Outsourcing Strategies: Benefits, Challenges, and Risks for Businesses

This report delves into the multifaceted world of outsourcing, exploring its core concept, benefits, and associated challenges for businesses. It begins by defining outsourcing as the strategic decision to acquire products or services from external vendors to reduce operational costs, highlighting its growing prevalence across various industries and company sizes. The report underscores the primary objectives of outsourcing, including cost reduction and a focused approach on core competencies. A comprehensive literature review is presented, drawing upon various scholarly sources to examine the benefits of outsourcing, such as cost savings, increased efficiency, and enhanced customer satisfaction through access to specialized skills and technologies. Simultaneously, the report acknowledges and examines the potential drawbacks, including data security risks, administrative complexities, and the possibility of hidden expenses. The report concludes by reiterating the significance of outsourcing as a tool for businesses to improve their operational efficiency and gain a competitive advantage in the market.

Running Head: OUTSOURCING 1
Outsourcing

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Introduction
Outsourcing of the business functions refers to the process wherein a company purchases
a product or service from an external vendor instead of performing the business operations in the
business facilities of the organization. The outsourcing strategy is commonly adopted by the
business organization to cut the operational cost of the organization. The outsourcing decision is
a strategic decision of the organization as the organization has to tradeoff between the potential
cost saving and the loss of control over the manufacturing of the product or service. In the recent
years, outsourcing industry has observed immense growth in the outsourcing industry with the
changing business philosophy of the business organizations. Previously, large companies used to
invest in a large number of unrelated businesses to reduce the comparative risk (McIvor, 2010).
However, several of these companies have realized that operating a large number of unconnected
businesses have limited advantages. Consequently, the companies have started developing core
competence and all other supporting activities are outsources. Today, outsourcing is the most
common phenomenon with the companies of all size and industries indulging in it. Outsourcing
provides numerous benefits such as cost savings and focus on the core competency of the
organization.
Project Objective
The primary aim of the following project is to explore the phenomenon of outsourcing
and its numerous benefits and challenges for the business organizations. Today, most of the
companies have undertaken outsourcing activities to reduce their cost of operations. However,
there are several challenges in the successful implementation of outsourcing. The current
literature review will examine the different challenges of the outsourcing activities for the

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organization. The business organizations face the risk of information breach, less efficiency and
decrease in customer satisfaction with the outsourcing activities.
Project Scope
The project will discuss the outsourcing activities of different companies. The project
will discuss the benefits and thee drawbacks of the outsourcing activities. However, the scope of
the current project is limited to the secondary sources. In the present research, all the information
is obtained from the secondary sources so the success or the failure of the project is dependent
upon the viability and the credibility of the secondary resources. The current research project
will only focus on the benefits and the drawbacks of the outsourcing activities. Therefore, it will
not provide any additional information provided by the research scholars.
Literature Review
According to Gospel and Sako (2010), outsourcing refers to the process wherein a business
organization transfers it’s associated or auxiliary operations to a third party vendor so that it can
focus on its core competency. It also reduces the overall cost to the organization and increases
the organizational efficiency.
Today, most of the business organizations have expanded their operations overseas in different
developing and developed nations. These organizations adopt the outsourcing business model to
reduce their cost and exploit the differences in the labor and the manufacturing cost in different
countries. The information technology companies are pioneer in adopting outsourcing business
model and it has been crucial in saving a significant amount of cost of these organizations.

