaining the kind of services offered by it.
Gunasekaran, Irani, Choy, Filippi & Papadopoulos (2015 p.157) mentions that organizations
have two types of outsourcing they can use in their functions they are on-shore outsourcing
(within the same country) and off shore outsourcing (held with other foreign countries). The on-
shore outsourcing is the most used and preferred type of outsourcing by firms. Firms delegate
some of its administration, research, operative and technical function to a third party supplier as
per the agreed terms and conditions. The study further states that on-shore outsourcing is further
divided to four parts which include: manufacturing, process, operational and professional
services. Examples of professional service outsourced include: purchasing, accounting,
information technology, legal, and other specialized services. Outsourcing can be well-defined as

Literature review 3
an arrangement that has developed and established over the years and is tremendously popular in
the market since the late 20th century. This service is very well conventional in the hotel industry
that embraces various housekeeping yearly maintenance contracts as well as banqueting other
services as well.
The process and operational outsourcing are fixed on delegating certain procedures, steps and
methods in a production process for example cloud computing and data analysis. Solli-Sæther &
Gottschalk (2015, p.89) supports the mentioned findings by stating that ‘It is for the firms to
decide which categories of services to outsource and represents value of money employed.’
Outsourcing has become a strategic decision for managers aiming at reducing overhead costs and
maintaining a standard level of support. Gunasekaran, Irani, Choy, Filippi & Papadopoulos
(2015 p.158) makes a final conclusion that ‘Managers are tasked with analytical decisions to
consider the benefits and risks emanating from types of outsourced services.’
Concept of firm’s production
The argument in this study is drawn from the relationship between outsourcing and firm’s
production. That makes it important for the study to clearly clarify the concept of firm’s
production. Zagler, (2017 p.125) explains that firms production represent a process in which
transformation of inputs is done with the aim of achieving desired results by value addition. The
outsourcing function leads to increase of churn in an economic system. It means that the firm
produces a smaller part of the final produce. Firm’s productivity is eventually measured with
different variables associated with it. The text is supported by Zagler, (2017 p.125) that ‘a firms
purchase of its inputs will create a lesser value to its final production process.’ Firm’s production
is measured on several aspects that include: increase in output, growth of profits, reduced costs
and quality products.
Based on economic theories the production function (output) is depended on certain components
like the level of revenues and costs. Firm production (output) would increase if the level of
revenue of the firm increases significantly (Gunasekaran, Irani, Choy, Filippi & Papadopoulos
(2015 p.156). Managerial decisions can effectively increase the level of income of a firm.
Managers are frequently and continuously thinking of the best competitive strategies that they
can employ to ensure production levels is high. To explain the concept further the study
mentions cost as another factor affecting production function which is classified into fixed and