Exploring the Pros & Cons: A Literature Review on Outsourcing

This literature review provides a comprehensive overview of outsourcing, defining it as a business practice involving the delegation of services to external sources, particularly in IT. It distinguishes between internal and external outsourcing, highlighting examples like Alibaba.com. The review details the advantages of outsourcing, such as enhanced focus on core competencies, cost savings, increased performance, and flexibility, using Skype as a case study. Conversely, it addresses disadvantages like loss of managerial control, security threats, quality issues, hidden costs, and potential staff termination. Furthermore, the review explores the impact of outsourcing on organizational performance, emphasizing cost efficiency and productivity improvements, while also acknowledging challenges related to decision-making and innovation. Desklib offers a wealth of similar resources for students.

Advantages and Disadvantages of
Outsourcing
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TABLE OF CONTENTS
Literature Review............................................................................................................................1
Definition of outsourcing and its type.........................................................................................1
Advantages and disadvantages of outsourcing............................................................................2
Further impact of outsourcing on organizational performance...................................................5
Challenges faced by outsourcing.................................................................................................6
Decisions related to outsourcing..................................................................................................7
References........................................................................................................................................8
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Literature Review
Definition of outsourcing and its type
Definition
According to Willcocks et.al.(2017) Outsourcing can be defined as the business practice that has
gained heights in the few decades majorly in business processing and information technology
outsourcing. In general terminology, it can be defined as an act of taking services from various
external sources. With the greater emphasize on information technology, outsourcing can be
defined as selling IT assets, activities and people to third party supplier to gain payment as per
the time period on the basis of mutual decision. Outsourcing from other point of view is
explained as buying of services from external organization or sources that an organization
currently offers.
As the word indicates ‘out as well as sourcing’ refers to the practice of transferring the work and
right of taking decision to some other sources. Reason of outsourcing by many of eh large and
small scale organizations is that they can get the work done in a better way at cheaper rates. The
process allocates risk as well as responsibility for the various function and services to some other
external entities. Therefore, to accomplish the work at faster and cheaper rate, outsourcing is
highly beneficial.
A recent survey conducted indicates that 42% of communication business, 37% of semi
conductor organization as well as 40% of computer manufacturer have high focus on outsourcing
their business activities (Oshri et.al, 2015). This is due to lack of communication expertise. In
addition to communication systems, payroll, database functions, inventory, etc are the areas that
are outsourced. Major of the firms revise their priorities and utilise their resources for selected
procedures and activities. The result was increase in outsourcing activities which segmented the
performance metrics into productivity, market ratio, cost efficiency, profitability, productivity,
and cash management. These metrics lead to understand the financial characteristics of an
organization that undertakes outsourcing.
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Types
According to Morschett.et.al (2015) the control and performance over outsourced function, it can
be divided into internal and external outsourcing. Internal outsourcing can be defined as the
practice in which the current organization concentrates on its own business activities and
transform internal resources into separate business entity to take decisions in favour of business
growth. External outsourcing on the other hand is defined as allocation of performances of
functions that are mutually related or separated to external organization or outsourcer. For further
explanation of external outsourcing, an example of Alibaba.com can be looked upon which
outsourced website development to well known firm in US to establish its internet organization
acting as one of the largest IPO these days. Reason of outsourcing was internet restriction in
China as well as lack of skilled resources.
Single partnerships, long term partnerships as well as short term partnerships are an example of
internal outsourcing while on the other hand centres concept, capital participation, joint
servicing, cooperation are an example of division of joint procedures in external sourcing.
Outsourcing is further divided into full type and partial type of outsourcing as per the utilisation
of resources as well as reallocation of responsibility and risk. Partial outsourcing is defined as
delegation of some functions or activities, to outsourcer while certain set of related functions are
undertaken by an organization itself. Full outsourcing irrespective of partial outsourcing is the
process which outsources major of its business processes to some other organization or source
with entrusting with responsibility for performance of functions.