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Outsourcing can be defined as the transfer of duties, operations and the authority to
someone outside the usual workplace. In the perception of Lientz (2009), the primary reason for
the outsourcing activity is often cited as the development of competitive advantage. The side-
operations of the organization which increases the workload of the employees unnecessarily high
and deviate their mind from the core business activities of the organization are transferred to
some other organizations. However, only those activities are transferred to an external
organization which cannot be used against the organization in some negative manner. Moreover,
if any data breach occurs in these activities, the negative impact on the organization is minimal.
With the challenges and the risk associated with the outsourcing activities, there have been
numerous options available for the outsourcing. For instance, a business organization can
outsource a part of the process or a whole process to a third party vendor.
According to Schniederjans (2006), the outsourcing activities of a business
organization are dependent upon increasing the customer service quality and reducing the overall
operational costs. The outsourcing activities also allow the business organization to enter the
market of a foreign country. With these processes, they can temporarily create employment and
contribute to the local economy. It can also increase the access of the organization to the skilled
labor and manufacturing technology. If a business organization does not have the labor equipped
with the desired skills, the organization can outsource the activity to an expert organization.
Along with it, the organization can also address the issue of manpower shortage with the
outsourcing activities. If a business organization suddenly gets bulk order and it does not have
the manpower to handle the project, it can outsource the business activities to the external
organizations.

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During the outsourcing activities, it is important for a business organization to outsource
the activities which are most beneficial for the organization. Some of the most common business
activities which can be outsourced to the external vendors are human resource management,
accounting process, technical support infrastructure or the legal procedures.
In the perception of Miozzo and Grimshaw (2011), the outsourcing functions provide several
unique benefits to the business organizations. One of the most significant benefits, which drive
the companies to adopt thee outsourcing model is the immense cost benefits that the process
provides. Most of the business organizations try to cut cost by the adoption of this model. Due to
the currency rate difference between the developed and the developing countries, the
manufacturing and the labor cost is significantly small in developing countries like China and
Indonesia. In these countries, the labor is available in large amount at a cheaper cost. It
drastically reduces the total production cost to the organization. Other than that, the companies
can also outsource other side operations such as human resource functions like payroll design or
legal work to third parties. In these cases, the companies will save cost as instead of hiring an
expert for the work, it can outsource the work whenever there is any requirement for the services.
Another significant benefit of the business is that the organization can pay attention to it core
activities. In the present times, there is lot of competition. The business organizations face
tremendous competition and constantly face the threat in which the competitors snatch away the
market share of the leading organizations. Therefore, it is very much important for the
organizations to develop a core competency or competitive advantage in their operations. In this
regard, outsourcing activities can be used by the business organizations to improve their core
business operations. As such, by concentrating on core business functions, the business

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organizations can develop their competitive advantage. The business organization can also use
outsourcing activities to improve their business operations.
Another significant advantage of outsourcing method is skill acquisition of the employees.
Today, the business environment has become dynamic and complex. In order to run successful
operations, it is important to have a diversified team which is talented in several aspects. An
organization can expand its expertise, technical knowledge and other skills. Most commonly, the
business organizations also outsource their business to the companies who specialize in a
specific business field. The supplier company has the employee in appropriate strength, skills
and experience that they can perform a certain task in better than the parent company. The
assistance provided as such a benefit the company a lot in terms of time efficiency, quality and
cost saving (MCiVOR, 2010).
Similarly, Jain, Hasija and Popescu (2013) have discussed that another benefit of the outsourcing
activity is enhanced customer satisfaction. With the outsourcing, the company has the
opportunity to transfer their work to other companies which are well-equipped with technology,
skills or expertise. It will result in better service to the customers and can eventually impact on
the customer satisfaction. Since the work will be performed by the industry experts, the customer
satisfaction will proportionally increase with the expertise of the outsourcing companies. These
organizations have an entire workforce dedicated for completing the task; therefore, if one of the
employees gets sick or is not present, the organization is bound to find a replacement of the
person. If the outsourcing center in in a foreign country, the company can also provide services
at odd times.

