Advantages and Disadvantages of Outsourcing Business Functions Report

This report provides a comprehensive literature review on the advantages and disadvantages of outsourcing business functions. It explores various perspectives from different authors, discussing the impact of outsourcing on business efficiency, competitiveness, and cost reduction. The report analyzes both the benefits, such as economies of scale and access to global talent, and the potential drawbacks, including loss of control and security risks. It includes a comparative analysis of different viewpoints, supported by real-world examples of both successful and failed outsourcing initiatives, such as Procter & Gamble and Royal Bank of Scotland. The report also covers key considerations for businesses when deciding which functions to outsource and emphasizes the importance of strategic planning, communication, and long-term relationships for maximizing the benefits of outsourcing.

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 1
Table of Contents
Literature review...................................................................................................................................2
Introduction...........................................................................................................................................2
Literature Review Scope and Objective.................................................................................................2
Comparative analysis.............................................................................................................................2
Quality and currency of articles and sources used................................................................................6
Currency of Literature Review...............................................................................................................6
Gaps identified......................................................................................................................................7
Conclusion.............................................................................................................................................7
References.............................................................................................................................................9

Advantages and Disadvantages of Outsourcing Business Functions 2
Literature review
Introduction
This section of the research is the key section where the ideas of different authors will be
discussed on the topic ‘Advantages and Disadvantages of Outsourcing Business Functions’.
This section contains the secondary data which contains the views and opinions taken from
various sources which will help in completing the research successfully. Outsourcing can be
referred to the process which is used for reducing the costs of the business operations by
transferring the business functions to outsiders rather than completing it internally.
Outsourcing has been a topic of discussion from many years and it is often observed that it is
used to achieve economies of scale. Different authors have given different views on the
concept which will be discussed here as under.
Literature Review Scope and Objective
The scope of the literature review is wide because Outsourcing is a wide topic which can be
discussed thoroughly. The advantages and disadvantages of the outsourcing business
functions will be discussed in different business areas and the thoughts of various authors will
be discussed on the topic which can cover the benefits & harms of outsourcing to the business
with the real life examples of the corporate world to make it clearer.
The main objective of the project is to identify the advantages and disadvantages of
outsourcing business functions. This will be done by going through various articles, journals
and web sources which provides a clear idea about what different authors think about the
same. It also considers that how outsourcing has proved beneficial or failure for the real
corporate giants.
Comparative analysis
According to Krstic and Kahrovic (2015), outsourcing of business functions improves the
efficiency of the business and also provides the competitive advantage of the business. The
author provides opinion that Outsourcing is now an important tool for the businesses and it
provides the competitive advantage to the small or large scale businesses. There are many

Advantages and Disadvantages of Outsourcing Business Functions 3
drivers for outsourcing which includes reduction of costs, savings, reduction in the capital
investment, focus on core competence and flexibility. In simple terms, it can be said that it is
moving the processes of business from internal service providers to the external service
providers in return of fee paid to the service provider. Similar to this, Iqbal & Dad (2013)
added that the companies discontinue the production facilities of their own and handover
these functions to other companies to seek better services, lesser costs and by this they can
also pay attention to their core functions. It provides overall global cost advantages which is a
the most important factor for outsourcing the business functions which cannot be ignored. As
per the author, there are four reasons which are responsible for outsourcing the business
functions. These reasons include improvement in the cash flow, improvement in the payment
control, staffing and improvement in the overall business performance (Bajec & Jakomin,
2010).
As per Manning, Massini & Lewin (2008), outsourcing of business function has different
views like Transaction- Cost view, Competence- Based view & Relational view. The author
further adds that the global scenario is changing which is also bringing a change in the
process of comp0leting the business functions. Outsourcing is important because it reduces
costs and brings economics of scale. In the business, it brings technological advancements in
the business and the business is able to access the global talent. Outsourcing helps business to
focus on its core competencies and this is how it makes itself capable to provide improved
services to the customers which improve the customer relationship. In contrast to that
Tayauova (2012) suggested outsourcing can lead to the loss of managerial control from the
managerial operations and can also provide threat to the security and confidentiality of the
organisations. The disadvantages of the outsourcing of business operations include the hidden
costs as well which ultimately increases the cost of the operations and can also create quality
problems. The execution of outsourcing is difficult. When an organisation outsources the
services, it expects better quality of services from the service provider which sometimes
influences the satisfaction level of the service user. In addition to this, Soriano-Meier, Garza-
Reyes, Lal & Rocha-Lona (2012) views that outsourcing of the business functions creates a
fear of leakage of the confidential data of the company. It creates quality issues and problems
or can also be slow in providing response.
In the opinion of Brcar (2011), Outsourcing of the business functions can ensure the
competitiveness of the firm. The author conducts a research by collecting information

