Outsourcing Business Functions: Advantages & Disadvantages Report

This report provides a comprehensive overview of outsourcing business functions, exploring both its advantages and disadvantages. It defines outsourcing, differentiating between internal and external types, and discusses its role in contemporary business to reduce costs and enhance focus on core competencies. The report outlines the project objective, scope, and reviews relevant literature, detailing the advantages such as cost savings, improved performance, and access to specialized personnel. It also highlights the disadvantages, including loss of managerial control and confidentiality concerns. The report further examines theoretical frameworks like resource-based view, core competency, and transaction cost theories, providing a balanced perspective on the strategic implications of outsourcing decisions. The report concludes by emphasizing the importance of considering various factors and potential risks when making outsourcing decisions to maximize benefits and minimize drawbacks.

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ADVANTAGES AND DISADVANTAGES OF OUTSOURCING BUSINESS FUNCTIONS
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Introduction
Outsources is a common practice in contemporary business, both private and public companies
use the outsourcing strategy to provide qualified and competitive product to satisfy the consumer
needs in the market (Dolgui & Proth 2013, p. 6774). Globalization has enabled companies not to
produce everything and they can outsource some products and service while concentrating on the
core business of the organization. The process of outsourcing aims at reducing the overall cost of
maintaining productivity in the business. It also enables companies to concentrate on the core
functions of the business. Outsourcing has been identified as one of the most effective ways to
cut down cost (Lacity, Khan, and Yan 2016, p. 284). The process also has some disadvantages.
Outsourcing was adopted as part of the business unit to help companies remain competitive in
the today’s market. It is also a form of manpower management in an organization. The concept
of outsourcing has been adopted in many countries in the world. This paper reviews the
advantages and disadvantages of the outsourcing processes in the business functions.
Project Objective
For many decades, business function as major aspect that has played essential role in
determining the failure or success of small and large-scale businesses. To outline the advantages
and disadvantages of Outsourcing Business Functions. The results will help in advising business
owners and organizations to have a clear understanding of the best strategies that needs to be
adopted in the process of outsourcing business functions.

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Project Scope
The paper focuses on the advantages and disadvantages of outsourcing business functions. It is a
general overview of the companies; it has some of the theories and decision-making process of
outsourcing.
Literature review
Advantages and disadvantages of outsourcing business functions
Definition and types of outsourcing
Companies source out work to cut cost as other suppliers’ are willing to do the work at a
cheaper, faster and better rate. (Dolgui & Proth 2013, p. 6705) refers to outsourcing as the
allocation of the risk responsibility for operating a function or service to another entity.
Outsourcing refers to assigning work, duties, responsibilities and decision-making rights to a
third party. Therefore outsourcing can be defined as the act of delegating job perfomance to an
entity who can perform the work better, cheap and faster (Dolgui & Proth 2013, p. 6705).
Outsourcing occurs when a company transfers some of its functions or duties to another supplier.
There are two types of outsourcing that is internal outsourcing and external outsourcing. Internal
outsourcing refers to reapportioning of duties in the business arrangement aiming at saving the
control over the organization’s performance. External outsourcing on the other hand refers to the
delegation of duties of separate or interrelated functions to a third party. Outsourcing can be
divided into partial or full outsourcing depending on the risk of the functions involved (Dekkers,
R. (2010, p. 4092). Partial outsourcing refers to the allocation of certain functions to an
outsourcer while the company itself performs set functions or duties. The company takes some of

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the responsibilities. Fully outsourcing refers to assigning the full responsibility of function
performance to an outsourcer or supplier’. The full responsibilities of a function are delegated to
a third party. Companies outsource additional functions which are not their core business
functions (Oshri, Henfridsson & Kotlarsky 2018, p. 4).
Outsourcing is pursued by organizations to increase effectiveness in operations and productivity.
Most companies outsource services to survive the dynamic market and make profits.
Outsourcing is mainly done to empower business focus, mitigate risks factors and build a
sustainable competitive benfits in the market and free up resources for the core business
purposes. Dolgui & Proth (2013, p. 6705) state that outsourcing has implications on day to day
management and performance of the organization and companies should outsource diligently as
such decisions may affect the cost and structures of the company. Also long term competitive
situations can also influence the nature of risks that the organization must control. Lacity, Khan,
and Yan (2016, p. 284) discouraged long-term relationships between the supplier and companies
when it comes to outsourcing services. It is important for companies to have a well outlined
conceptual framework for when making the outsourcing decision and settling on a supplier.
The global economic factors such as long-term business productivity, cost projections, data
security, employment stability, cultural differences and the capability of the growth of the
business are some of the factors to be considered when making outsourcing decision. These
factors are important as the suppliers can choose where they want to perform the work to ensure
maximum profitability (Oshri, Henfridsson & Kotlarsky 2018, p.5 ).
For organizations to make effective decisions on outsourcing, it is necessary for them to identify
their needs and understand why outsourcing is the better option for them or not. Some

