Literature Review: Outsourcing Business Functions Analysis

This report is a literature review that examines the advantages and disadvantages of outsourcing business functions. It begins by defining outsourcing and its prevalence in the current business environment, highlighting the shift of business functions to external providers to reduce costs and focus on core competencies. The report then explores various perspectives on outsourcing, citing authors who emphasize its benefits, such as cost reduction, increased productivity, and access to expertise, and those who caution about potential risks to data privacy and business control. The literature review covers key drivers of outsourcing, including cost savings, access to core competencies, and globalization. It discusses real-world examples of companies that have successfully utilized outsourcing, such as Unilever Europe and Alibaba.com, as well as instances where outsourcing has failed. The report also highlights factors that contribute to successful outsourcing, such as clear communication, effective planning, and the selection of reliable partners, while also addressing potential drawbacks like job losses and data security concerns. Overall, the report provides a balanced view of outsourcing, emphasizing the need for careful consideration of its pros and cons before implementation.

RUNNING HEAD: Advantages and Disadvantages of Outsourcing Business Functions
Business Research
Literature Review: Advantages and Disadvantages of Outsourcing Business Functions

Advantages and Disadvantages of Outsourcing Business Functions 1
Table of Contents
Introduction................................................................................................................................3
Scope of Literature Review........................................................................................................3
Objectives of the literature Review............................................................................................3
Literature Review.......................................................................................................................3
Conclusion..................................................................................................................................8
References..................................................................................................................................9

Advantages and Disadvantages of Outsourcing Business Functions 2
Introduction
Outsourcing can be referred as the process in which the business functions of an organisation
are transferred to the outsiders rather than completing it on their own. It is done for reducing
the costs of the business or for the purpose of focussing on the core functions of the business
(Yeboah, 2013). Different authors have different opinion on the process of outsourcing of
business functions. Some of the authors believe that it is done for the betterment of the
business operations while some say that it is a risk to the privacy and confidentiality of the
business. This literature review is on the topic ‘Advantages and Disadvantages of
Outsourcing Business Functions’ and various sources will be referred in order to collect the
data and to complete the research successfully.
Scope of Literature Review
The scope of literature review is wide as outsourcing has become a common way of
completing the functions of the organisations. It is a topic which is discussed by many of the
authors and different views are given on its pros and cons. The literature review will be based
on the secondary data and the examples of the organisations which outsources their business
functions
Objectives of the literature Review
The main objective of literature Review is to discuss the advantages and disadvantages of
Outsourcing the business functions by referring to various literatures, journals and other
secondary sources. Their views will be compared and the conclusion will be given.
Literature Review
Outsourcing is a common process used in the present business environment. It is handling
over the functions to some other company to access the expertise and to focus on the core
functions of the business. In return, a fee or charges are paid to get the outsourcing services.
It is a huge industry which provides employment to people and also provides competitive
advantage to the organisations (Fapohunda, 2013). Different opinions are provided by
different authors on the idea of outsourcing the business functions.

Advantages and Disadvantages of Outsourcing Business Functions 3
In the opinion of Cicek and Ozer (2011), outsourcing is the method which helps in making
the use of core competencies of the business and also assists in allocating the resourcing
effectively. Outsourcing the business functions adds value to the performance of the
organisation. Outsourcing benefits the business by reducing the cost of the businesses and by
increasing the productivity and speed. The author further adds that outsourcing of business
functions is directly related to the performance of the business. Many researches have shown
that the companies which trust external sources for outsourcing their business activities
produce better results and improve the quality of the work. Also, the innovation capacity of
the organisation has increased.
As per Krstic and Kahrovic (2015), outsourcing is a significant business tool which provides
competitive advantage to the business. Today, many small and large scale businesses are
adopting outsourcing because they need to control the overhead costs and they need to access
to the knowledge of the outsiders. Outsourcing helps these businesses in utilising the
resources effectively by using the best practices used in the industry. The main drivers of
outsourcing include savings of costs, reduction in capital investment, access to core
competence, globalisation and development of IT.
According to Giustiniano and Clarioni (2013), outsourcing has reached to the peak of its
popularity in late 1990’s and grew at the rate of 30%-35%. It is because of the advent of
globalisation that outsourcing of business activities popularised. As per Jirawuttinunt (2015),
Outsourcing is mainly done in the sectors like IT, HR, customer services and after sales
services. The author, in his research found that the organisations which adopted outsourcing
are likely to improve the flexibility, cost savings and performance of the firm. In the opinion
of Szuster (2010), it depends on industry to industry that outsourcing is beneficial or not. The
companies which are flexible enough and have quality in their work can prefer the in-house
facilities while the other companies should prefer outsourcing their business functions
In accordance with Rajee and Hamed (2013), outsourcing is the strategy adopted by the
management which is facilitated by globalisation and liberalisation because more
opportunities are now available to the companies due to open global markets. The research
conducted by the author on 15 companies shows that the organisations which outsourced
their functions have seen tremendous growth and more productivity. It also provides
competitive advantage and reduced the overall cost of the companies but on the other hand,
he also opined that outsourcing could also have negative consequences. The organisation may

