13 Advantages and Disadvantages of Outsourcing Business Functions

This report provides a comprehensive analysis of outsourcing business functions, exploring both the advantages and disadvantages. It begins with an introduction to outsourcing, defining its practice and highlighting its benefits such as cost reduction, professional engagement, and time efficiency. The literature review delves into the objectives and scope of outsourcing, including IT-enabled services, financial services, and customer service. The core of the report focuses on the advantages, such as cost savings through economies of scale, risk sharing, and the ability to minimize variations in employee count, along with the development of internal staff. It also addresses the disadvantages, including potential loss of control, quality concerns, and the importance of careful contract management. The report emphasizes the need for strategic decision-making in outsourcing to ensure positive outcomes for business performance and concludes with a balanced view of the practice.

ADVANTAGES AND DISADVANTAGES OF OUTSOURCING BUISNESS FUNCTIONS
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TABLE OF CONTENTS
INTRODUCTION.................................................................................................................................3
LITERATURE REVIEW......................................................................................................................4
OBJECTIVES OF OUTSOURCING................................................................................................4
SCOPE OF OUTSOURCING...........................................................................................................4
ADVANTAGES AND DISADVANTAGES OF OUTSOURCING FUNCTIONS..........................5
CONCLUSION...................................................................................................................................10
REFERENCES....................................................................................................................................11
ADVANTAGES AND DISADVANTAGES OF OUTSOURCING BUISNESS FUNCTIONS

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INTRODUCTION
Outsourcing refers to the practice in which service is outsourced in an organisation to provide
it with specialized work along with cost reduction. In business there are several works which
are not possible to be done in house and can prove to be expensive. It is then outsourced in
which the task or manufacturing part is performed by others according to the conditions made
by the outsourcing company. In recent years many companies have adopted the practice of
outsourcing instead of making partnership with others and save themselves from sharing
profits and also keep ownership to themselves. Outsourcing possess qualities like cost
reduction, professionals engagement with the firm, time efficiency and quality improvement.
(Riley, 2010) Large companies like Construction Company, Big manufacturing units,
shipping companies, Big Hotels, etc. are few examples which outsources large part of their
function which also provides employment to the people indirectly along with creating
efficiency within the organisation. Smaller companies mostly outsources to refrain
themselves from heavy expenditure and to involve experts without the need for hiring full
time staff. There are many advantages reviewed in literature by researchers which are taken
into consideration while outsourcing business function. But at the same time few
disadvantages are also been observed like loss of control, risk of quality maintain, complex
nature and time consuming. The decision regarding outsourcing must be taken carefully so
that it gives positive effect to the business.
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LITERATURE REVIEW
OBJECTIVES OF OUTSOURCING
In order to improve capabilities and bring proficiency in its processes, organisations look for
ways in which the work can be done in a superior way along with minimum expenses.
Outsourcing is the aid which provides specialised service and enables enhanced business
performance at lower cost. Since the service provider’s deals with many companies at a same
time, they become specialists in their work and in analysing the process required in the firm
and thus deliver the agreed work efficiently. The reasons behind outsourcing can depend on
factors like improvement in efficiency, business optimization and strategic transformation.
Improvement in efficiency is a lengthy process and requires change in working of
organisation but is very useful in providing optimum utilization of resources with the help of
outsourced professional advisors. (Anon., 2013) Strategic transformation focuses on
benefiting from external expertise in which change is made strategically to change the present
working criteria of the business. It not only involves in sharing risks with outsourcing firms,
but also involves experts as partners. (Pine, 2017)
SCOPE OF OUTSOURCING
The purpose or scope of outsourcing is various depending on the nature of the business and
work required. The commonly outsourced service which has gain much popularity is IT
enabled service or BPO. There are many organisations which provide financial services like
Merchant banking, Underwriting, Payroll preparation, Account maintenance etc.
Advertisement is another popular service which is outsourced to advertising agencies for
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designing and building up their service or product for gaining customer attraction and create
awareness. (Anon., 2011)Organisations whether big or small are largely depended on currier
service to deliver large quantity of parcels and hence require outsourcing courier service.
