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Business Notes – Business Notes on
Benefits of Outsourcing
Subject (Business)
These notes provide an exhaustive summary concerning
outsourcing strategies. It comprehensively defines what is
outsourcing, and its associated risks and benefits. It goes
further ahead by explaining the effects and impacts it has on
businesses in the United States and Foreign countries with a
detailed analysis of data to its backing.
Nowadays there are many outsourcing companies, so these
notes will be very beneficial to students to better understand
what outsourcing entails. With the comprehensiveness of these
notes, the student will get to learn how efficiency and
productivity can be improved for consistent customer service
through Outsourcing.
BENEFITS OF OUTSOURCING: DISCUSSIONS AND FINDINGS
3.1: Introduction The study sought to explore the outlook and behaviour of IT outsourcing factors such as their growth, marketing, business strategies, threats, weaknesses, opportunities, advantages, and limitations to growth in consideration of international political, social-cultural, economic, humanitarian, and technological influences. Mainly the findings and discussions were obtained from qualitative and quantitative analysis of data. Case studies, journals, and other relevant documents were used to analyse the secondary data, while data collected through surveys was used to analyse the primary data. 3.2 Benefits and Risks of Outsourcing
3.2.1 Benefits of Outsourcing In the world, entrepreneurs are constantly looking for new strategies of saving money to improve the production of goods and services and promote efficiency in their businesses to enable them to compete with other businesses. Historically organizations controlled their supply and distribution channels because most of the businesses were vertically integrated. Generally, studies reveal that during this period, goods were obtained and outsourced from the raw materials, and companies individually transported these products to their stores. Due to advancements in technology and globalization, organizations began to outsource their products and services to international companies and countries. As per Smadi & Al-jawazneh (2016), outsourcing is critical in the growth and expansion of a given business. They stated that many advantages and risks are associated with outsourcing a particular task. However, Harland et al. (2005) argued that organizational decision regarding outsourcing involves many constraints that largely affect the organization's management practices. In this regard, the study sought to establish the general benefits and risks of outsourcing IT services. The study revealed that outsourcing leads to increased efficiency. By this, the study established that outsourcing directly or indirectly helps an organization to increase efficiency in many different ways. According to Dhar & Balakrishnan (2006), outsourcing allows workers to focus on their areas of expertise thus promoting employee satisfaction. On an organizational level, Harland et al. (2005) established that outsourcing enables the organization or the company to reduce costs, focus on their core competencies, improve the balance sheet, and provide the organization with short-term financial assistance. Additionally, the research established that outsourcing leads to increased organizational flexibility, which is critical in meeting its needs and objective. Mainly the research revealed that these benefits were mainly due to scope and the economies of scale.
Outsourcing helps an organization to concentrate on the core competencies, this means that outsourcing of non-key organizational activities is an approach that improves the performance of the organization, hence promoting organizational efficiency. Primarily the main objective of outsourcing is that service providers can significantly perform a given service much better and with significant expertise than the internal organizational operations hence promoting improved service delivery. Outsourcing has significant risks to companies that included loss of control, increased monitoring costs, reduced manufacturing quality, loss of importance and key knowledge, instability, and poor service delivery that may cause the organization to lie below the expectation (Iqbal & Dad, 2013). However, the most significant risk that is largely associated with outsourcing is managerial errors; in this regard, due to outsourcing, the company may find it difficult to make an effective decision regarding what activity should remain in the organization and that which should be outsourced. Even though outsourcing has a significant impact in changing a given sector's structure, outsourcing may lead an organization into making mistakes that may encourage the company or the organization to outsource its competitive advantage. 3.2.2 Risks of Outsourcing In their study, Varajao et al. (2017) established that outsourcing of Information Technology (IT) entails a wide range of services under various scales. The study established that even though outsourcing is beneficial to a given organization or company, it is significantly associated with inherent risks. Gonzalez et al. (2010) argue that in the modern world, organizational processes and the production of different products and services have largely become extremely complex, this is because business and market have become extremely dynamic, there has been increased competition, there has been the urge of increased reliability and improved sustainability and quality. Thus, the need for the implementation of
different management approaches and techniques. Generally, can outsource services both from a domestic or an international organization. Balogun (2010) established that even though outsourcing has benefits, it has risks that affect the process; some of the risks that are associated with outsourcing include increased dependence on the providers; by this, the study established that by outsourcing a product to the provider, the responsibility of management and control is significantly left with the supplier, this relatively becomes a big problem to the organization because it must rely on the supplier for the provision of the required services. The study revealed rather than managing its IT sector, the company has no obligation to negotiate for a working plan with the service provider or the third party. Generally, this is a major problem because outsourcing IT services means that the company cannot independently handle the services. Additionally, if any change is needed for the outsourced service, the company has no option but to wait for the provider. Additionally, suppose the supplier does not effectively perform its duties as agreed with the company. In that case, this could make the company incur unwanted damages that may cause the company to incur unwanted costs. Varajao et al. (2017) established that outsourcing of IT services leads encourages and promotes the loss of know-how and knowledge, in case the study established that when outsourcing certain IT services, the company to some extent transfer some of its IT staff to the provider, by doing so would make the company transfer some knowledge and efforts to the company. The study also established that outsourcing of IT services makes the outsourcing company incur high costs; this means that even though vendors bring new and improved skills to the outsourcing company, their primary goal is to make money just like any other business. Therefore, company's outsourcing IT services must increase their costs; generally, outsourcing services from third parties is an extremely and expensive activity.