Advantages and Disadvantages of Outsourcing Business Functions 4
rely heavily on the other organisations which could hamper its long term growth. Outsourcing
of the functions and their success also depends on the choice made for selecting the
outsourcing partner, ineffective planning and poor communication between the organisation
and outsourcing partner. The author further adds that the organisations considers their
outsourcing projects as successful if the benefits generated by the projects are more than the
costs incurred on developing the in-house capabilities. Outsourcing should be done
effectively with planning and care. A good choice of outsourcing partners is required to
increase the chances of successful outsourcing. The outsourcing process should consider
providing training to the managers to deal with different cultures and different organisations
to manage the programs. Also, to reduce the negative consequences, effective communication
plays a main role between the organisations and outsourcing partner (Iqbal and Dad, 2013).
According to Sako (2014), the functions which are meant to meet the business needs like
marketing, human resources, Information technology are often outsourced by the
organisations in the present business environment. It is done to support the core functions of
the business. There are many advantages as well as disadvantages of outsourcing the
functions of business. As per Palugod and Palugod (2011), the rapid growth of globalisation
has transformed the methods in which the business managed. The author adds that the main
driver of outsourcing business activities was the development of Information and
Communications Technology (ICT). The global outsourcing survey conducted by Deloitte
found that the trend of outsourcing the business function will continue to rise in the coming
years. The customers are now expecting high quality services from the service providers
because they are paying high amounts for that quality. As per the survey, more than 35% of
the businesses said that they are getting the value from their services which they outsource
from others (Deloitte, 2017).
The statistics of outsourcing shows that two million jobs were outsourced in 2013. Most of
the opportunities are given to the workers in China, India and other developing countries
because they provide their services in cheap rates. The businesses prefer outsourcing their
services to improve the efficiency of the business and to make effective use of the resources
available to them. 53% of the manufacturing companies outsource their services so that the
costs can be reduced and the efficiency can be improved. It’s not all about reducing the costs
but also to access the pool of talent from across the world but there are problems associated
with outsourcing. Outsourcing the functions leads to the loss of jobs in many multinational

Advantages and Disadvantages of Outsourcing Business Functions 5
companies. The outsourcing of services poses threat to the privacy and confidentiality of the
data and information of the organisations which can be leaked and can be misused (Duo,
2017).
The companies should find a balance. There are various factors which should be considered
before outsourcing the functions of the business. The pros and cons should be weighed and
then the decision should be taken whether the functions should be outsourced or not. Many
real life examples are seen in the corporate world which have benefitted through outsourcing
of business activities and also the ones which failed in the same. As per Muzychko (2015),
there are few companies which have proved that outsourcing created value for them and
helped them in sustaining the competition in the market. In the case of Unilever Europe, the
company had different divisions and its business was expanded into different countries.
These companies used multiple ERP systems across the country. The country was not IT
specialist so it outsourced the ERP systems from the external service provider. This
improvement in the business contributed to €700 million annual savings on the operational
activities of the business. Another example can be taken of the world’s biggest ecommerce
websites Alibaba.com. The company have grown and proved its succe3ss in the recent years.
The founder of the company Jack Ma outsourced the website development from the service
providers in USA. The company still relies on the outsourcing partners for production of
various goods and services. This shows that the outsourcing is beneficial to the businesses
because it means getting the work done by the specialists. As per the research done by IBM,
only 27 per cent of the company outsource their services to cut down the costs but 36% are
those who seek innovation and 37% for growth. Outsourcing the business optimise the
success of the businesses.
Outsourcing is budget friendly and also time efficient. It lets the business use the expert
services and helps them to make good use of the resources. It let the business use in house
staff and overhead expenses of the business. USA contributes 70 per cent of the total
outsourcing markets and then UK follows it. There are many factors which promotes
outsourcing which includes availability of cheap labour, set of skills, globalisation,
infrastructure, and support from government. Where the advantages of outsourcing includes
cost reduction, improvement in quality, fostering innovation, increase in speed, savi8ngs on
capital, growth in revenue, risk management and more, the disadvantages include lack of t\
competitive advantage, loss of privacy and secrecy of data, loss of management control,