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organizations outsource their core works while other outsources the secondary values. Most
organizations understand outsourcing as the general idea of saving resources and allow
companies to forecast more on its core competencies (Khan et al 2016, p. 286). The outsourcing
decision making is critical to the whole process. The most significant criteria when selecting a
supplier are performance history, quality, cost and location. For cost, an analysis has to be done
to determine all the internal and external costs for an effective decision. The organization also
has to analyze to understand the impact of outsourcing services or goods from another company.
For a company to be successful or maximize on outsourcing, they must have clear objectives and
goals to be achieved for the outsourcing activities. The company also has to research and
understand the impact of outsourcing on the activity on the organizations’ goals or objectives. To
minimize on risks of exposure, the company follows the following steps;
i. Assess the strategic risk and rationale for outsourcing
ii. Conduct a due diligence process where they ensure the credibility of the supplier, if
the supplier is competent, relevant knowledge and expertise, honest and financially
sound.
iii. Sign a contract with duration and terms indicated.
iv. Change management as risks are likely to increase
v. Assigning individuals to manage the contract and do a periodic review and give
feedback
vi. Prepare for a new arrangement with minimal disruption to the core business.

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Theories Related to Outsourcing
According to Girth, Hefetz, Johnston & Warner (2012, p. 889) there are different frameworks in
various theoretical approaches that explain the outsourcing process. The three approaches of
outsourcing process include;
 Resource-based View theory
 Core Competency approach
 Transaction Cost theory
The resource-based view in outsourcing refers to an organization that lack of valuable,
exceptional and organized resources and capabilities seek an external supplier to overcome its
shortcomings or weaknesses. According to Weerakkody and Irani (2010, p 620), the resource-
based view outsourcing is frequently used in the framework of decision making and the selection
of a suitable vendor. Companies use the most cost-effective way to maintain and sustain a unique
product and its competitive advantage in the market. The core competency theory refers to the
organization core functions kept in the house while other additional functions not considered
core can be considered for outsourcing (Dekkers 2010, p. 4092)
Another theory is the core competency which refers to a cluster of features that an organization
possesses allowing it to achieve its competitive advantage in the market. Organizations focus on
its core competencies for sustainable competitive advantage in the market and can assign
functions and duties considered not core to other firms at a low cost. The company’s main goal
and objective is the core business. Another theory is the transactional cost theory which
facilitates the analysis of comparative costs of planning, adapting and monitoring completion of
tasks under different governance structure. A transaction occurs when a product or service is

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conveyed across a separate technological interface. The decisions on transactions are based on
relative cost of transferable good or service (Yang, Wacker & Sheu2012, p. 469). Organizations
choose to outsource the service or goods depending on the cost of the transaction. When the
supplier offers a lower rate to the company, they choose to outsource the service or the products.
Most companies use the reduction in the cost of production and efficiency.
Pros and cons of Outsourcing
Pros of outsourcing
The most important aspects adopted as importance and advantages of business outsourcing are;
saving on cost, Focusing on core activities of the business, improving the performance of the
organization, flexibility in service offered and access to experience personnel. A company can
focus on its value proposition activities and increase its competitive positioning when they hand
over noncore activities to a qualified and competent third party. Cost saving is another
significant objective of outsourcing. A company can save on cost when they do not need the
service full time and only outsource when necessary. Outsourcing supporting roles allows the
organization to focus on the core business of the company. The ability to concentrate on the core
business of the company enables the company to remain competitive in the market as they do not
have other distraction activities taking up their time (Yang, Wacker & Sheu2012, p. 469).
When a certain resource is not needed by the organization full time or obtaining the resource
cannot be financially justified, the organization outsources the resource, and it helps in reducing
the overall cost. For example, for a small sized company, keeping technical expertise to provide

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the maintenance services needed occasionally, can be expensive hence the company can
outsource these services when needed.
Outsourcing also enables companies to get access to highly qualified personnel, which the
organization might not be able to afford on the payroll. They can take the advantage and exploit
the suppliers’ innovations, investments, and capabilities. Outsourcing companies can help an
organization achieve performance improvement. Through availability of different resources and
taking responsibilities for functions that do not add financial value to the organization. The
outsourced staffs or services provide the company with an opportunity to grow. With external
outsourcing, the quality of service or product outsourcing is expected to be high as they only
concentrate on a specific task. Many companies outsource due to flexibility. Suppliers of
outsourcing services are contacted due to their flexibility which reflects in the changing business
environment and how they cope.
Outsourcing also enables companies to share risk. The outsourced company must have the ability
to analyze risk and handle some of the responsibilities of the business process. Outsourcing also
enables faster delivery of goods. Work is outsourced to other companies or third parties who
specialize in the particular field and have the expertise needed to carry out some of the services.
It leads to completion of work faster, and delivery of quality work when well-coordinated (Yao,
Jiang, Young, & Talluri. 2010, p.312). Outsourcing also helps reduce costs such as the
recruitment and operational costs. It reduces the need to hire individuals in-house which saves
time and other costs related to recruitment are saved.

