Outsourcing Strategies: Models, Benefits, and Pricing Analysis Report

This report provides a comprehensive overview of outsourcing, a business process where organizations contract external parties for services. It explores the reasons behind outsourcing, including cost reduction, efficiency improvements, and access to specialized expertise. The report details various outsourcing models such as time and materials, fixed pricing, cost-plus, dedicated team, unit pricing, gain-sharing, and shared risk/reward, explaining their structures and applications. Furthermore, it highlights the benefits of outsourcing, such as reduced expenses, increased efficiency, access to skilled expertise, and improved service delivery, while also touching upon the role of outsourcing in core competencies and risk management. The report also includes figures to illustrate different pricing models.

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Outsourcing
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Outsourcing
It is a business process or activity in which an organization or firm hires another
company or individual to conducts activities or perform duties or even provide services that are
generally performed by the staff of that organization. In simple terms, it is obtaining goods or
services by contract from an external party or supplier. Therefore, as an agreement one company
gains the liberty of hiring another and gives it the responsibility of an existing activity which
could be done internally (Chen and Xiao 2015, 250). It sometimes entails transferring all the
employees as well as assets from one firm to the other. The outside business, in this case, is
known as the third party or service supplier. This company is responsible for arranging the duties
or services for the hiring organization’s own installations at internal places for their own
employees or rather computer systems (McIvor 2017, 60). In this respect, outsourcing firm tasks
are sometimes referred to as outsourcing contracting business activities or processes.
Reasons for Outsourcing
The primary reasons as to why organization outsources are gaining momentum, lowering
expenses as well as improving efficiencies. Companies which are using outsourcing methods to
enhance their efficiencies or rather reduce their expenses depends primarily on the third-party
suppliers in order to execute all the outsourcing duties for them to achieve all of these
advantages which it is expecting (Chen and Xiao 2015, 253). The third-party company thus
primarily focuses on a specific assignment. It is an advantage since it has the ability to do better,
quicker and cheaper as compared to the hiring business. It is because of this reason that made
outsourcing to gain popularity among organizations who are seeking services from third party
companies (Su, Levina, and Ross 2016, 81). As a result, company seek all of their services
within their specific businesses for them to focus on their resources precisely on their primary

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competencies which allows them to meet the competitive advantage that came with globalization
in the business world.
Some of the factors which have led an increasing trend of outsourcing include the lack of
the specific expertise or labor in some sections of the business process hence the needs to seek
that expertise outside the premises of the business. Sometimes there is availability of cheap labor
without compromise on the quality of output. This makes most of the huge organization to
outsource with the aim of reducing their operation cost and gaining on profits (McIvor 2017, 65).
The ability as well as feasibility of other companies to focus on the specific business activity
while giving the outsourcing companies the chance to concentrate on the crucial business
process. These among other factors have typically contributed to most of the existing
outsourcing partnership across various locations in the universe (Chen and Xiao 2015, 256). For
instance, expertise in communication capabilities, favorable financial packages, and technical
expertise are some of the advantages of outsourcing to nations such as India.
Organization in these cases often outsource with the primary objective of reducing
expenses, increasing momentum, and improving the efficiencies. Firms that choose to outsource
depend on the relative skills of the third party suppliers of skills, services or products to perform
the outsourced duties in order for the contracting firm to obtain these advantages (Williams and
Durst 2019, 465). The basic concept is inclined on the fact that since the third party suppliers are
purely focused on doing that specific business activity, which is their area of specialization, they
can perform it better, quicker as well as cheaper as compared to the hiring company (Su, Levina,
and Ross 2016, 81; Zhang, Liu, Tan, Jiang, and Zhu 2018, 430). It is because of such reasons
that businesses choose to engage in outsourcing activities hence supporting the outsourcing
within their businesses model in order to get the chance to focus all of their resources to the