Customer services like telex-calling services, messaging, sending emails, providing after
sales service are related to customer services provided to the organisations which is also one
of the most important function outsourced by big companies. (Crosby, 2017) Along with it
there are many services which are outsourced in business like transport service, labour, web
designing, software designing, legal consultants, managerial experts, etc.
ADVANTAGES AND DISADVANTAGES OF OUTSOURCING FUNCTIONS
The reasons for outsourcing function in business are many which make it as an inevitable part
of business, although consideration of risks involved after its implementation is also very
essential. To further look about advantages and disadvantages outsourcing function involves,
a brief literature review has been made and evaluated accordingly. With its increasing
demand and requirement, it has become a common topic for discussion among researchers.
An outsourcing function may have optimistic or pessimistic impacts on business
performance. In both cases the overall impact depends on the ways the company handles it
and support it receives from the management or owners. (Meehan, 2017) For example, before
signing contract, if the company does not go through the papers and blindly believes on the
projected benefits, the results might get appalling and can result in drawback. Similarly if the
outsourcing project goes fine, it can improve the business performance by allowing company
to centre its attention on other important work which cannot be outsourced or requires
confidential involvement. By allowing experts to the firm, it brings in work efficiency along
with cost reduction. While if the outsourcing project goes incorrect, the work might become
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out of control and can even led to its termination. The effects are sometimes such bad that
many companies have to face severe debts and even result in its shutting down. (Patricia,
2014)
External agencies provides services in many companies which otherwise may not be possible
for them to maintain by their own. Outsourcing saves money by providing economy of scale
as cost per unit goes down when volume increases. For example, in manufacturing firm’s
large investments is required to purchase manufacturing machines for production of spare
parts or parts that needs special machines. If an external vendor provides the similar product
in lower cost, the requirement to make additional investment will not be essential any more.
With the help of outsourcing manufacturing work to external agency, efficiency and fast
availability of products is possible without investing further capital. Economies of scale must
be measured before making decisions of outsourcing as sometimes it may not exist i.e. if the
unit cost does not drop; the reason behind outsourcing is not accomplished and should be
eliminated from the firm on manufacturing part. (Slowik, 2016) Secondly, outsourcing helps
in sharing risks in corporate with the help of diversification in portfolio. In big companies
investment in a particular product or service makes company portfolio smaller and if the
market goes down, the effect will be led entirely upon it. By outsourcing other company’s
brands and products, the chances of fallback becomes less as if market for specific product is
diminishing, the rest of the portfolio can still be on high. Thus by outsourcing products from
different companies, the overall risk is shared and the risk of investment in single stock is
taken care off. (Anon., 2017) For example, in biotechnology industry, the investors
outsources manufacturing of drugs which are still needed to be approved but required to be
produced in order to gain approval. The manufacturing firms are outsourced by bio-tech firms
during clinical trials and drug development process. Thus by outsourcing manufacturing part,
the cost of setting new infrastructure is avoided and if the experimented product is of no use,
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the risk is shared across other pharmaceutical firms in which the experiments were made.
(Horacio Soriano-Meier, 2012) On the other hand it is also necessary to look into legal
contracts and terms of agreement while making contracts with other experts. At the time of
financial hit, if the outsourced company does not come up, the reason behind outsourcing can
become disadvantageous and unpleasant. (Sen, 2009)
Another important advantage of outsourcing is to minimise variation in employees count
during peak season of business. In every business there are times when it faces peak or low
throughout the year. By outsourcing staff, expense of hiring full time staff is saved and if
availability during peak season is met by outsourcing agencies the company might handle the
peak season with ease. If the peaks are continuous, hiring full time can prove to be more
economical while if they are occasional, contractors can save money even if cost per person
is higher. (Meyer, 2005) Outsourcing can help in development of internal staff also if
managed strategically. For example, less interesting or menial works and works related life
risks can be outsourced to contractors which liberate internal staff to pursue new and
developed opportunity. But the contractors who are outsourced shall never be given new
work which is growth oriented and internal staff with obsolete works. It will result in denial
of employee learning opportunities and make the firm depended on the outsourced agency.
The outcome can also effect in companies overall professional growth if outsourced without
looking into the negative impacts of external agencies. There are many training centres who
can train the present employees with fresh and innovative ideas. Thus by outsourcing training
methods, efficiency among employees is increased along with procuring new ideas.
