Analysis of Business Functions Outsourcing: Advantages & Disadvantages

This report provides a comprehensive literature review on the advantages and disadvantages of outsourcing business functions. It begins with an introduction that highlights outsourcing as a cost-saving and time-saving strategy for modern businesses, covering functions like marketing, human resources, sales, and accounting. The report defines outsourcing, differentiating between various types such as out-tasking, consulting, contingent workers, and off-shoring, and then delves into Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO), explaining their significance and evolution. The advantages of outsourcing, including speediness, expertise, risk-sharing, cost savings, and a focus on core business objectives, are discussed. Conversely, the report also addresses the disadvantages, such as the risk of exposing sensitive information, potential issues with deliverables, hidden costs, and a lack of customer focus. The report also includes a discussion on Human Resource Outsourcing (HRO), its growth, and its advantages and disadvantages. The report highlights that the global HRO market is expected to reach US$53.9 billion by 2020, driven by the growing demand from global MNEs and SMEs. This report serves as a valuable resource for understanding the strategic implications of outsourcing in contemporary business environments.

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Advantages and Disadvantages of Outsourcing Business Functions
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Table of Contents
1. Introduction..................................................................................................................................3
2. Project Objective.........................................................................................................................3
3. Project Scope...............................................................................................................................4
4. Literature Review........................................................................................................................4
4.1 Defining Outsourcing.............................................................................................................4
4.2 Information Technology Outsourcing (ITO).........................................................................6
4.4 Business Process Outsourcing (BPO)....................................................................................7
4.4.1 Advantages of Outsourcing Business Functions.............................................................8
4.4.2 Disadvantages of Outsourcing Business Functions........................................................8
4.5 Human Resource Outsourcing (HRO)...................................................................................9
4.5.1 Growth of HR Outsourcing.............................................................................................9
4.5.2 Advantages and Disadvantages of HR Outsourcing.....................................................10
4.5.3 Types of HR activities Outsourced................................................................................10
4.5.4 Reason for HR Outsourcing..........................................................................................11
4.6 Literature Gap......................................................................................................................11
5. Conclusion.................................................................................................................................12
References......................................................................................................................................13

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1. Introduction
In the contemporary business scenario, outsourcing of basic business functions can be
identified as a profitability source saving both time and money (Raiborn, Butler and Massoud,
2009). Depending on the business size and resources available to an organisation, modern
business management has initiated the process of outsourcing the fundamental business functions
such as marketing, human resources, sales, and accounting etc to stay on top in a target market
(Belcourt, 2016). The study has been developed to present a literature review stating the
advantages and disadvantages of outsourcing business functions.
In the meanwhile, the project undergoes several types of research conducted by authors to
identify how the term outsourcing has been associated with modern organisational management.
Evidently, in order to sustain a healthy competitive momentum in the business, domestic as well
as multinational companies need to evaluate the sense of outsourcing of fundamental business
functions (Namasivayam, 2014). Also, the research describes the literature gap attached to the
topic of outsourcing of business functions.
2. Project Objective
The research study identifies the past literature so that the process of outsourcing
business functions can be understood. Furthermore, the study of literature has illustrated different
types of outsourcing in the modern business management. In terms of modern businesses,
virtually most of the basic business activities can be outsourced to achieve certain advantages
(Wu and Park, 2009). Therefore, the study has been aimed to identify how different types of
outsourcing have benefited the modern business firms to stay competitive. Besides, the project

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elaborates the basic advantages and disadvantages of the process of outsourcing business
functions.
3. Project Scope
The literature review on outsourcing of business functions critically reviews the
definition of the outsourcing concept. Moreover, the study emphasises on explaining different
types of outsourcing that are widely used in the current business scenario. By considering the
findings of the study, it can be seen that there are several advantages of outsourcing of business
functions. However, the previous literatures lack in presenting the major disadvantages of the
outsourcing process. Hence, it is important for the future researchers to focus on the
disadvantages of outsourcing process in order to make the readers understand and consider the
pros as well as cons of the technique before applying it in the real life scenario.
4. Literature Review
In the modern-day business context, outsourcing can be identified as one of the crucial
business practices that save both money and time for business organisations. In the review of the
literature, a number of outsourcing types have been described followed by the pros and cons of
the particular business practice.
4.1 Defining Outsourcing
Outsourcing can be referred to a specific business practice that enables management to
complete certain business functions outside the organisation instead of developing an in-house
set of the employees or department (Law, 2017). Precisely, over the last decade or so,
outsourcing of certain business functions has become a profitable trend for contemporary

