Advantages and Disadvantages of Outsourcing

4504 words (18 pages) Dissertation

9th Dec 2019 Dissertation Reference this

Tags: Business StrategyOutsourcing

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I. Introduction

1.1 Outsourcing

Outsourcing is a typical routine with regards to contracting out business capacities and procedures to outsider suppliers. The advantages of outsourcing can be generous – from cost investment funds and proficiency additions to more noteworthy upper hand.

Outsourcing is one of the most popular trends of organizational change. Outsourcing has become noticeable since the popularization of the resource based view – organizations focus on their core competencies (Prahalad and Hamel, 1993) and transaction cost economics – making products in house or buying them from market (Williamson, 1981). In the end, the goals are to lower costs and to invest companies’ resources on core strategic business concerns (Khosrowpour et al., 1996). In simple words Outsourcing shifts tasks, operations, jobs, or processes to an external team of workers, with the aid of contracting with a 3rd party for a massive time frame. Companies usually try this to lessen expenses or enhance efficiency. Outsourced features can be achieved by the third party either onsite or offsite of the business.

“Do what you do best and outsource the rest” has become a recognized business tagline at international level in the 1990s by the fabled management consultant Peter Drucker.

The Ernst & Young “European Outsourcing Survey 2008” highlights that 70% of respondents already outsource at least one function of their business, with 20% set to increase their level of outsourcing in the next two years, as they increasingly view it as a means to gaining a competitive edge. (Alinga Consulting Group, 2018)

Some common services which companies generally outsource are:

  • Human Resources
  • Cleaning Services
  • Payroll Services
  • Manufacturing
  • Order Fulfillment
  • Call Center
  • Marketing Services
  • Accounting Services

 

1.2 Why outsource procurement?

Outsourcing procurement is not a Childs play, it can cannot be done easily instead, a lot of considerations are taken and analysis is done before its implementation since directly or indirectly it relates to the profit and loss and shares of the company.

Taken together, this prompts quantifiable cost-cutting and unmistakable investment funds. While cost reduction is the biggest substantiated reason, there are different advantages also, for example, having the capacity to use in-house assets for center procedures. (Cap Gemini, 2018)

In today’s trend most of the companies following the strategy of procurement out sourcing specially in IT services such as Business process outsourcing (BPO) sector. Organizations that outsource their acquisition capacity to obtainment BPO firms can take advantage of a pool of specialists, which can direct them in issues relating to process and approach consistency. They can benefit themselves of this aggregate capacity to enhance their effectiveness and in general execution.

Taking in figures, currently IT firms all over the world out sourcing their services by 67%, financial firms 33% and there are many more services which are being outsourced at higher percentage and are increasing every year. (‘deloitte-nl-s&o-global-outsourcing-survey.pdf’, no date)

Outsourcing brings in a lot of flexibility and financial freedom but it also has its pitfalls. Any company looking to outsource must keep in mind the pros and cons of outsourcing before deciding to take the leap. Below are the few advantages and disadvantages of outsourcing.

II. Benefits of Outsourcing.

2.1 Gain Procurement Expertise

Companies hold different areas which require an expert of that particular field in order to get the maximum efficiency from that corner. So they need to hire an amateur and train them for longer period of time. This involves extravagant or useless expenses if a firm is planning to operate at low cost. So keeping an expert for procurement is a good idea but along with cost saving. Therefore outsourcing can form a better option. Where you can get pre trained experts of outsourcing from companies which are specialized in business process outsourcing who can provide the organization with the best procurement solutions. (Next Process, 2018)

Importance of procurement experts:

  • Maintains effective budget management
  • Helps in Services and product improvement
  • Provides professional assistance in this competitive world and many more
  • Procurement experts are professionals who match a plan for increasing success rates in an ever changing, competitive marketplace with your corporate capabilities.

Therefore it is very important to have an expert for procurement within a firm which can be achieved by outsourcing with minimal cost.(Staff, 2016)

2.2 Cost reduction

Another advantage of outsourcing is that the outsourcers can effectively save their costs. As said by UK- based corporate “As the market matures then I think we’re going to see more and more companies looking to procurement outsourcing as a means of achieving efficiencies and cost savings” (Capgemini and Procurement Leaders, 2009).The clearest and most visible benefit is the cost savings resulting from outsourcing. You know that doing procurement from within your organization can be expensive. But companies that specialize in creating procurement solutions face much smaller expenses. Instead of wasting money in-house, you could save by relying on a provider with lower overhead costs. And that lets you cut your own overhead. In addition, you’ll also be saving money in other ways. Outsourcing procurement lowers costs because you won’t be devoting office space or IT resources to maintaining your own in-house procurement system. You’re also cutting back in terms of headcount and training. You won’t have to hire anyone new to run procurement and you’re freeing up the employees already working for you so they can focus on other tasks. (Halfcostproducts, 2011)

Taken together, all these cutbacks lower your transaction cost per procurement. And even if the amount saved per procurement is small, it’s going to quickly add up to significant savings. You can do your job at a lower cost and improved quality. Because of the difference in salaries between Western countries and Asia, for example the currency exchange difference in India can be an advantage, same work can be achieved by paying less without compromising with the quality of work. (Flatworld Solutions Pvt, 2018a)

2.3 Outsourcing enhances resource allocation

Since outsourcing enables a firm to spend less time and money on providing training to learners and have low staff-training ratio, in addition to that a company is freed from huge technical, administrative staff members, therefore this time and wealth can be used to focus on other aspects of the firm which would eventually lead to the rise of an organization.

