HI6008 Advantages and Disadvantages of Outsourcing Business Functions Assessment Answer
Title: Advantages and Disadvantages of Outsourcing Business Functions
The key research problem that the researchers attempt to investigate through this literature review is outsourcing and both its advantages, as well as, disadvantages in the context of businesses. The literature review has shed light on various conceptual models and theoretical underpinnings concerning outsourcing and its positive and negative impacts of companies. Through the literature review, it is identified that a large number of empirical studies emphasise the positive influences of outsourcing. In comparison, the number of empirical studies aiming to identify the drawbacks of the outsourcing process remains limited.
1.1 Research Problem
While it is common for the strategic goals and aims, as well as, the character of work in which a business operates to change, outsourcing may also change and bring additional risks or benefits for the client organisation. In this context, Tayauova (2012) argues that not all companies are similar and therefore, the outsourcing practices of different types of companies can be significantly different. Throughout previous pieces of literature presented by past scholars, many contradicting views can be observed concerning whether outsourcing brings companies benefits or challenges. For instance, the study of Cantone et al. (2019) postulates that outsourcing enables organisations to hand-off specific responsibilities to a reliable third-party provider or vendor and allows them in terms of emphasising on their central activities that add competitive value to the businesses and facilitates important functions such as product or service development. On the contrary, the study of Kavosiet al. (2018) indicates that in a majority of cases where a company has engaged in outsourcing, a loss of control over the outsourced operations can be evident. As per Kavosiet al. (2018), the management of external resources necessitates the combination of extraordinary skill sets, process management, contract management and negotiation power for decision-making. However, due to the complexity of combining such elements, it is often possible for outsourcing approaches of an organisation to be ineffective. Therefore, before finalising a decision concerning whether to outsource specific operations due to the unavailability of specific resources, a company must identify several issues. The current study aims to shed light on the literature gap concerning the issues that must be evaluated by companies before finalising outsourcing decisions along with recommending areas for improvement to enable contemporary organisations in terms of implementing outsourcing strategies with efficacy.
1.2 Research Questions
As evident from the literature gap, there are several issues faced by companies when outsourcing resources. Without sufficient investigation and evaluation of the capabilities of the different companies, it is possible that companies may end up outsourcing their resources to a supplier whose capabilities and competencies do not align with the objectives of the client. Therefore, the first research question is;
- What are the issues the companies need to evaluate before outsourcing their resources in the market?
Outsourcing can bring several benefits in the context of companies including cost reduction, more efficiency of processes, increased focus on important business areas and improvement of organisational capabilities through resource enhancement. However, different types of companies have different needs and therefore, the requirement of develop in some areas can be more important than others. Therefore, the second research question is;
- What are the areas of improvement for the companies to implement an efficient outsourcing strategy?
2.0 Definition of Outsourcing in the Business Context
The notion of outsourcing is made up of two separate words including ‘out’ and ‘sourcing’. Whereas the out part refers to outside a company, sourcing can be defined as the action taken by companies to transfer or delegate decision rights, responsibilities or work to a third-party vendor or a provider (Madsen, 2017). Outsourcing is a common practice in contemporary businesses and is used as a means of obtaining cheaper, better and faster services. On the other hand, (Ishizaka et al. 2019) refers to outsourcing as the process of allocating responsibility and risk for carrying out a service or function to another entity. In other words, outsources may be defined as a practice performed by organisations or other entities to delegate jobs or operations to a third-party vendor that can perform the operations or jobs better, faster and cheaper in comparison to the client company. There are mainly two types of outsourcing including internal and external. The consideration of the type of outsourcing strategies implemented by companies depends upon the extent of control over the outsourced functions by the client companies. Internal outsourcing, in this context, refers to the process of reallocating business functions within the organisational setting to save control over the performance of the functions whereas, external outsourcing refers to the process of delegating the operations of individual or mutually linked functions to outsources extrinsic to the client company (Un, 2017). As an example, the ventures that are performed within external outsourcing consist of cooperation, participation in capital and centres concept. On the other hand, the ventures that are performed within internal outsourcing consist of short and long-term partnerships, as well as, single partnerships. Outsourcing can also be divided into full and partial classifications of outsourcing based on the efficient utilisation of resources, as well as, the reallocation of responsibilities and risks. Participative, otherwise known as the selective outsourcing method refers to the practice of delegating specific business processes or functions to a third-party vendor or service provider while the combination of mutually linked functions is carried out by the client company. On the other hand, full outsourcing refers to the practice of delegating individual functions that operate on a standalone basis to extrinsic service providers or vendors and entrusting such entities with full obligation and responsibility for the performance of the function.