Advantages and Disadvantages of Outsourcing Business Functions 6
delays and inaccuracies in work, problems with the quality, poor communication and lower
productivity and financial loss (Sarifuzzaman, 2012).
The failures of Outsourcing can be seen from an example. In 2004 JP Morgan cancelled its
outsourcing contract with IBM and brought back its own talent and developed in-house
capabilities. As per JP Morgan, its merger with Bank One have created the ability of the
company to manage is own IT infrastructure for the growth and success of the company.
Because of this IBM lost billions of dollars (Garland, 2015). To avoid the failure in
outsourcing, The Company should focus on the reasons which cause the failure. These
reasons include poor communication, changing needs of the buyer, no strategic objective or
poor transition of activities. These are not the only reasons but some of the key reasons of the
failure. The top management needs to focus on these reasons so that the problems can be
avoided and success can be made sure.
It is seen that most of the outsourcing projects fail due to the lack of clarity of role between
the organisation and the service providers. The projects also fail due to the lack of effective
planning for the whole process of outsourcing. There is a lack of trust or the outsourcing
partner is not the one which could be trustable. The other reason is poor communication
between the parties (Rayess, 2016). The business is advised to consider these factors and then
enter into the outsourcing contract so that it could not create problems and issues in future.
The companies should maintain clear communication through different channels so that the
role clarity is also maintained between the parties. The choice of selecting the outsourcing
partner should be made effectively so that no long term issues can be created. The long term
relationships should be maintained so that the outsourcing benefits can be maximised. In the
Global Outsourcing summit 2010, it is discussed that outsourcing provides new centre of
excellence to the companies, it is a key to access the technological excellence of the
companies which are the stop performers of this industry. The support of government is
required to have clear and smooth outsourcing processes. It also has economic impact. The
economies which make available cheap services and talents will be benefitted in terms of
revenue, earnings and employment generation. In the developing countries, the process of
outsourcing provides flow of foreign currency and it provides opportunities to t5hese
countries to grow and develop. This is how outsourcing can be negative or positive for the
economies and the businesses. The critical success factors should be considered before

Advantages and Disadvantages of Outsourcing Business Functions 7
entering into the outsourcing contract. It will improve the chances of success of outsourcing
and will benefit the businesses and the economies (Adu-Gyamfi, 2015).
Conclusion
It can be concluded that after going through the opinions of different authors and secondary
sources, it is clear that outsourcing of business functions may have advantages or
disadvantages. It depends on many factors like choice of outsourcing partner,
communication, role clarity and others which determine success for the outsourcing contract.
The advantages of outsourcing the business functions includes increase in speed and
productivity, flexibility, ability to focus on core functions, more profitability, access to
expertise and more while the disadvantages includes loss of privacy and secrecy of data, loss
of management and control and more. The literature review includes examples of the
businesses which have gained success or faced failure by outsourcing their business
functions. It clears that outsourcing is the need of the present businesses as the business
functions are now more wide and expanded. In the present world of business, outsourcing is
the way through which businesses could transform their activities and reach heights in the
industries.

Advantages and Disadvantages of Outsourcing Business Functions 8
References
Adu-Gyamfi, L 2015, ‘Evaluating the impact of outsourcing on organisational
profitability’, World wide journal of multidisciplinary research and development, 1(3), pp.23-
39.
Cicek, 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.
Deloitte, 2017, ‘Global outsourcing survey 2016’. Retrieved from
https://www2.deloitte.com/us/en/pages/operations/articles/global-outsourcing-survey.html.
Duo, M 2017, ‘14 Multi-Million Companies Who Were Built Leveraging Outsourced And
Remote Developers’, Codeable.
Fapohunda, T M 2013, ‘Towards successful outsourcing of human resource
functions’ International Journal of Human Resource Studies, 3(3), p.39.
Garland, A 2015, ‘Five of the biggest outsourcing failures’, ITproPortal.
Giustiniano, L and Clarioni, G 2013, ‘The impact of outsourcing on business performance:
An empirical analysis’, Journal of Modern Accounting and Auditing, 9(2), p.153.
Iqbal, Z and Dad, A M 2013, ‘Outsourcing: A review of trends, winners & losers and future
directions’, International Journal of Business and Social Science, 4(8).
Jirawuttinunt, S 2015, ‘The effect of HRM outsourcing on performance of multinational
firms in Thailand’, Journal of Business and Retail Management Research, 10(1).
Krstic, B. and Kahrovic, E., 2015. Business process outsourcing as a tool for improving
enterprise efficiency. Ekonomika, 61(3), p.31.
Muzychko, A 2015, ‘5 Successful Stories of Outsourcing’, LinkedIn.
Palugod, N and Palugod, P A 2011, ‘Global trends in offshoring and
outsourcing’, International Journal of Business and Social Science, 2(16).

Advantages and Disadvantages of Outsourcing Business Functions 9
Rajee, F S and Hamed, A B 2013, ‘Outsourcing Services as a Strategic Tool for
Organizational Performance: An Exploratory Study of Nigerian Food, Beverage, and
Tobacco Industry’, Journal of Management Policies and Practices.
Rayess, R 2016, ‘5 reasons most outsourcing projects fail’, CIO.
Sako, M 2014, ‘Outsourcing and offshoring of professional services’, In The Oxford
Handbook of Professional Service Firms.
Sarifuzzaman, M 2012, Impact of outsourcing on company performance study on a local
public limited company in Bangladesh (Doctoral dissertation, BRAC University).
Szuster, M 2010, ‘Outsourcing of transport service–perspective of manufacturers’, Total
Logistic Management, pp.87-98.
Yeboah, A 2013, ‘The relationship between outsourcing and organizational performance’, European
Journal of Business and Management, 5(2), pp.1-12.