A Detailed Analysis of Outsourcing Business Functions: Pros and Cons

This report provides a comprehensive analysis of outsourcing business functions, examining its advantages and disadvantages across various departments. The study delves into the concept of outsourcing, defining its core principles and differentiating it from related concepts like insourcing, out-tasking, offshoring, and nearshore outsourcing. It explores the decision-making process involved in outsourcing and the importance of considering multidimensional criteria. The report then focuses on specific functions, including accounting, information technology, human resources, and sales and marketing. It highlights the benefits and drawbacks of outsourcing each function, drawing on literature reviews and case studies to support its findings. The advantages discussed include cost reduction, access to specialized skills, increased flexibility, and improved efficiency. The disadvantages explored involve potential risks, such as loss of control, security concerns, and the impact on customer relationships. The report concludes by offering insights into the strategic implications of outsourcing and its role in achieving competitive advantage.

Advantages and Disadvantages of Outsourcing Business Functions
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Advantages and Disadvantages of Outsourcing Business Functions.
1.0 Introduction
Outsourcing has become a significant business function both in the private and public sector
and is a major component in business strategy (Gunasekaran et al., 2015). The increasing
competition among companies both in the local and international market has sobered up
managers to emphasize on attaining competitive advantage to as to survive in the market.
With the current trend, the satisfaction of the needs of the customers and winning their trust is
becoming more difficult; however, it can be gained through offering products and services of
value. The performance of the business can be achieved by use of the traditional methods in
addition to outsourcing the business functions. The objective of outsourcing is to increase
flexibility and adaptability of the company to the new market situations by focusing on the
goal of the firm, delegating some functions, transactions to other businesses. However,
outsourcing also comes with limitations in cases where the outsourced company is less
productive than the outsourcing company.
1.2 Project Objective
The aim of this study is to determine why most organizations outsource some of their
business functions. Furthermore, this study examines the reasons for the decision of
outsourcing with the aim of developing an in-depth understanding of the objective.
1.3 Project Scope
Outsourcing is extensive and involves all the business functions; but because of the
constraints of time and money, it was impossible to address all the functions in this research.
Therefore, based on the above reasons the researcher considered the following significant
business functions:

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 Information technology
 Accounting services
 Human resource
 Sales and marketing
The data gathered is from twenty-nine organizations.
1.4 Literature Review
The concept of outsourcing
Mella and Pellicelli (2012) define outsourcing as delegating work previously done within the
company to be done by an outside organization. To differentiate between insourcing and out-
tasking, Mella and Pellicelli describe insourcing as moving the outsourced function from the
supplier to be entirely managed by the staff which mostly results in competition with outside
suppliers. While out-tasking occurs when the task is done outside the firm, but full control of
the operations are retained by the company; that is the specific details of how the work is to
be carried out.
Alebrand, (2013) further gives the difference between offshoring and outsourcing: when an
outsourced task is done locally viz in the same country, then it is termed as “onshore
outsourcing.” Whereas an outsourced work executed in other countries but within similar
time zones is referred to as “nearshore outsourcing.” If the outsourced work is done in
countries with time zones that are far apart, then it is termed as “offshore outsourcing.”
Outsourcing is a process of decision making. The important decision is to outsource given
tasks or not. The decision to outsource is become much complicated in modern organizations
because of their integrated applications with each other. For instance, IT applications cut
across all the operations of different departments thus making it difficult to outsource only

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one application. Furthermore, in the case of poor performance out of outsourcing, and then
the whole company is affected. Therefore, the criteria used to examine the decision of
outsourcing has to be multidimensional and imperceptible (Mella and Pellicelli, 2012).
Types of services outsourced
This part considers the commonly outsourced services. Schniederjans, M., Schniederjans, A
and Schniederjans, D. (2015.) outlines services that are mostly outsourced: Information
technology services, Human resource services, administrative and sales and marketing
functions.
1.4.1 Outsourcing the Accounting Function
Maelah et al., (2012) asserts that the accounting services are the most outsourced however
they are limited to specific jobs in the function. According to Raudla and Tammel (2015)
Some of the services within the accounting function that can be outsourced include virtual
payroll, the collection of receivable accounts, management of cash by banks, the filing of tax
returns, preparation and reporting of financial statements, auditing, printing of cheques, the
collection of money receipts etc. Raudla and Tammel (2015) highlight the benefits and
drawbacks that can be achieved from outsourcing services in the accounting function.
According to their study, the outstanding purpose of outsourcing the function of collections is
because supplier can follow-up on the clients who are tardy in payments that would help the
staff because of unique skills that are required in persuading organizations to pay for accruing
invoices and product collections. The fundamental motives for internal auditing outsourcing
include: A blend of skills, Employee value: the performance value of the supplied auditing
staff is usually above bar attributes the benefits of outsourcing to The experience of diverse
practices: Because auditors often audit many different organizations then the knowledge base
is built up and thus able to carry out the auditing task efficiently. Furthermore, Raudla and