Advantages and Disadvantages of Outsourcing Business Functions 4
through survey and finds that outsourcing business functions is a strategic decision which
ultimately affects the entire organisation. It is taking advantage of the global markets and the
stronger strategies which ensure competitive advantage to the company in the global
industries. It is found that outsourcing will increase in future and the areas where it will be
used the most will be HR, quality and after sales services. The author concludes that it is
increasingly important for the success of the business organisations and this sector of
outsourcing will grow in future.
According to Troacă & Bodislav (2012), outsourcing has evolved in the last two decades and
is continuously rising. The author discusses the advantages and disadvantages of the concept
of outsourcing. The advantages of the concept are that Outsourcing is the strategic tool use in
the business which provides competitive advantage to the business. It helps companies to
increase their level of savings from 10 to 15% on the total costs incurred on the processes
which is because of the economies of scale. Besides financial advantages, there are other
benefits of outsourcing like it helps the business in focussing on the core processes and in
accessing the resources. But there are also some of the concerns with Outsourcing like
specially when the organisation loses control from its operations and also loses the
performance which ultimately affects the image of the firm in the market and reduces the
profitability. The results of outsourcing the business functions are not immediate. When a
business outsources its business functions, it loses the productivity of its labour because the
time spent on the transfer of knowledge to the service provider could have been used in
generating services by themselves (Marvin, 2011).
In accordance with Sharma & Loh (2009), outsourcing is a contributing factor in the success
of businesses and in the year 2009, it contributed US $172 billion in the industry. The main
drivers of the outsourcing activities like cost efficiency was considered important and it has
been found that the multinational companies are taking more part in the outsourcing of
services and the developing countries like India and China will be much ahead than they are
right now. There will be competition in future in relation to the outsourcing industry. In US,
the number of outsourcing companies doubled between 2005 to 2008 and 60% of the
companies showed their willingness to expand their current outsourcing services in future. It
is also found that smaller companies are more apt for outsourcing their business operations to
gain specialisation and expert services on the services. It is seen in the last few years that the
labour cost is reducing due to the outsourcing of services and cost saving is the primary

Advantages and Disadvantages of Outsourcing Business Functions 5
motive of any company for outsourcing their business activities (Gotzamani, Longinidis &
Vouzas, 2010). It was also found that the firms which outsource the services have saved up
to 3.5 times more than their actual savings. The affect is different in different industries, like
in manufacturing industries, there is no such positive affect is seen on the performance but
the lead time of the processes increased because the outsourcing helps the businesses to deal
with the supply chain management (Smith, 2012).
As per Wang, et al. (2008), around 145 UK and US organisations have been surveyed and
among these 56 per cent of the companies did not see any cost reduction benefits while 23%
experienced cost benefits in their business. The author suggests that the companies should not
underestimate their in-house production capabilities and should only adopt outsourcing
facilities if it provides benefits to the business. The survey conducted by the author came to a
conclusion that among several UK based companies which took part in survey, 350
companies were pulled out of the outsourcing contract and held of these companies said that
the quality of the outsourcing services were poor and remaining half said that there were no
cost savings which bought them back to the in-house production facilities.
According to Cowley (2004), JP Morgan in the year 2004 have cancelled the outsourcing
contract of $5 billion with IBM and hired back the employees who were hired by IBM to
process the functions. This shows that JP Morgan decided to start their operations in house
instead of outsourcing them to IBM. IN house production facilities bought competitive
advantage to the firm.
Outsourcing provides swiftness and expertise to the businesses which helps in completing the
work faster and helps in giving better output. It also helps in sharing the risks between the
service provider and service user. But on the contrary, there are some hidden costs and it also
provides risks of leakage of confidential information (Suraju & Hamed, 2013). For e.g. there
are many success stories of sousing the business activities and also the cases of failure.
According to Muzychko (2015), there are many companies which have successfully used
outsourcing services and created value in their businesses. For e.g. Procter & Gamble is a
leading company for fast moving consumer goods which is successful across the world. The
company was facing a challenge in the global markets due to rapidly changing market of
technology and innovation; the company outsourced its Research and Development activities
and it proved to be one of the best decisions of the company. Outsourcing its Research and
Development function boosted the innovation activities. By 60 per cent and it created more

Advantages and Disadvantages of Outsourcing Business Functions 6
than $10 billion revenue from its products. Today, more than half of the innovation for the
company comes from an external source. On the contrary there are some other real examples
of failure of outsourcing of business activities. One of the examples is of Royal bank of
Scotland. In June 2012, the software update of RBS failed which left millions of customers
unable to access their bank accounts and they were unable to withdraw money from their
accounts. Also, the bank was not able to carry n its transactions. The problem was converted
huge backlog in the economy and it took several days to clear the mess up. It was all because
of the IT vendor which was providing the software services to the bank and the bank did not
have any back up plan which created the problems and it became worse.
With all these pros and cons discussed, it is advisable that the businesses should consider the
type of services which should be outsourced and the benefits and harms related to it. The
streams which are commonly outsourcing its services are Information Technology,
Outsourcing of legal matters, web designs and recruitment services (Weske, 2012). There
should be a consistent communication between both the parties for increasing the overall
effectiveness of the outsourcing decisions taken by the company. Also, the long term
relationships need to be established in order to maximise the benefits of outsourcing the
business functions. The companies can also make a business plan for building an optimum
model for outsourcing. It may reduce the costs of outsourcing, capabilities and results of
outsourcing the business functions. The improvements in the business functions might
enhance more when it is done with proper planning and execution (Chew & Gottschalk,
2013).
Quality and currency of articles and sources used
The quality of the research papers or other sources used for completing the literature review
is high in quality which is helpful in conducting the research well. The sources used are
supported with genuine references which show that these sources are valid. The references
have the details of the author, year of publication, title of the source and from where the
source has been taken. All the content which has been mentioned in the assignment is
secondary in nature which means that it has been already used before.