Advantages and disadvantages of outsourcing
As per Virtaluoto.et.al (2016) Outsourcing in past was referred as off shoring and was considered
as the beneficial business concept for major of the industries practicing it. However, it has many
advantages and disadvantages that highly impact the business activities in positive and negative
manner. In the current scenario, countries like USA and Japan who are trading partners have
adopted the concept of outsourcing in major of their business units with an expectation of
increase in competitive advantage, enhancement of business core competencies, as well as
reduction in production cost. Along with the benefits, both the nations suffered from various
issues like compromising on quality of good or work, delaying in delivery, as well as less skilled
labours.
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Advantages
Tate and Bals (2017) stated that the most significant merits of outsourcing are enhanced focus on
core competencies, saving of cost, increased performance, as well as flexibility. Many of the
researchers are in favour of the fact that delegation of non core business activities to a trusted
third party outsourcer will help organization to focus on core business activities. The statement
can be considered by taking an example of ‘SKYPE’ which acts as one of the most important
communication tool that provides facilities of video and voice calling and messaging. It would
not have achieved such a great success if it had not outsourced its back end operations related to
development to developers ‘Jaan Tallinn, Priit Kasesalu and Ahti Heinla’. Outsourcing helped
Skype to gain competitive positioning and concentrate on other central activities to its
proposition value.
Another major advantage of outsourcing is saving of cost which led an organization to gain
higher profit margins. Need of outsourcing arises when it is identified that resources, equipments
or human resources are not fully utilised. For an instance, medium scale business who have hired
full time technical expertise which supports maintenance process of computers, systems and
laptops on occasional basis (Solli-Sæther and Gottschalk, 2015). Cost of hiring such employees
costs very high as compared to their utilisation and therefore, in such scenarios businesses must
outsource the activities whenever needed to save lot of cost. In addition to this, outsourcing
organizations have access to utilise highly skilled resources which may not be available to client
organization. In order to accomplish the task assigned by client, they are in position of fully
exploiting the innovation, as well as capabilities of specialists.
The most vital reason for outsourcing is to achieve the improvement in performance which is
possible for outsourcing organizations because of economies of scale. Large Scale organizations
have the capability of proving large opportunities and functions which will further help to save
the best employees who are not willing to work in less stimulating environment. In addition to
this, outsourcing organizations employees focus more on task as compared to internal operations.
Disadvantages
According to Willcocks et.al (2017) Major disadvantage of outsourcing is to lose control of
managerial operations that are that are outsourced, threat to confidential and security, quality
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issues, unwanted costs, as well as reallocation of current teams. Loss of control over functions
that are outsourced is because of the reason that management of various external resources need
special skills that includes combination of skilled human resources along with process
management, power negotiation, and contract management.
Another disadvantage of outsourcing lies in confidentiality and security of clients. Outsourcing
contracts are made which includes terms and condition related to security and confidentiality but
on the other hand, it becomes difficult for clients to execute and audit the procedures. For an
instance, outsourcing of financial services, information must be unknown to brokers and traders
who might misuse the information (Strange and Magnani, 2018). It is important for outsourcing
organizations to ensure that all the processes meet the diligence with system security as well as
legal compliance.
Most of the business entities outsource their process with an expectation to gain better services
when compared to internal staff. To raise the expectation of own, outsourcer must evaluate
various outsourcing entities with high reputation in the market to achieve quality of work.
Compromised quality will result into the declining of number of customers and will impact
negatively on its brand image. Process of outsourcing minimise the cost of operation and help
clients to gain more profit margin. However, quality of work puts direct impact on trust of
customers and therefore, poor quality of work will weaken the customer base of an organization
and outsourcer as well.
Hansen et.al (2016) reflected that Hidden cost is also one of the drawbacks of outsourcing. While
outsourcing the work, clients make contract with outsourcing organization with all the details of
services covered in the form of documentation which is duly signed by the client. In many of the
cases client have to pay for the uncovered services which were missed before, and such
additional charges increase the overall cost of the task and therefore decreases the profit margin.
For an instance, analyst may exclude various costs intentionally that includes selection of a
provider over another, preferring in sourcing over outsourcing, as well as connected to specific
business or not.