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more specific core competencies which are a direct path to attaining competitive market
advantage.
Outsourcing Models and Pricing
The most appropriate model for outsourcing services is determined by the type of
services offered by the third party. In the traditional sense of things, outsourcing contracts were
billed on the basis of material, time or fixed prices (Oshri, Kotlarsky, and Willcocks 2015).
However, some of the outsourcing services have simply matured from the fundamental needs as
well as services to more complex partnership that are capable of generating transformation and
innovation, along with contractual approaches which have evolved to entail managed services
together with outcome-based arrangements. Some of the most common structure of outsourcing
engagement is shown below.
Fig.1 sources from (Alina 2016).
Time and Materials
As suggested by the name the contracting company will pay the provider basing the
contract on time as well as the material used by the third-party firm to complete work. In

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history, this approach was generally used in long term application development along with
maintenance contracts between two companies (Oshri, Kotlarsky, and Willcocks 2015). For this
model to be appropriate and effective the situation must be where the scope, as well as
specifications, are hard to estimate or should evolve rapidly.
Fig.2 sources from (Alina 2016)
Fixed Pricing
This model is based on the fact that the deal price has been determined at the beginning
of the agreement. The model works well when there are stable as well as clear requirements,
scope along with objective. When a company pays a fixed price for outsourcing services which
can be appealing since it makes the costs more predictable. The model works out perfectly, but
when the pricing of the market goes down over time as is always the case, a fixed price stays
fixed hence benefiting the vendor (Rost 2016). However, sometimes, the fixed pricing can be
hard on the vendor that has to meet all service levels at a given price despite the number of
resources those services might need. For the cost-plus model, the contract is termed in such a
way that the client has to pay the supplier for an actual cost of the services plus a predetermined

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percentage for the profit (Rost 2016; Oshri, Kotlarsky, and Willcocks 2015). However, this
pricing plan does not give room for flexibility as business objective or technologies changes and
provides little incentives for the suppliers to effectively perform.
Fig. 3 Showa fixed price model. sources from (Alina 2016)
Dedicated Team or Performance-based Pricing
In this outsourcing model, the buyers offer a financial incentive which encourages the
suppliers to perform at an optimum rate. These types of pricing plan, however, require the
suppliers to be penalized in case they provide unsatisfactory services (Sardar, Lee, and Memon
2016, 234). Thus, performance-based pricing is used in conjunction with time-and-materials or
even fixed price. This approach is beneficial when the clients are in a position to identify
specific investments then the vendor could make to deliver level of performance (Oshri,
Kotlarsky, and Willcocks 2015). The main aim is to ensure that all of the delivered outcomes
create incremental business value for the customer. If this is not the case, then they might end up
rewarding the vendors for work they could be doing.

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Fig.4 sources from (Alina 2016)
Unit Pricing
The vendor in this situation would determine a specific rate for a given level of service.
The client will, therefore, be forced to pay to base on the usage of the services. For instance, if
the business is outsourcing 20 desktops to be maintained the outsourcing company might be
forced to pay a fixed amount of money per each unit of desktops. This model has been
considered effective since it can deliver productivity gains from the first day while making it
easier to make analysis as well as adjustment of the component cost (Oshri, Kotlarsky, and
Willcocks 2015). Nonetheless, it needs an accurate estimate of the demand volume as well as a
commitment for certain minimum transaction volume.
Gain-sharing
In the gain-sharing outsourcing model, the pricing is done on the basis of the value
delivered by the supplier past its typical responsibilities while deriving it from its expertise as
well as contribution. For instance, an automobile manufacturer might be able to pay the services
offered based on the number of cars produced. The customer and vendor all have a role to play

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in the game (Oshri, Kotlarsky, and Willcocks 2015). Both their monies are at risk while each
party stands to gain a certain percentage of profits in case the performance of the supplier is
optimum and could meet the objectives of the buyer.
Shared Risk/Reward
In this setting, the providers, as well as the customer, jointly provide funds for the
creation or development of the new solutions, products and services with the provider sharing the
rewards for a definite period of time. Such a model of outsourcing encourages the providers to
develop ideas that improve the business as well as spread the financial risks between the two
participating parties (Oshri, Kotlarsky, and Willcocks 2015). It eradicates some of the risks that
could be incurred by the provider by sharing them with the vendor. However, the primary
downfall is that it needs a higher level of governance to be implemented effectively.
Benefits of Outsourcing
All the firms that outsource seek to take advantages by reducing expenses as well as
enhancing efficiencies. It is through outsourcing that most of the organization manages to free
up resources such as staff and facilities which could be redirected to other projects which would
otherwise have higher yields returns for the organization as compared to the outsourced services
(Dinu 2015, 103). Some companies may otherwise use outsourcing as a method of streamlining
manufacturing since outsourced duties might be performed faster and efficiently by third party
organizations.
It is through outsourcing that companies get access to skilled expertise. In fact, this is
one of the main reasons as to why businesses seek to outsource some of their tasks. Sometimes
companies get a chance to access skilled expertise. It allows the contracting company to focus
on the core missions, which is to provide a high-quality product as well as services for their