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Tammel retaliates that outsourcing go accounting function results in Flexible costs: the
business can only incur costs for the audit work done and thus can easily save on cost by
shifting from the fixed costs for internal staff to external staff. Similar conclusions are shared
by Butlernand Callahan (2014) regarding to the benefits of Outsourcing payroll services,
which include Avoiding the last-minute rush of payments of payroll tax, Evade the payment
of software updates, Escape the printing of pay checks, To counter check for any double
locations in check delivery and To ease clerical work for the accounting staff to focus on
other weightier matters.
Siew-Chen and Seow-Voon (2016) in their study found out that outsourcing can be risky, for
instance, Collection companies can sever the customer relationship with the business by the
manner in which they collect the debts from the adamant business. This may further
terminate any future business deals with the firm. According to Sulaiman Ainin et al. (2012 )
outsourcing is usually costly because the supplier is paid a percentage of the collected bill.
Hay et al. (2016) emphasizes that internal auditing is Costly because the external auditing
company costs more than the internal auditors because the ultimate cost is reflected in the
overheads and profit margin of the business. Also Hay (2017) found out that The issue with
delegating the auditing function to the external auditing firm may take advantage of the
opportunity and develop their managers (because they gain a broad knowledge base about the
services of the company) thus depriving the organization of the chance to train managers for
the enterprise in the future.
1.4.2 Outsourcing Computer Services.
Computer services are the most outsourced services in history. Gorla and Somers (2014)
records that some suppliers further outsource their internal services to other providers. The
functional computer services that are usually outsourced include the department of data

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management, where the supplier hands over the entire main frame of the application to a
facility that is integrated to work for many firms. All the software applications of the business
are operated from this location. Another outsourced area is the communication and networks,
help desk, upkeep of desktop computers, etc.
Outsourcing of information system/technology is the allocation of IT function that used to be
an internal task to a third-party. The IT outsourcing services are software development,
maintenance of hardware, and web hosting (Lewis, 2015). The call for web hosting and data
storage services have recently increased. Organizations receive this functionality by the
application service providers where the management can store and retrieve their information
through the public networks.
Chang and Gurbaxani (2012) in their research highlight that Outsourcing IS function Cuts the
expenses for acquisition of desktops more so in companies’ facing financial crisis. In
different studies Gorla and Somers (2014); Chang and Gurbaxani (2012) found out that the
purchase of any required computers needed for the data center and its maintenance is taken
care by the supplier. Outsourcing leads to Cost reduction by shifting the entire data center,
management of calls and networks and the control of the customer care desk to the supplier.
By changing computing costs from static to variable helps in the reduction of costs such as
installation and salary paid to the staff during installation and maintenance Lewis (2015).
Furthermore, the company enjoys services from experienced workers which it may not
possess. The knowledge base of the employees of the supplier has diverse experiences from
working with different companies
On the contrary, Datta and Mahapatra (2014) argue that the risks associated with outsourcing
IT function may prohibit its outsourcing. For instance, Datta and Mahapatra stresses that the
firm has to incur training costs on how to communicate with the customer care desk from the