3.0 Theories and Model Related to Outsourcing
3.1 Resource-based View of Outsourcing
The notion of outsourcing is associated with several activities. Each of the phenomenon’s in the context of outsourcing can be described with the use of different frameworks embedded in a variety of theoretical underpinnings and conceptual models. In this context, one of the empirically researched constructs is the Resource-based View (RBV) of outsourcing.
According to the RBV construct, the decision of outsourcing by client companies is often based on the abilities of the companies in terms of investing in intrinsic capabilities and thereby, allowing them to maintain a competitive advantage (Oliveira Netoet al. 2018). The RBV construct can be further described as the conscious and intentional view of the resources a company possesses which act as the fundamental determinants of the performance of the company and may contribute to enabling the firms in terms of sustainable competitive advantage. As per the RBV construct, a company that experiences the lack of rare, valuable, organised and inimitable capabilities and resources, shall search for a provider extrinsic to the company to seek assistance in overcoming that weakness (Edvardsson and Durst, 2019). The RBV construct can be especially observed in the preparation phase of the outsourcing process that associates with establishing a definition of the decision-making framework and in the selection process for selecting appropriate providers. As argued by Mweru and Maina (2016), a firm is a collection of both intangible and tangible assets that contribute to increasing the competitiveness of the firms. The RBV construct allows firms to identify the attributes of the specific resources owned by a firm that may not be imitated by other players in the same industries. However, Mweru and Maina (2016) further argue that even if a competitor can imitate or replicate the resources of a company and use the resources as a means of gaining a competitive edge in the market, it is possible, without other constructs into play, that the advantage may not last long.
3.2 Transaction Cost Theory in Outsourcing
Another construct that has been empirically researched by previous scholars to explore the notion of outsourcing is the Transaction Cost Theory. As per this theory, the organisation of economic or financial activities and functions of a firm is reliant upon establishing a balance between the production economics the examples of which include scale against the costs involved with transacting (Yuan et al. 2020). Transactions, in this context, act as the exchange of services, as well as, goods between economic actors. These economic actors can be technologically standalone units that may exist both intrinsically and extrinsically to a company. The transaction cost theory model of outsourcing allows organisations in terms of analysing the comparative costs associated with the arrangements, the adaptation and the control of the completion of tasks under alternative structures of governance. As postulated by Creon et al. (2017), the transaction cost theory facilitates the identification of two costs that assist organisations in terms of considering between two alternative structures associated with a transaction consisting of hierarchy and market and enhances the comprehension of the appropriateness of the structures for the specific transaction. The measure of costs that are used for the purpose includes transactions costs and production costs. As argued by Schermannet al. (2016), outsourcing allows companies to reduce costs involved with the production (for example, operating information system functions within a company requires costs). This is true fundamentally because outsourcing allows service providers to enjoy the economies of scale in providing information system functions to the client companies such as systems development and communication operations which consequently leads to the generation of higher transaction costs influenced by the negotiation, control and enforcement of contracts.
3.3 Core Competencies Theory in Outsourcing
Another of the empirically researched constructs of outsourcing is the Core Competencies Theory of outsourcing. As per the views of Agrawal et al. (2016), outsourcing decisions of companies are mainly fuelled by two things including increasing emphasis on core competencies and improving profitability. As postulated by Baatartogtokhet al. (2018), core competencies refer to the cluster of specific characteristics possessed by a business that enables the organisation in terms of gaining a competitive edge over other players in a given market. Through outsourcing, organisations can emphasise more on the core functions and activities that they do best and hand-off the responsibilities of other, non-vital functions to their parties and vendors to complete a set of processes rapidly and cost-efficiently (Li et al. 2017). By focusing more on the core services and offerings of the firm, organisations can make consolidated decisions regarding product development, strategic directions, as well as, other core areas and thereby, improve their profitability.