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According to Hsuan and Mahnke (2011), another interlinked facet of outsourcing is
enhancement of operational efficiency. As per the above discussion, if the organization wants to
sustain in the marketplace, it has to recruit highly talented people who can create a competitive
advantage for the companies. The outsourcing is mean to achieve this competitive advantage or
operational efficiency. It allows the organization to seek maximum efficiency and implement
them within the organization. The efficiency refers to high product or service quality with timely
delivery of task. It also allows the home employees of the organization to focus on important
task and accomplish them with a high degree of efficiency. The organization can focus on its
core objectives instead of daily supervising the mundane or regular task.
In the views of Schniederjans, Schniederjans, Schniederjans (2015), outsourcing
activities also allow the benefit of risk sharing to all the companies. The companies can develop
a contract in which they can share organizational risk with the outsourcing companies. While
entering into an outsourcing agreement, the companies have to evaluate several aspects such as
they are offering high quality of service and timely completion of the projects. The companies
also need to evaluate that the outsourcing company is offering the same service as mentioned in
the agreement. If the external vendor fails to do so, the company can file a legal case against
them.
Along with the numerous benefits as discussed by Miozzo and Grimshaw, (2011), there are also
certain disadvantages associated with the outsourcing activities. The foremost disadvantage
associated with the outsourcing activity is the data and information risk. While outsourcing he
business activities to an external vendor, the company has to share a lot of confidential and
sensitive information with third party. It increases the vulnerability of the organization. Even
when the supplier or the vendor does not have any mal-intent, it might be possible that the

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security system of the external vendor is not robust. However, it makes the entire organization
more vulnerable to the security attacks.
Han and Mithas (2013) have stated that the outsourcing activity also creates various
administrative issues related to the management and control of the outsourced activities. When
an organization enter into an outsourcing deal, they sign a contract wherein it is written all the
duties, responsibilities and evaluation will be conducted be the outsourcing companies. However,
it creates several administrative challenges for the organization. If the principles of the
organization do not match with the outsourced organization or if the outsourcing organization is
dealing with more than two companies, it can create hurdles for the organization. Therefore, it is
important that the organization implement a proper managerial control over the organization.
Another issue in the outsourcing activity is that the most of the times, the companies have to deal
with hidden expenses which were not mentioned earlier in the project signing document. There
are several hidden expenses such as verification of online document or any other legal procedure.
As a result, it is important to establish a proper framework for the outsourcing activities.
Conclusion
Conclusively, it is stated that outsourcing activities have high potential and would be to
reduce the cost of the organization. There are numerous benefits of outsourcing such as low cost
operations, higher efficiency and skill development. The companies use the outsourcing
activities to reduce their overall operational costs by taking advantage of the difference in the
labor costs or the manufacturing costs to the organization. Other than that, an organization can
easily access efficient workforce in an instant with the outsourcing method. The outsourcing also
reduces the challenges of human resource shortage of the organization.

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Outsourcing has numerous challenges also as the organization becomes more vulnerable to
security or IT data breach. Along with it, the organization will also face other challenges such as
reduction in control over other activities of the organization. The organization will also several
other challenges such as reduction of control over the supporting activities of the organization.
When the organization will lose control over these activities, the quality of services provided to
the customers will also be questionable.

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Epstein, W.N. (2012). Contract theory and the failures of public-private contracting. Cardozo L.
Rev., 34, p.2211.
Gonzalez, R., Gasco, J. and Llopis, J. (2010). Information systems outsourcing reasons and risks:
a new assessment. Industrial Management & Data Systems, 110(2), pp.284-303.
Gorla, N. and Somers, T.M. (2014). The impact of IT outsourcing on information systems
success. Information & Management, 51(3), pp.320-335.
Gospel, H. and Sako, M. (2010). The unbundling of corporate functions: the evolution of shared
services and outsourcing in human resource management. Industrial and Corporate
Change, 19(5), pp.1367-1396.
Han, K. and Mithas, S. (2013). Information technology outsourcing and non-IT operating costs:
An empirical investigation. Mis Quarterly, 37(1).
Hsuan, J. and Mahnke, V. (2011). Outsourcing R&D: a review, model, and research
agenda. R&d Management, 41(1), pp.1-7.
Jain, N., Hasija, S. and Popescu, D.G. (2013). Optimal contracts for outsourcing of repair and
restoration services. Operations Research, 61(6), pp.1295-1311.
Lientz, B. (2009). Start Right in E-Business. London: Routledge.

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McIvor, R. (2010). Global services outsourcing. Cambridge University Press.
Miozzo, M. and Grimshaw, D. (2011). Capabilities of large services outsourcing firms: the
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