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esteemed customer (Dinu 2015, 103). In other ways, outsourcing allows the contracting company
to focus on core activities. With time the workload of a company increases with increase of
noncore functions along with the quality of the core activities having to suffer as the business
grows (Zhu 2016, 130). Therefore, outsourcing some of the activities to a third party gives the
company an edge hence allowing them to focus all the key resources on the primary activities of
the business.
Outsourcing plays a role in increasing in-house efficiency. After the tasks have been
allocated to the outsourcing partner, the contracted company shares the workload of the in-house
employees (Dinu 2015, 103). This step allows the development of an internal task force and uses
theme effectively and efficiently. Furthermore, the process is a better form of risk management.
Through outsourcing the company is in a position to share any related risks with the outsourcing
partners (Petkov, D. and Petkova 2017, 21). This process reduces the risk of the contracting
company. Apart from risk management, outsourcing improves services delivery to the client.
The outsourcing partners are in a position to produce quality deliverables faster hence increasing
the turnaround time to the customers (Lahiri 2016, 470). Therefore, the company will enjoy on-
time deliveries as well as high-quality services to the customers hence benefiting from increased
customer satisfaction.
Outsourcing is a mode of cutting costs and increasing savings for the company. All of
the advantage listed above are accompanies with reduced cost and huge savings. Outsourcing
allows a company to enjoy cheap labor with quality outputs. Above all, it gives the contracting
company an edge in staffing flexibility (Dinu 2015, 103). Outsourcing independent task enables
the business to maintain financial flexibility at a time where there is uncertainty in demand. The
business can easily scale up or even down in a comfortable way. At a lower cost, offshore

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outsourcing gives the company a chance of operating the business even during offseason and
holidays (Bruccoleri, Perrone, Mazzola, and Handfield 2019, 4211). The benefit of outsourcing
helps the firm to gain a competitive advantage in the market. The company increases
productivity while managing in-house resources in an intelligent manner. It helps to pass the
competitors who do not yet realize the benefits of outsourcing.
Limitation of Outsourcing
It is not always merry with outsourcing. Outsourcing companies are forced to handle
their agreements while having continuous interaction with the third party suppliers in a proper
way to guarantee success. Some companies might discover the funds which have been dedicated
to handling such interactions compete with the resources which are dedicated to the outsourced
function. There may be negating factors of the advantages sought by outsourcing (Dutta, Gwebu,
and Wang 2017, 457; Nero 2018). Organizations might understand they are losing control over
the elements of duties, or rather services outsourced. For instance, if an organization outsources
the center function it may end up losing the control over quality of customer services provided.
Despite the fact that the contract offered by the company indicates certain quality measures. The
outsourcing company might face increased security hazards as they must exchange proprietary
information (Mathew 2017, 600). Third-party suppliers may misuse or mishandle the data
provided to them (Dutta, Gwebu, and Wang 2017, 459). There might be lack of communication
and cooperating of the internal staff with staffs from the third party company. This might be a
prevalent situation in case the outsourced company works overseas.
It is difficult to implement outsourcing with a higher failure rate of outsourcing
relationships. At the center of the issue, there is an inherent conflict of interest in most of the
outsourcing arrangement. The clients would seek better services which are often at lowers costs