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supplier. Also, the services of the help desk define the reputation of the business to a larger
extent. Therefore if the service provider blunders in addressing issues relating to staff then
this may affect the general functionality of the business. Lewis (2015) argues that In some
cases, the supplier may not ardently track open problem and outsourcing the development
function is risky because the performing programmers can quickly leave the firm for fear of
shifting to the provider which may be known for mishandling of its employees.
1.4.3 Outsourcing Human Resource Function.
The human resource function provides mostly clerical services which can readily be
delegated to experienced and technologically equipped supplier. Some of the services offered
by the human resource department include: health, life and employee insurance. Other non-
clerical tasks which are more sensitive include outplacement, recruitment, training and
transfers (Kock, et al., 2012)
Butler and Callahan (2014) explores on the impacts of outsourcing HR function and suggests
that the technical and emotional act of addressing laid-off employees can quickly and more
efficiently be handled by the supplier because this is part of their full-time job meaning they
have expertise to handle such matters which cannot be found within the organization.
Additionally, psychological counselling can be extended to employees in case of need. Butler
and Callahan reiterate that Outsourcing the aspect of life insurance enables the company to
avoid the threat of enormous losses that result under self-insurance. According to Mahmud et
al. (2012) when the Health insurance is handled by an in-house staff it costs the organization
additional fixed costs as opposed to outsourcing. Similarly, Kock, et al., 2012) highlights that
Outsourcing recruitment is advantageous to the company because the expenses incurred are
taken care of by the supplier until the firm gets the qualified candidate. On the hand, an
internal recruiting official comes with fixed costs which must be incurred whether or not the

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company gets the potential candidate. The firm is likely to get the best candidate for the job
because the supplier will be actively determined to get one in order to be paid. Otherwise, the
company has not motivation (Butler and Callahan, 2014). However, some scholars argue care
should be taken when outsourcing some HR functions. According to Butler and Callahan
(2014) outsourcing leads to the needs of the firm being addressed by the supplier for a limited
period of time. Butler and Callahan (2014) reasons that it is often the case that providers do
not want to incur costs approach colleges to recruit employees who are later grilled on the
company functions by an insider and is then presented as a potential employee. Glaister
(2014) concurs with Butler and Callahan (2014 that Outsourcing to those suppliers that
sometimes further outsource to third party suppliers may become hectic to the staff who have
to trace the locations of the suppliers
1.4.3 Outsourcing the Function of Sales and Marketing
The areas of public relations, promotion, supply and external sales have been in practise for a
long time. Raassens et al. (2012) and Shacheendran, (2013) suggests that outsourcing
marketing is of benefit because the organization can easily save on costs by substituting the
internal fixed cost with the supplier cost which is variable. The provider is accessible to a
diversity of talents which can creatively design the advertising strategy of the company thus
leading to active promotion which otherwise would not be possible if the in-house staff were
left to undertake (Raassens et al., 2012). The fixed cost of public relation according to Sheikh
and Rana (2014) can be reduced since the supplier will only charge based on the time spent at
work. Also, the suppler is more likely to have a wider media contact than the employee.
According to Glaister (2014) the initiation, establishment and maintenance of call centre can
efficiently be run by the supplier than the company due to extensive expertise. Also, the
additional costs incurred in the setting up of a call centre such as furniture, buildings etc. are
forgone. Outsourcing also Minimizes computer security risk because the call centre staffs are

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less likely required to access the organization data base to respond to queries. Outsourcing
the sales function implies that the company will no longer incur base salary to the external
sales person who are mostly paid on commission. This reduces the company expenses. A
study conducted by Gichuru, (2012) revealed that an external sales officer is of advantage to
the company in areas of low volume sales or distant regions in which case it would be costly
for the firm to cater for a full-time worker. Similarly, Sheikh and Rana (2014) in his survey
records that the benefit of an external sales person is that he/she can be of great use in
countries which one must communicate in the local dialect and knowledgeable about the
culture
In a survey conducted by Raassens et al. (2012) show that in some situations outsourcing the
sales and marketing function can be costly because the commission rewarded to the sales
people is exorbitant compared to that of an internal sales staff. Osmond et al. (2000) found
out that the cost of outsourcing call centre is much higher because the cost per call of the
external company must be reflected in the profit margin and principal costs of all the call
centres. Outsourcing puts the repute of the business at stake because of the autonomy of the
calls made by the callers of the supplier which sometimes may put off customers (Willcocks,
and Cullen, 2013). Ignorance of the industry of the company and its product line may be
exposed by the provider in case of any publicity, according to Al-Mutairi, and Al-Hammad
(n.d). Additionally, the supplier advertising cost is usually much higher than that of the
internal employee.
Conclusion
Outsourcing is an excellent practice by the management. Despite some management fears or
awareness on the quality control, there exist significant ideological reasons such as increase
of Return of Investments and access to a pool of expertize that should make the senior

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management to reconsider outsourcing certain business functions (Freytag et al., 2012). The
advantages and disadvantages of outsourcing of different business functions vary, and
therefore the management should advisedly consider the type of services to outsource
depending on the kind of business, type of market, the company’s budget, etc.

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