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Termination of staff is the major downfall of the process. Top management of an organization
after outsourcing of work are in perception of reducing the unwanted manpower that costs high
to the organization and impacts its overall cost. Question arises on either re allocating the staff or
to terminate them to increase the organizational profits.
Further impact of outsourcing on organizational performance
Cost efficiency
According to Porter and Kramer (2019), the major motivation of outsourcing is reduction in cost.
Maintaining of in house services are far most expensive as compared to outsourcing of various
processes to some third party or external sources to get the work done at much cheaper rates.
There are various factors that impact outsourcing decisions are minimisation in cost, fixed
contract based on cost predictability, technological investment risk, access to expertise, as well
as perception of efficiency. Outsourcing can also facilitate organization to reduce the labour cost.
The major motivation of maximum of the business firms in UK is cost reduction. It can also
economise the cost of production by replacing in house production with various buying in
components. In house expertise focus on extensive research, marketing, development and
distribution for giving high quality of product to its clients and for this organization charge no
amount from customers. Outsourcers on other hand are more efficient because of their cost
structuring as well as economies of scale.
As per Pla-Barber et.al (2018) Conversions of fixed cost to the variable cost by outsourcers
release some capital for further business investment and allow business entities to neglect higher
expenditures at early stages. Additionally it supports small scale business to focus on its human
resources. It is known fact that hiring of individuals for short duration of projects is highly
expensive and is less efficient. However, small scale organizations can act as large scale business
by opting outsourcing. Therefore, it can be concluded that the most important sources of
outsourcing are access to economies of scale as well as unique expertise.
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Productivity
Outsourcing is viewed as a process for enhancement of productivity. Outsourcing process must
be fully documented in the systematic manner to achieve desired outcomes. Decision making
related to process plays an important role in increasing the productivity of task assigned by the
client. Appropriate as well as detailed information helps outsources to take cost effective steps. It
is essential for an outsourcing organization to response quickly to strategic threats and
opportunities. In addition this, organizations who wish to outsource their entire business
functions must focus on provisioning of outsourcing contract that deals with future and current
requirements of an organization. Core responsibility of an outsourcer is to provide innovative
solutions as per the time boundation mentioned in the contract.
As per the recent survey in German organization proved that outsourcing has great benefits on
increasing the returns per employee which in turn helps to increase the capacity and quality of
work. All the businesses have limited number of resources and mangers whether at higher level
position or mid level position have limited attention and time (Barley et.al, 2017). Outsourcing
will be an added advantage for such busy manager and will support them to set clear priorities to
serve the customers in the most efficient manner. It will also help an organization to enhance its
operating efficiency.
Profitability
Outsourcing and profitability are highly interrelated with each other which is not the case with
German Manufacturing Firms. In the era of competition, organizations are focused and find new
ways of generating income and value. Major of the organizations in UK and USA have adopted
outsourcing policies to expand their business activities into new markets. Significance in
interrelationship between profit margin and outsourcing can be observed by analysing the profit
margins of Chrysler and General Motors (GM). It is found out that profitability of Chrysler is
four times higher than General motors and reason for driving the profit margin is outsourcing in
an effective manner through strategic alliance. It has also been observed that profits are more for
the business entities who do not focus on subcontracting whether as an outsourcer or supplier.
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Challenges faced by outsourcing
Kotabe and Murray, (2018) defines that business management believes that if business is not
core competency and better value is identified externally, then outsourcing is considered as the
better option. Outsourcing comes with various challenges which include selection of appropriate
vendor, and to take decision with respect to activities which are to be outsourced and which are
to be processed in house. An organization faces different challenges in setting up the governance
model, management of vendor relationship, as well as commitment of partnership. The major
failure of outsourcing is lack of methodology. Inherent issue is not the major cause of failure in
outsourcing but is due to the lack of methodologies that are needed to guide managers.