jawazneh (2016) argue that global influence on businesses has largely enabled organizations to search for new opportunities in the global market to outsource several goods and services to increase their competitive abilities and advantages against their competitors. Outsourcing in information and technology includes technical services such as customer services, telecommunications, infrastructure administration, technical support, application development, among other services. Many outsourcing services include consulting companies, full-service providers, specialized and trained experts, among others. In his study, Pahirathan (2017) established that outsourcing is an international trade that is significantly spreading extremely due to globalization. Outsourcing is primarily characterized by the exponential growth and development of mastering and acquiring new technology that is believed to be a substantial catalyst in global economic welfare. Organizations can outsource a limitless number of services that include administration, corporate, marketing, technological information, etc. Mainly Edvardsson (2011) defined Information technology outsourcing (ITO) as the process of handing over some service to a supplier or third party to get some results. Generally, as mentioned above, decision-making when outsourcing information technology is arguably complicated and requires some good time to enable the Chief Information Officer (CIO) management to come up with an ideal decision. Ideal Situation for Outsourcing Providers The world today has greatly been faced with increased competition, increased levels of customer awareness that have necessitated organizations and companies to adapt techniques and strategies to help the organization survive in these challenging and difficult environments (Appelbaum et al., 2015). In this regard, firms and organizations have opted for the outsourcing strategy that provides organizations with quick solutions towards such
challenging and turbulent environments. In his study, Mwira (2011) established that in the modern world, outsourcing strategy was the most effective technique for organizations because of its significant systematic and structural changes that led to reduction of budgets, among others things, therefore the study established that those organizations had utilized the concept of outsourcing as an alternative towards improving the companies and competitive organizational positions that are aimed in achieving the goals and the objectives of the company. Khaduli (2014) observes that global outsourcing is a vital technique that helps organizations reduce costs; additionally, the study established that some of the strategy's basic advantages are to save on the labour cost, among other benefits. Even though the model was found to be beneficial, the study found some challenges that organizations and companies faced when engaging in the global outsourcing technique. Some of the challenges identified included a selection of the provider, legal costs, and others. The study revealed that the reasons for outsourcing varied significantly from one company to another. Jain & Natarajan (2011) revealed that organizations were prompted to engage in outsourcing activities in different situations, such as the desire and the need for specialized skills and the need to look into such functions that primarily waste valuable and essential resources. The research noted that routine tasks that include payroll, accounting, some human resource, and data entry functions are mainly considered to be non-key activities in a company that to a large extent consume essential energy and the company's time. The study also established that such activities destructed the employees from being attentive to those activities that significantly helped the company to generate income, and thus this greatly hindered the organization from being competitive as compared to others, hence it was important to assign such services to an outsourcing provider to focus on the core activities of the company.
outsourcing helps the United States to ensure that importation costs are balanced. Appelbaum et al. (2015) established that the United States of America helps reduce capital expenditures and leads to the reduction of the capital outlay. Additionally, the study also revealed that outsourcing is important in Foreign Countries and the United States of America in that it leads to the creation of new market opportunities for the Americas in foreign countries. In this regard, even though outsourcing promotes the economy of the developing countries seeking outsourcing services, it is also critical to understand that it is critical in stimulating overseas economic growth and also creates new markets for the Americans. Outsourcing also makes the American business start- ups more competitive and also keeps goods and services for the process low for their consumers. Researchers reveal that the outsourcing of low-skilled jobs overseas, for the non- core organizational functions such as data entry, accounting, customer services, and others, helps organizations and companies, for example, in the United States of America goods and services at extremely low prices. However, outsourcing has adverse consequences in the United States and foreign countries; in this regard, Schieberl & Nickles (2014) observes that the major effect of outsourcing is job losses which are mainly transferred to other countries. Many countries mainly hire less-skilled employees when the country does not need high skilled level workers. Generally, in most cases, companies outsource high-skilled employees from countries such as U.S., thus taking away essential jobs from the Americans. The Future of Outsourcing Gillis (2002) asserts that the future of outsourcing will be digital; this is because, according to his assumption, with globalization and increased advancement in technology, outsourcing will increasingly continue to utilize digital systems to provide organizations with cheaper, better and smarter services. One of the key sectors of outsourcing that seems to be