So time saved after outsourcing can be used by an organization in following ways:

  • They can put more attention for strategic planning.
  • Get involved with field staff, managers and understand the problems and plan accordingly. Such as need of training or not, esteem booster.
  • They can spend more time on analysis and measurement of company’s parameters.
  • They can spend more time in planning and budgeting.
  • They can review and implement new technologies in order to enhance the effectiveness and increase the efficiency.

These are the key things which can an organization do of leftover time saved due to outsourcing.

It is clear that the less will be the back office loads, the more efficient will be the company with a positive output.(Patel, 2017)

2.4 Greater Access

Procurement specialist organizations approach databases both within the nation as well as outside the nation. This means they can give numerous service providers with variety of options and different specialists in different fields. Furthermore, they additionally have the contacts and market suited experts to ensure you precisely get the best arrangement on services you require for your business. This in turn gives access to the modern techniques, along with advanced management paths.

With this expanded access, you will have the capacity to guarantee better quality and costs on the majority of your acquirements than you could accomplish alone. You’ll have an entire group of procurement specialists working for you giving you access to the most ideal chances of success. Also, you’ll get all that without setting up a different office inside your very own organization which will end up in cost saving and less operations.

2.5 Flexibility

Outsourcing encourages firms to rapidly increase their procurement experts to coordinate quickly changing business sector needs in current scenario. For example if a company requires the services related to the current demand of the market then they contact Some procurement specialist organizations and receives a demand of services and the clients just need to pay for the services. At the same time if the demand goes down the firm can withdraw the service any time.

In other words Outsourcing provides the ability to increase or reduce output according to the current demand. When orders are increasing, buying products outside can provide additional resources to meet delivery requirements without increasing direct labor costs. (Gansberg, 2017)

This installation and removal of service can easily be operated only if it is being done by third party organizations. Therefore outsourcing increases the flexibility of a firm’s operations.(GEP, 2018)

2.6 Customer satisfaction

The advantages of having a third party organizations  to provide services is that they are bound to provide best level of services whatever may be the circumstances. Since there is itself heavy competition between outsourcing specialists, it is there main vision to provide best service in order to get contracts. (HSA, 2003)

For example there is a security company in Ireland named Synergy which is a fully licensed and approved contractor, and with more than 100’s of security professionals employed in the firm.

They provide security services to different sectors such as IT, static guard services on construction sites and many more. So when there in an emergency such as any guard got ill or got harmed during the work, they immediately replace with another personals. (Synergy, 2018)

And this work of replacement wouldn’t have been possible without outsourcing. Hence outsourcing concludes customer satisfaction.

III. Drawbacks of Outsourcing

3.1 Quality Risk

Quality can be defined as the standard of something as measured against other things of a similar kind. When a person is paying for any product or service he or she doesn’t expect to compromise with quality of the product. Outsourcing can expose an organization to potential risks and legal exposure in terms of quality.(Kaya and Özer, 2009)

As an example, if a car is recalled for faulty parts and that part was outsourced, the car manufacturer carries the burden of correcting the potentially damaged reputation of the car maker but not the outsourced authority.

While the vendor would need to make good on the faulty product by contract, the manufacturer still has the black eye from the incident and carries the burden of correcting the negative public perception.

Another live example, the Pan Pharmaceuticals was the world’s fifth largest contract manufacturer of vitamins and health supplements in Australia. The Australian government suspended the firm’s license to produce medicines for next 6 months because of quality failure in the year 2003. As a result Original manufacturers that outsourced production to Pan Pharmaceuticals had to face serious consequences due to product recalls. And the third party contractor was away from all troubles. (HSA, 2003)

3.2 Language Barriers

3.3.1 Difficulty in implementing new processes in the enterprise and feedback problems due to language barrier.

What does this means?

Most of the companies are spread over the globe with different languages. And in order to understand any instructions or new processes one must have the knowledge of the language in which the instructions are published and it is totally impractical to publish the same in every language. So it becomes an important issue in outsourcing. Since there becomes a need of training of instructions or keeping a translator as well. Same happens with the feedback system. If there will be communication gap then the problems and critics within the firm cannot be understood properly or can be misunderstood which will form difficulty in diagnosing any issue.(Business 2 community, 2012)

For example there is a marketing team who decides to put new set of instruction or software into cloud in English language. As the cloud is being accessed from every corner of the world from where the firm is operating via outsourcing, which comprises of different people with different ethnicity such as Chinese, Japanese or any other whose first language is not English. They will find it difficult to understand; hence it becomes mandatory to introduce training team to make them understand how the software works or what the instructions are. Therefore it takes more than double the time than normal to complete the task. In other words language barrier creates a sense of delay in processes.