Some of the other challenges faced by outsourcing are future modification in supply
circumstances that includes financial difficulties, political issues between two organization, loss
of secured and confidential information as well as termination of employees in an organization
which seek outsourcing as a vital business practice. In addition to this outsourcing may also lead
to decline in critical skills as well as potential to bring innovation in future. In case of critical
tasks and activities, outsourcing does not guarantee the effectiveness as it requires skilled
resources, organic organizational process, and competencies (John et.al, 2015). By considering
an example of book publishing house, major challenges faced by an organization is disclosing of
confidential information, books pirating, plagiarism, as well as submission of low quality of
work.
Decisions related to outsourcing
It is critical to take decision on whether an organization must outsource the activities or must
process within an organization by utilising existing resources. Decision making is highly
dependent on two variables that include strategic importance of an organization as well as level
of competitiveness as compared to suppliers. In addition to this, there exist major factors that
motivate outsourcing such as cost, politics and strategy. Private sector industries drives
outsourcing based on cost and strategy. However, outsourcing must not only be the matter of
cost and issues related to performance but to gain new heights in the market, it is important for
an organization to focus on its goals and objectives, scope, major considerations as well as
implementations (Solli-Sæther and Gottschalk, 2015).
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Decision making can further be explained by considering an example of book publishing house
in Kenya. Economic problems in Africa resulted in declining of living standards and increased
gap between elites and masses. African government in such situation adopted structural
programs that align with International Monetary Fund (IMF) for gaining the credit facilities that
led to currency devaluation as well as reduction in expenses on social services such as interest
rates, education, etc. In such scenarios, publishing house concentrate on cost cutting of products
and outsourcing found to be one of the best ways to provide product at affordable prices.
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References
Books and Journals
Barley, S.R., Bechky, B.A. and Milliken, F.J., 2017. The changing nature of work: Careers,
identities, and work lives in the 21st century. Academy of Management Discoveries, 3(2),
pp.111-115.
Hansen, U.E., Larsen, C. and Larsen, T.H., 2016. Outsourcing and Offshoring R&D in Green
Technology to Emerging Economies: Opportunities and Challenges for Europe.
John, J.S., Guynes, C.S. and Cline, M., 2015. Recent trends in offshoring relationships. The
Review of Business Information Systems (Online), 19(1), p.1.
Kotabe, M. and Murray, J.Y., 2018. Global Sourcing Strategy: An Evolution in Global
Production and Sourcing Rationalization. In Advances in Global Marketing (pp. 365-384).
Springer, Cham.
Morschett, D., Schramm-Klein, H. and Zentes, J., 2015. Outsourcing and Offshoring.
In Strategic International Management (pp. 361-384). Springer Gabler, Wiesbaden.
Oshri, I., Kotlarsky, J. and Willcocks, L.P., 2015. The Handbook of Global Outsourcing and
Offshoring 3rd Edition. Springer.
Pla-Barber, J., Linares, E. and Ghauri, P.N., 2018. The choice of offshoring operation mode: A
behavioural perspective. Journal of Business Research.
Porter, M.E. and Kramer, M.R., 2019. Creating shared value. In Managing Sustainable
Business (pp. 327-350). Springer, Dordrecht.
Solli-Sæther, H. and Gottschalk, P., 2015. Stages-of-growth in outsourcing, offshoring and
backsourcing: Back to the future?. Journal of Computer Information Systems, 55(2), pp.88-94.
Strange, R. and Magnani, G., 2018. Outsourcing, oshoring and the global factory. In The
Routledge Companion to the Geography of International Business (pp. 78-95). Routledge.
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Tate, W.L. and Bals, L., 2017. Outsourcing/offshoring insights: going beyond reshoring to
rightshoring. International Journal of Physical Distribution & Logistics Management, 47(2/3),
pp.106-113.
Virtaluoto, J., Sannino, A. and Engeström, Y., 2016. Surviving Outsourcing and Offshoring:
Technical Communication Professionals in Search of a Future. Journal of Business and
Technical Communication, 30(4), pp.495-532.
Willcocks, L.P., Lacity, M.C. and Sauer, C. eds., 2017. Outsourcing and Offshoring Business
Services. Springer.
Willcocks, L.P., Lacity, M.C. and Sauer, C., 2017. Introduction. In Outsourcing and Offshoring
Business Services (pp. 1-22). Palgrave Macmillan, Cham.
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