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Disadvantages of outsourcing.
The outsourcing concept also has some disadvantages. Loss of managerial control over
outsourced operations is one of the main disadvantages of outsourcing. Managing external
resources requires special skills such as process management, people skills, contract
management and power negotiation. Another disadvantage of outsourcing is lack of
confidentiality. Accompany outsourcing accounting services has to provide all he needed
information to the supplier, making it difficult to control the operations of the outsourced
services or goods. The auditing of outsourced services proves difficult as the confidentiality
cannot be kept. When a company allows outsourcing, chances of imitation products coming up
are high. Other investors pick the idea and start distributing the same products in the market.
The third disadvantage is the high expectation of receiving better services from the external
outsourcer than internal staff (Schoenherr, 2010, p.310) The outsourcer has to prove that they do
not have a bad influence on the goods and services produced as many companies might lose their
market position in case of any irregularities. When outsourcing services, the parties involved
signs an agreement on the kind of services to be offered, and when there is an additional service
needed, the company has to pay additional charges. Some of the outsourcers intentionally
exclude some costs to gain the upper hand when selecting the supplier to be used and add some
of these costs later on which are not covered in the contract.
When outsourcing some services, it is very difficult for the management to reallocate the existing
employees. The employees view the outsourcing process as a lay off system. It is difficult for
existing employees to be absorbed in the new system hence the company loses some of the skills
and existing workforce. Only few employees accept change and integrate in the new system. The
team moving to outsourced one goes through a lot of changes which may interrupt the

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company’s performance, and failure of the program may lead to the firing of some members of
the management team who came up with the outsourcing idea(Schoenherr, 2010, p.309).
According to a study done Wongleedee (2016, p. 42) when a wrong outsourcing partner is
chosen, problems such as delay in delivery time arises , the sub-standard quality output of goods,
a lot of defects and inappropriate categorization of responsibilities that might lead to loss of
customers to competitors. Mitigating these factors inside an organization is way easier than when
dealing with an outsourced service. The third party has different ways of handling problems
which might take a lot of time and resources.
According to Dekkers (2010, p.42) outsourcing is not customer focus oriented. Since the
outsourced vendors serve many companies and different organization at the same time, they
might not be much focused on your organization tasks. They try to perform their duties as
quickly as possible and move to the next client and sometimes not paying attention to the
customers’ needs (Wongleedee 2016, p.42). Customer satisfaction is not their main objective.
Outsourcing also leads to loss of internal expertise. There is no opportunity to train and develop
new skills as the duties are outsourced and developed somewhere else. The company does not
invest in the existing employee skills leading to stagnation in the company and sometimes loss of
very skilled workers who moved to other companies where they can grow. Reliance on external
firms may cause the wearing off of the internal skills of the organization and no chance of
growth for the available employees (Schoenherr 2010, p. 342)

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Conclusion
There are different reasons why companies make decisions to outsource their employees.
Outsourcing has both advantages and disadvantages. It is up to the company to choose what
outweighs the other. Companies have to go through the decision making process on choosing the
best supplier in order to avoid loses. The outsourcing can lead to legal ramifications and bad
public relations due to a bad relationship if the process is not clear and there is a breach in
contract. When looking to outsource, the business practices need to be considered. The decision-
making process needs to be followed and the supplier thoroughly analyzed. For example,
outsourcing vendors need to pass through vetting, and they must have specific skills and
equipment required to perform their duties. They should also be experts and deliver services first
and quickly. It assists the company to maintain the quality of their services and products without
compromising on standards. The vetting of the outsourcing supplier has to be done thoroughly
for better results. Outsourcing also creates a gap between the customer and the company as the
third party does the services for the customer while on the other hand, the company loses contact
with its customers.

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List of References
Dekkers, R. (2010). “Decision Models for Outsourcing and Core Competencies in
Manufacturing.” International Journal of Production Research 38 (17): 4085–4096.
Dolgui, A, & Proth, J 2013, 'Outsourcing: definitions and analysis', International Journal Of
Production Research, 51, 23/24, pp. 6769-6777, Business Source Premier, EBSCOhost, viewed
30 April 2018.
Girth, A, Hefetz, A, Johnston, J, & Warner, M 2012, 'Outsourcing Public Service Delivery:
Management Responses in Noncompetitive Markets', Public Administration Review, 72, 6, pp.
887-900, Education Full Text (H.W. Wilson), EBSCOhost, viewed 1 May 2018.
Lacity, M. C., Khan, S. A., and Yan, A. 2016., 'A closed loop outsourcing decision model for
developing effective manufacturing strategy', International Journal Of Production Research, 48,
7, pp. 269-328, Business Source Premier, EBSCOhost, viewed 30 April 2018.
Oshri, I, Henfridsson, O, & Kotlarsky, J (2018), 're-representation as work design in outsourcing:
a semiotic view', MIS Quarterly, 42, 1, pp. 1-A6, Business Source Premier, EBSCOhost, viewed
30 April 2018.
Schoenherr, T. 2010. “Outsourcing Decisions in Global Supply Chains: An Exploratory Multi-
country Survey.” International Journal of Production Research 48 (2): 343–378.
Weerakkody, V. and Irani, Z. (2010). A value and risk analysis of offshore outsourcing business
models: an exploratory study. International Journal of Production Research, 48(2), pp.613-634.