It is being surveyed that more than 65% of companies in the US are being challenged due to language barrier which contribute to inefficiency, ineffective collaboration and low productivity, among other factors. (Robert Shecterle, 2011)

3.3.2 Language barriers lower project leader effectiveness.

A project leader is a person who is responsible to carry our company goals more effectively but if the leader is striving to understand the language of team members or vice versa and if there will be communication gap between team lead and members or between other members then it will be difficult to cooperate with each and the goals of the firm will be fading away. (Business 2 community, 2012)

3.3 Risk of leakage of confidential data

Every company holds a secret recipe which should not be exposed, but when the services of a company are being outsourced there are many chances of leakage of unwanted data of the company which is undesirable. (Flatworld Solutions Pvt, 2018b)

This happens when a company gets lured by the low cost service providers and takes up the decision very quickly with giving a second thought, which must be avoided.

“We are not saying outsourcing is inherently bad, but organizations that do get breached have probably made some bad outsourcing decisions,” said John Yeo, Trustwave’s European director.

The investigations data released in 2013 by Trustwave Global Security Report which was done  on 450 global data, showed that 63% data breach were linked to a third-party component of IT system administration. (Venza Group, 2013)

Therefore outsourcing increases the chances of data leakage. And it becomes a serius issue when it comes to the third party contractors which handles online payment getaways.

For example Darden Restaurants, which is an American multi-brand restaurant was notified by government officials on August 16 that it had been the victim of a cyber-attack.

It wa stated that the customers who visited Darden-owned Cheddar’s Scratch Kitchen between November 3, 2017 and January 2, 2018 may have had their credit-card information stolen. Darden estimates that 567,000 payment card numbers could have been compromised.(Business Insider, 2018)

3.4 Wal-Mart Outsourcing

Introduction

Wal-Mart, an American company gloating “Regular Low Prices” has extended and redistributed to incorporate the work of outside work and providers to meet their enterprise’s requests. In doing this, there are a few advantages to using modest Chinese work. By utilizing Chinese plant work, the Wal-Mart Corporation can give merchandise at low costs, expanding their intrigue to the buyer. Additionally, by utilizing modest work in different nations, Wal-Mart extends their partnership around the world, incorporating opening stores in those nations where the organization utilizes shoddy, remote work. By utilizing Chinese work, Wal-Mart can amplify its enterprise’s benefits abroad to the United States, where the value run is a lot higher.(Businesssessy, 2016)

Advantages

A) Focus on Other Business Aspects

Wal-Mart has alternate people will deal with supply and dispersion, you can invest more energy in further building your business. SCM can without much of a stretch destroy valuable hours, so you can utilize those spared hours for showcasing, setting up client connections, and growing new thoughts.

B) Minimize Overall Costs

If the Wal-Mart hires professionals in the organization, cost of hiring will be more, can utilize their skill, information, and associations with lessen your general costs. They will take a shot at coordination and with other asset suppliers to build up the savviest plan conceivable. This may incorporate making changes like acquiring more affordable materials, transportation enhancement, and better stock administration. In the event that the association chooses to go seaward, this can support your reserve funds significantly more.

C) Meet Customer Demand

On the off chance that your business has leveled because of absence of assets, you may just have the capacity to supply your clients with a limited number of items. At the point when this is the situation, it tends to be about difficult to develop and manufacture your image value. Re-appropriating can help you in this division on the grounds that an association will find a way to get the amount of items your clients need. This can be the impetus for real development and move your business into what’s to come. Wal-Mart has executed the same strategy.

D) More Flexibility

By working with an outsider association, you approach their assets, which implies you’ll have help in making an increasingly broad framework. Thusly, you can pick and pick who your organization works with and make changes en route.

Disadvantages

A) Unanticipated Costs

With enhanced effectiveness and monetary investment funds may look engaging. The issue is that there is dependably the potential for concealed expenses en route when leaving this procedure in the hands of an outsider. Issues like expanded transporting costs for pulling cargo and related expenses can put a damper on cost projections that at first seemed promising.

B) Potential for Setbacks

Despite the fact that redistributing SCM will regularly look extraordinary on paper, it tends to be a mind boggling process with a lot of chances for difficulties for Wal-Mart. In the event that the outsider you pick makes doubtful courses of events all through conveyance, it can prompt a large group of issues. Precedent: Once stock not being gotten on time, which implies purchaser request wouldn’t be met. Thus, this could prompt income misfortune and further glitches inside the production network.

C) Integration Difficulties

Wal-Mart business has been completely coordinated with an outsider, tasks should run generally easily. The issue lies in the change procedure, which requires a lot of budgetary sponsorship and an impressive time speculation from the two gatherings. Indeed, even a minor absence of correspondence can result in incidents and rearrangements.

D) Quality Suffers

At the point when the association you employ for store network the executives needs involvement in your industry, the nature of your items may lessen. In the event that the association compromises, utilizes less expensive materials, and doesn’t completely survey dangers, it tends to be hindering to your organization. Deals can diminish alongside your image value, and contenders are bound to excel.(Business Org, 2013)

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