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as it would do the work itself. The vendor on the other is in the business to make profit. The
tension, in this case, must be managed to ensure a successful outcome for vendors as well as
client (Dutta, Gwebu, and Wang 2017, 465). The other cause of outsourcing failure is the
company’s rush to outsource in absence of valid business case. The mistake is pursuing quick
fix for cost-cutting maneuver instead of investment designed to increase capabilities,
profitability, as well as increase agility. The advantages might more likely disappoint.
Generally, the risks increase with the boundaries created between clients as well as vendors
responsibilities blurring the scope of responsibilities expand (Dutta, Gwebu, and Wang 2017,
469). The relationship will only succeed if both the client and the vendor attain the expected
benefits.
Outsourced Activities
Outsourcing cannot be done on all activities. Some of the activities, which could be used
for virtual assistants as well as administrative services which could generally handle the
scheduling, data entry, travel arrangements, typing as well as other small administrative duties
(Rashid 2016; González, Gascó, and Llopis 2016, 225). Most of the time, sales calls are based on
figures which means more calls translate to more sales. Many of the financial services which
include invoicing, bookkeeping as well as accounts payable and receivable along with financial
reporting, and analysis and planning can be handled by third-party accounting companies.
Non-Outsourced Activities
Some of the activities that should not be outsourced are discussed as follows. The
termination of leadership which entails the eradication of nonperforming personnel in the
company should never be outsourced (Gilley, Rasheed, and Al-Shammari 2017, 48; Mishra,
Kumar, Sharma, and Dubey 2018, 40). It is only appropriate to use external guidance as well as

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counsel for evaluating along with outplacement. The development of the staff-Best practices can
assist, but internal managers understand their staff as compared to external one. The future of the
employees lies with the manager hence essential for the internal leaders to take time to develop
their professions. To sustain growth the company should implement excellence training classes
as well as internet teachings to be part of the growth (Gylling, Heikkilä, Jussila, and Saarinen
2015, 98). Retention is another activity that cannot be outsourced. As the industry gets better
and fresh jobs created. The company should be in a position to increase its retention capability
by preventing its employees from jumping ship. Therefore, employee turnover is in the hands of
the in-house management and must be priority. Finally, succession planning should be done by
the in-house management teams which own the vision of the company (Globerman and Vining
2017, 30). An external party might be useful, but the terms of promotion of senior management
should be done by the company and not the third party.
Reason for Controlling Outsourced Activities
It is necessary to periodically assess the outsourced job when the project is going on.
These reports, they might be helpful to the organization in terms of offering favorable evidence
of good entrepreneurial leadership and also helpful in inspection purposes (Globerman and
Vining 2017, 33). As a leader or the one who requested the service, you must be in control of the
whole process. You have the powers to request the contractor to take remedial action where you
feel the work was not well done as per the company’s expectations. This is to avoid more failures
in the business market (Gunasekaran, Irani, Choy, Filippi, and Papadopoulos 2015, 165;
Montaseb, Ragheb, Ragab, and Elsamadicy 2018, 274). It is important to document in case there
is an application for possible sanctions and remedial action. This is to show that the recruiting
company has used its powers to deal with this matter (Globerman and Vining 2017, 35). A final

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assessment is also done to the outsources; this is to evaluate the quality of job done and the
general results achieved by the contractor during his job.
Conclusion
In conclusion, companies use this outsourcing service for efficient running of the
company and meet the market competition. The business subcontracts their company task to
other outside companies due to absence of knowledge. Outsourcing is gaining a lot of popularity
in business around the globe in these recent days. Around 70 percent business in Europe has
adapted to these services. They use it to seek money infusion, operating expenses and reducing
risk. However, due to numerous ethical concerns, some of the businesses prefer using the most
expensive path since the price difference might be deceptive as the variation will occur on the
original cost. Compromise in client information, as well as reliability of the vendors, are among
the primary ethical concerns which businesses tend to face more specifically in agreements for
offshore outsourcing. In this case, outsourcing cannot be a correct instrument for permanent or
every work, but it is effective for correct job. There are a few of the traditional and typical
outsourcing issues which include poor planning as well as outcomes lower than the expected
value. Nonetheless there are alternatives to some of these issues that face players outsourcing.
Despite all the problems which might be encountered outsourcing seems to have a positive and
bright future.

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