(Kahrović, 2015)
Outsourcing is also adopted by business owners to make them free from chorus works i.e.
work which does not involve any risk or can be performed by subordinates. It allows
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organisations focus on their core business and improve their expertise. (Kremic, 2006) For
example, in a grocery shop, if the owner wants to add florist department, it can outsource that
division to florist or an expert of that field. If the owner focuses on its new part the main
division may get hampered and can lose the core business i.e. grocery, therefore outsourcing
becomes positive approach for the owner and helpful in expanding its operation. By
outsourcing product or service, chances of getting improved quality becomes high as the
agencies mostly use specialised process. Like cleaning service required in hospitals, hotels,
clinics, universities, etc. needs special treatments and by outsourcing cleaning function,
hiring full time staff along with purchasing special cleaning equipments is saved. Thus
trained experts help in getting quality control and avoid inconvenience during sanitary
inspections. While there are few examples also which shows disadvantage in this area as
outsourcing agencies sometimes lack quality control when they become more focussed on
profit making. Large agencies which outsource its service to many companies simultaneously
are more prone to not providing superiority product or service and lead the company lose
quality control. (Reddy, 2016)
In literature, risk related to outsourcing is not limited to quality control only but also lack of
methodology causes outsourcing failures. There are chances that the suppliers perform
superior work in the beginning of agreement to make good impression, but gradually losses
its quality check. If the management does not monitor and manage the outsourcing functions
precisely, the result can again be negative. (Kahrović, 2015) This problem usually happens if
the management is not trained and lacks skill in it which makes future calculation mistakes
regarding outcomes of outsourcing. The management or the outsourcer also requires gaining
knowledge about present market so that it outsources current and latest technology or product
rather than outdated one. (Anon., 2013) Usually cost curtail tendency makes the owner or
management to make wrong decisions as they get attracted easily without looking into its
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hidden costs. They get cheated by the agencies hidden costs which are not discussed properly
at the time of signing contracts and thus overall expense becomes higher than expected.
(Stevenson, 2009) For example, in a computer manufacturing company, large number of
parts is manufactured, few parts are outsourced so that requirement for special manufacturing
machines is avoided and hence is outsourced. If the outsourcing agency provides with the
parts in lower costs but the quality is not good, the reason behind outsourcing is not fulfilled.
If the quality requirement is clearly mentioned in the agreement, the outsourcing company
can charge the agency for breach of agreement. On the other hand if the agreement does not
contain condition regarding quality check, the outsourcing company may face lack of quality
control along with getting cheated on legal part. (Mukherjee, 2014)
While making a research on outsourcing, it is seen that if an organisation wants to stay ahead
in competitions, it requires focusing on core competencies along with adopting latest
technologies and methods which is possible vastly by outsourcing. Cost reducing factors
along with getting work done faster is also an important advantage outsourcing possesses.
With the help of professionals and experts, outsourcing helps in gaining innovative
development which otherwise would have been limited in organisations. On the other hand,
disadvantages of implementing professional assistance can risk safeguarding of important
data and expose company’s secrets and formulas. (Anon., 2017) Loosing customer morale is
also probable as customers may lose faith in the company’s capability and sometimes
outsourcing from foreign countries is unaccepted by them. (Riggins, 2017)
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CONCLUSION
On concluding note it can be said that outsourcing is a strategy utilised by organisations to
fulfil their requirement in areas where they lack expertise, by contracting their business
functions to external agencies. With growing in demand and necessity, outsourcing has
become core in business operations which is being taken up by many firms to reduce costs,
risk, operational costs, etc. Although there are few business areas in which outsourcing is not
accepted due to traditional problems or poor management. Vastly, the advantages of
outsourcing confirm its needs in present conditions and reasons for its implementation in
business. If outsourced with awareness, it can prove to be better than performing in house
function along with scope of expansion (Kremic, 2006). The future of outsourcing seems to
be intense and positive as clear indication in broadening confidence among outsourcing
companies can be seen along with its acceptance whether in strategic area or work
performance part. Thus after analysing both advantages and disadvantages it can be said that
outsourcing can prove advantageous only if done with proper management and planning
otherwise can prove to be disadvantageous.
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REFERENCES
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