increasingly growing is the IT sector. A study conducted by Kuek et al. (2015) established that by 2030, the outsourcing market of IT services would have grown by $100 billion. Additionally, different studies assert that outsourcing will continue to grow because most businesses will continue to look into different ways of reducing costs and improving quality and productivity. The study also established that the outsourcing approaches based on the traditional assumption would ensure that the services will be provided based on digital tools in the future. Studies reveal that in the future, small businesses and others are expected to witness increased outsourcing practices to increase efficiency and reduce operational costs and inefficiencies. Increased costs on transportation, oil, and raw materials will also prompt many companies and organizations to outsource some of their services to reduce operating costs. The study established that outsourcing will significantly continue to survive even in the future because it is key to providing businesses and organizations with specialized skills and saving time and operational costs. Research-based online researchers revealed that outsourcing was mainly focused on outsourcing key business functions and services rather than non-key organizational services (Alzhrani 2020). For example, the study established that many companies and organizations with SMEs would consider outsourcing IT services to help them gain and access improved, experienced and better skills to promote high-quality solutions. A study conducted on several companies in India indicated that outsourcing of IT services was on the rise due to the increased number of qualified and trained personnel of individuals who have the required resources, methodologies, and skills relevant to other companies, especially those the new entrants. The research established that the future of outsourcing would greatly be affected by standardization; this is because, with the increased economic crisis experienced in recent years, many organizations have now favoured
The researcher sought to investigate the advantages of outsourcing; the bar graph presents the results. As demonstrated by the bar graph, the respondents stated that the overall advantages of outsourcing focused on core tasks, promotion of growth and efficiency, maintenance of the
operational costs, reduced of costs and while others stated that outsourcing was beneficial in that they led to the development of internal staff, provided continuity and promoted flexibility in the organizations. However, based on the results, 40% of the respondents found that the main advantage of outsourcing was that it helped companies to reduce costs, in this regard the respondents stated that by reducing the expenses an organization would occur by hiring a new employee to undertake a particular work, it would be essential to outsource the given service. Of the respondents interviewed, 20% of them stated that outsourcing helped companies maintain focus on the key-organizational activities; by doing so, the company would outsource the non-core activities, promoting productivity and efficiency in the company. 10% stated that outsourcing maintained operational control, while 15% stated that outsourcing promoted growth and efficiency in the company and others, respectively. Disadvantages of Outsourcing The researcher sought to find out the main limitation of outsourcing that can significantly affect the production and the success of a given company. The results are as
others stated that outsourcing might to some extent be costly, reduction of quality control, public backlash risk among others. In this regard, 40% of the respondent stated that outsourcing promoted loss of control, by this it meant outsourcing comes with the risk of losing some control, especially in regards to the outsourced service; this meant that the company had the obligation of giving the supplier freedom to carry out the outsourced service freely. 20% of the respondent stated that outsourcing led to increased confidentiality risks and that it did provide an opportunity for the internal development of the outsourced task; By this, it meant that outsourcing services did not allow employees in the given company to build talents in regards to the outsourced service. 18% of the respondent revealed that outsourcing promoted loss of focus; this means that the organization would lose focus on its essential activities and focus on the outsourced services. However, 5% of the respondents indicated public backlash risk, financial burdens, and reduced quality control as disadvantages of outsourcing. The above results agreed to that of a personal interview between Mr. Obrien, who stated that outsourcing led to increased productivity and efficiency, encouraged the reduction of costs; however, Mr O’Brien strongly believed that outsourcing promoted a focus on the key organizational activities. Regarding limitations, Mr O’Brien strongly agreed that outsourcing led to increased confidentiality risks and loss of control.
2. Impact of Outsourcing on Business By these questions, the researcher sought to find out the negative and the positive impacts of outsourcing in the individual business. Questions were distributed to managers and leaders of different organizations who had outsourced different services to their organizations.
According to the pie chart, approximately 73% of the respondents revealed that outsourcing had significant impacts on their businesses; they argued that outsourcing had both positive and negative impacts on the businesses. Some of them stated that outsourcing had improved efficiency and productivity in their organizations; this was by the mere fact that through outsourcing, they had acquired new and essential skills through specialization. 27% of the respondents believed outsourcing has no impact on their businesses; they cited that they had seen no improvement or any consequences due to outsourcing. They also revealed that they will not outsource any service in the future but will hire a specialist in the said areas such as information technology, data analytics, and others. Positive impacts on business
positively impact individual businesses, neither did they state whether the outsourcing had adverse consequences to individual businesses. Negative Impacts of Outsourcing in Businesses The researcher sought to investigate whether there were negative impacts of outsourcing on businesses and the reasons for the effects. The results are demonstrated as
shown in the chart below. As per the results demonstrated by the chart, approximately 80% of the respondents indicated that outsourcing had extremely adverse effects on the individual business. Additionally, the results indicated that approximately 20% of the respondents felt that outsourcing had no adverse effects on the individual business. Those who stated that