Advantages and Disadvantages of Outsourcing Business Functions 7
Currency of Literature Review
By currency we mean the publication details of the material which has been used in the
literature review. All the sources used in the literature review are recent. The sources used are
of the year 2004 and after years. There are some recent researches which focussed on the uses
of outsourcing of business functions and also the drawbacks of the business functions. Most
of the researches are of the year 2012 and above. It depicts that the information used is not
out dated and provides the latest information and views of different authors on the topic
which helps in building up clear conclusion on the topic.
Gaps identified
Research gap is the missing or insufficient information which hampers the conclusions of the
research. It also affects the ability of decision-making of the practitioners. It can also be
referred to the gap between the existing research and the research to be done. It shows the
missing information in the collected data for the research which could have been used to
generate the final conclusions. The research conducted above covers the concept of
outsourcing and the advantages & disadvantages of same for the businesses of today. It has
also been covered that how outsourcing has been proved success and failure for different
business organisations. The research does not cover the drivers of the outsourcing of business
functions and the critical success factors of the same. The ideas of different authors have been
compered on the basis of similarities and differences in their views for outsourcing business
functions.
Conclusion
It can be concluded from the literature review that Outsourcing business activities is a
strategic tool for the business. It depends on the type of business and its internal capabilities
that it needs outsourcing or not. Outsourcing business functions is both beneficial and
harmful for the businesses. On one hand it may improve the effectiveness of organisational
functions and the decision making and also minimise the business risks. On the other hand, it
contains hidden costs and also risks the confidential information of the company. The
literature review discusses the real life examples of the businesses which show how
outsourcing can be success and failure for the business.

Advantages and Disadvantages of Outsourcing Business Functions 8
Outsourcing business functions brings competitive advantage to the companies. For having
benefits from outsourcing the business functions, the companies should consider the risk
factors, their outsourcing partners and also the cost of outsourcing and should compare it with
the benefits it gets from the same. The comparative analysis will let the company know that
whether it should go for outsourcing or should develop in house capabilities.

Advantages and Disadvantages of Outsourcing Business Functions 9
References
Bajec, P, & Jakomin, I 2010, ‘A make-or-buy decision process for outsourcing’, PROMET-
Traffic&Transportation, 22(4), 285-291.
Brcar, F 2011, ‘The Perspective of Business Process Outsourcing in Slovenian
Organizations’, Organizacija, Volume 44.
Chew, E, Gottschalk, P 2013, ‘Knowledge Driven Service Innovation and Management: IT
Strategies for Business Alignment and Value Creation’, IGI Global.
Cowley, S 2004, ‘ Update: J.P. Morgan cancels $5B IBM outsourcing deal’. [Online]
Available at:
http://www.computerworld.com/s/article/95933/Update_J.P._Morgan_cancels_5B_IBM_outs
ourcing_dea l. (Accessed 17 August 2017).
Garland, A 2015, ‘Five of the biggest outsourcing failures’, ITproPortal.
Gotzamani K, Longinidis P, Vouzas F 2010, ‘The logistics services outsourcing dilemma:
quality management and financial performance perspectives’, Supply Chain Management: An
International Journal, Vol. 15, No. 6, pp. 438–453.
Iqbal, Z & Dad, A M 2013, ‘Outsourcing: A Review of Trends, Winners & Losers and Future
Directions’, International Journal of Business and Social Science, Vol. 4 No. 8.
Krstic, B. and Kahrovic, E., 2015. Business process outsourcing as a tool for improving
enterprise efficiency. Ekonomika, 61(3), p.31.
Manning, S, Massini, S & Lewin, A Y (2008), ‘A Dynamic Perspective on NextGeneration
Offshoring: The global Sourcing of Science and Engineering Talent.’ Academy of
Management Perspectives, Vol. 22 Issue 3, p35-54.
Marvin, K T 2011, ‘Global Trends in Outsourcing and their Impact (Doctoral dissertation,
Worcester Polytechnic Institute)’.
Muzychko, A 2015, ‘5 Successful Stories of Outsourcing’, LinkedIn.

Advantages and Disadvantages of Outsourcing Business Functions
10
Sharma, A & Loh, P 2009, ‘Emerging Trends in Sourcing of business services’. Business
Process Management Journal., Vol. 15 No. 2.
Smith, A 2012, ‘The Pros and Cons of Outsourcing’.
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