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companies as it reduces costs and improves the efficiency of the firm by shifting jobs,
operations, and tasks to other companies or individuals. In other words, outsourcing of certain
fundamental business functions such as human resources, marketing, information technology,
and business process, etc enables an organisation to concentrate on core business objectives and
targets saving on precious time, effort, and cost (Raiborn, Butler and Massoud, 2009).
Based on the types of activities, there are several similar terms whose meanings are same
as outsourcing. Some of these terms are discussed herein below:
 Out Tasking: Out tasking is also known as subcontracting that refers to hiring of
external service providers on a temporary basis in order to meet the requirements of
supplementing resources (Fitz-Enz et al., 2014). For instance, design of training process
and delivery of training activities can be considered as supplementary requirement for an
organisation.
 Consulting: According to Hunter, Saunders and Burroughs (2007), consulting is a
process of helping an organisation by providing information regarding ‘how to do the
task’. On the other hand, outsourcing focuses on ‘doing the task’. The literature on
Business Function Outsourcing does not provide proper distinction between the two
concepts (Grensing-Pophal, 2010). Moreover, the Human Resource Outsourcing service
providers render both management consulting and outsourcing services.
 Contingent Workers: Hiring contingent workers is the process of leasing employees to
an organisation by a HR service firm (Grensing-Pophal, 2010). Hence, in place of
outsourcing the entire process, the company hires employees of other firms to continue its
operations.

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 Off Shoring: Finally, Fitz-Enz et al. (2014) defines off shoring as a process of
outsourcing the business functions across the national boundaries.
On the basis of the above discussion, it can be seen that all the terms have similar
meaning to outsourcing. But, in real sense have different utilities and drawbacks for the
company. Hence, it is important for the organisation to choose the outsourcing process
effectively after considering both of its advantages and disadvantages to seek sustainable growth
of business.
4.2 Information Technology Outsourcing (ITO)
Information Technology (IT) outsourcing strategy is a comprehensive plan that enables a
firm to perform the IT functions related tasks by the outside IT experts instead of internal IT
department of the enterprise (Davison, 2017). Precisely, modern companies do not want to invest
the bulk of investment to set up IT infrastructure within the organisation. Therefore, by
identifying the technology gaps within the firm, it has become a common practice to allocate IT-
related tasks to be outsourced (Mitchell and James, 2017). Apparently, in terms of business
transition, IT outsourcing delivers best possible use of technology at the lowest possible cost.
In the meanwhile, by shifting the IT-related business functions from the internal
resources to the external contractors, a business organisation can focus on strategic long-term
goals in an effective manner (Noordeh, 2014). However, by considering the rapid growing IT
industry around the world, IT outsourcing strategy has become one of the most common
practices for MNEs to complete the entire IT-related tasks such as computer programming
(Mahmoodzadeh, Jalalinia and Nekui Yazdi, 2009). Evolution of modern IT sector has provided

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the opportunity for modern businesses to use IT outsourcing as a variable practice depending on
the major IT-related tasks and the difficulty level of the activities.
4.4 Business Process Outsourcing (BPO)
Business process outsourcing is the certain business practice that enables an organisation
to perform a number of business-related functions and operations by another third-party
individual or firm. Precisely, business process outsourcing is popularly renowned as offshore
outsourcing if an organisation has assigned a task to another country (Law, 2017). By assigning
most important business functions to the outsourced company instead of hiring in-house
employees has become the latest trend in business process outsourcing (Anderson, 2015).
Primarily, companies operating in the developed nations such as the United States of America,
Australia, and United Kingdom, etc has opted for such options to get the job done. Moreover,
companies of developed economies use emerging nations for the outsourcing of business process
(Wu and Park, 2009).
Globalisation can be identified as the major influential factor promoting business process
outsourcing. The phenomenal growth of outsourcing industry such as Information Technology
and Human Resources has forced business organisations to utilise the opportunity at the
international level instead of developing in-house departments (Ghodeswar and Vaidyanathan,
2008). As a result of the scenario, job sector of developed countries can be affected in a negative
way by the practice of business process outsourcing due to shifting in jobs to other countries.
Evidently, BPO practice can be termed as the best cost saving measure to complete significant
business-related tasks (Glaister, 2013).

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4.4.1 Advantages of Outsourcing Business Functions
The advantages of outsourcing business functions have been described as follows:
 Speediness and Expertise: By outsourcing various business functions, modern
companies have completed the tasks by the specialised expertise. In the presence of
expert knowledge and technical assistance of the outsourced vendors, the quality of
output and swiftness of the tasks have been enhanced through outsourcing (LI, 2017).
 Risk-sharing: Outsourcing of certain business process enables a business firm to transfer
some important responsibilities to the outsourced vendors (Belcourt, 2016). Due to their
expertise in the field, the third-party vendor can derive a better risk-mitigating plan to get
the job done. Therefore, risks associated with a certain task will be shared in this way.
 Recruiting and Operational Costs Savings: The practice of outsourcing eludes the
requirement to employ in-house departments and employees. Therefore, the cost of
recruitment and management operations can be minimised (Al-Kassem, 2017). Clearly, it
is one of the leading benefits of outsourcing business functions.
 Focusing on Core Business Objectives and Process: Outsourcing of certain business
process that is considered as supporting business function can provide ample time to the
business management to concentrate on the core business functions and objectives
(Belcourt, 2016). Thus, the process of outsourcing helps to strengthen the internal
business environment and core business targets.
4.4.2 Disadvantages of Outsourcing Business Functions
The disadvantages of outsourcing business functions have been described as follows:

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 Risk of exposing significant information: During the outsourcing of business functions,
the organisation needs to expose different significant information to the third party that
may lead to loss of company data in the future (Weidenbaum, 2015).
 Issues regarding deliverables: In the case of choosing a wrong partner for the
outsourcing of business function, the company may face some common problems such as
poor quality of output, stretched time of delivery and inappropriate categorisation of
responsibilities (Weidenbaum, 2015).
 Hidden costs: There are several hidden cost involved with the outsourcing process. For
example, the company needs to pay for developing a contract between both the
companies (Weidenbaum, 2015). Additionally, outsourcing leads to drawing of national
income to foreign countries. Hence, it is important to consider the hidden cost while
using the outsourcing process.
 Lack of customer focus: It is important to note that a outsourced vendor may serve a
number of organisations at a time (Weidenbaum, 2015). In such case, the vendor may
lack in completely focusing on a particular company’s task.
4.5 Human Resource Outsourcing (HRO)
4.5.1 Growth of HR Outsourcing
In order to enhance operational efficiency, streamline activities, and reduce the
management and administrative costs, HR outsourcing has become the latest trend to be followed
by the most number of international (Mutwil, 2016). Driven by the continuous growing demand
from the global MNEs and SMEs, the global Human Resource Outsourcing industry is estimated
to achieve US$53.9 billion by 2020 (Strategyr.com, 2016). In terms of markets, Asia-Pacific can
be given the highest rank as the HRO market is expected to grow at a CAGR of 8.1 percent

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(Strategyr.com, 2016). Comprehensively, the growing awareness among the modern business
firms and diversified business model has influenced the overall growth of HR outsourcing, to say
the least.
4.5.2 Advantages and Disadvantages of HR Outsourcing
There are several costs and benefits of Human resource outsourcing to an organisation.
Some of the direct costs may include loss of time spend to identify which HR activity need to be
outsources (Anderson, 2015). Additionally, the time spent in selection and maintenance of the
contract with the outsourcing vendors also lead to loss of time and effort. Furthermore, there are
several other costs involved with the outsourcing of HR activities such as training costs,
travelling costs, supply costs, and procurement of new software or equipment (Mitchell and
James, 2017). However, there are certain benefits of outsourcing the HR activities that include
operational efficiencies, lesser effort of the personnel, and access to latest technologies (Mutwil,
2016).
4.5.3 Types of HR activities Outsourced
According to Glaister (2013), there are several HR activities that can be outsourced to
external vendors. The list of HR activities that can be outsourced is presented herein below:
 Payroll, salary and compensation survey
 Recruitment and selection
 Coaching and mentoring
 Training and development
 Benefit design and administration
 Employee relations

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 Performance management
 Employee communication
 Corporate relocation
 Employee assistance programme
 Organisational development and design
4.5.4 Reason for HR Outsourcing
According to Sim (2010), several empirical studies have proved that HR outsourcing
trend is beneficial for the organisations. However, the HR outsourcing is not just limited to
transactional HR activities such as benefits management, records management and payroll
administration, but also include strategic and transformational activities such as recruitment and
selection, manpower planning and training programs (Sim, 2010). The primary reason for
outsourcing HR activities is to minimise the cost of HR department (Saxena and Bharadwaj,
2009). Furthermore, HR activities are outsourced to improve the overall performance of the HR
department and customer service quality of the firm (Retová and Pólya, 2011). Hence, in the
recent times, HR activities are mainly outsourced to external vendors in order to improve the
organisational efficiency and save the cost of the firm to be competitive in the market.
4.6 Literature Gap
It is important to note that most of the literature on business function outsourcing
primarily focuses on the benefits of the process. For instances, the risk associated with the
outsourcing of business functions such as information technology, HRM activities and other
processes are not researched through in-depth analysis (Galanaki and Papalexandris, 2017).
Furthermore, it can be seen some of the literatures have presented various risk associated with
the outsourcing of business function for the organisation and lacked in presenting the negative

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impacts of global outsourcing on economic health of the country (LI, 2017). Hence, there is a
scope of identifying the economic impacts of business function outsourcing on the financial
stability of the home country.
5. Conclusion
By considering the above analysis, it can be seen that global outsourcing of business
function has become a major tool for the multinational organisations to improve their efficiency
and seek sustainable growth in the market. Furthermore, there are several advantages and
disadvantages of business function outsourcing that must be considered while implementing the
process in the life real scenario. However, the literature lacks in presenting the economic impacts
of business function outsourcing that provides a scope for research in the future. Conclusively,
the researcher can focus on identifying the economic advantages and disadvantages of the global
outsourcing process in order to gain better understanding of the chosen field.

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