3.4 Outsourcing Model
Figure 1: Hybrid Model of Outsourcing (Onsite-Offshore)
(Source: Influenced from the findings of Gurung and Prater, 2017)
As identified by Gurung and Prater, 2017, companies can obtain the advantages and exploit the positive aspects of outsourcing fully when the outsourcing strategies of the companies are inclusive of considerations regarding the core competencies of the company and the vendors for getting the best out of both worlds. In an onsite model, the outsourced functions are carried out at the premises of the client which may incur additional costs for the accommodation of the vendor resources whereas, in an offsite model, a company may lack effective control over the functions performed by the vendor. The hybrid model of outsourcing entails switching between onsite and offshore in which the first two stages include the development of project scope and meetings concerning the project requirements. The third to fifth stage of the model entails offshore outsourcing where the vendor companies perform the delegated function or activity at their premises. Finally, the sixth stage which is reviewing the task or project completed by the vendor and accepting the function if each of the requirements are met and then finalising or closing the project or activity.
4.0 Outsourcing: Advantages and Disadvantages
4.1.1 Increased Operational and Financial Flexibility
Outsourcing allows organisations to transform fixed costs into variable costs. Therefore, the practice of outsourcing enables businesses to augment the flexibility of operations and financial aspects. When capacity is set as the basis for payment, organisations can circumvent the ownership of activities as required to third parties (Somjai, 2017). Outsourcing facilitates more productivity in organisations by enabling them to hand-off the maintenance of a functioning low in terms of capital assets while the full-time employees of the companies can focus on augmenting the core competencies to produce value.
4.1.2 Optimal Task Delegation
Delegating tasks between different parties can generate significant cost-efficiencies and thereby, generate better value in a business setting (Somjai, 2017). Performing all tasks involved with a set of operations may compel organisations in terms of hiring people with different skill sets and thereby, paying more in terms of compensation, buying new machinery and equipment increasing costs. Therefore, delegating non-vital responsibilities allow organisations to save cost otherwise spent in those areas and additionally, improves organisational performance from the rapidness of two parties working on different functions at the same time and from the cost and performance efficiency offered by the providers.
4.1.3 Enhancement of Knowledge and Capabilities
Outsourcing provides organisations access to knowledge and new capabilities at cheaper costs. A provider extrinsic to a company may proffer competencies that are otherwise unavailable for the client companies in any other way. Vendors that take outsourcing obligations and responsibilities are typically better equipped with the knowledge, necessary equipment and talented pool of employees and are thereby, better positioned often than the client companies (Aswini, 2018). Thereby, outsourcing allows client companies to deal with the necessity of accessing a new capability or substituting an existing function.
4.1.4 Performance Improvement and Economies of Scale
Outsourcing facilitates performance improvement for client companies due to the effect of the economies of scale (Doval, 2016). A variety of opportunities and functions can be offered to client companies by suppliers within large scales that assist organisations in terms of saving the best workers. Furthermore, the operational experience of suppliers is typically higher given that such outsourced vendors typically have a greater concentration of employees on tasks in comparison to internal operations.
4.2.1 Chances of Data Breach
With the implementation of outsourcing decisions, vital company information gets accessed by third-parties and thereby, the outsourcers remain at the risk of exposing company technology, as well as, confidential data concerning different activities of the businesses (Latif, 2018). With the outsourcing of recruitment, payroll and HR services, this issue is especially true since despite terms of confidentiality and security being embedded in contractual agreements, performing audits is always difficult when a subset or sets of functions are outsourced to third-parties.
4.2.2 Risk of Unsynchronised Operations
With the selection of inappropriate and inefficient vendors or suppliers, a company always remains at the risk of failing to synchronise the deliverables. A few of the areas where problems can be evident in such a scenario include sub-standard quality output, stretched timeframes of delivery, an inaccurate delegation of responsibilities and flaws (Latif, 2018). With outsourcing, a company loses control and supervision over the outsourced function making it hard for the companies to predict the results.
4.2.3 Hidden Charges
There are often various types of hidden charges associated with outsourcing. As postulated by Doval (2016), anything that is not covered in a contract established and signed between the client and provider provides a basis for the providers in terms of adding more money to the invoice.
4.2.4 Lack of Customer Focus by Vendors
With outsourcing, outsourcer companies can often experience the lack of consumer focus on the part of the vendors. As argued by Aswini (2018), as outsourced vendors typically have several clients that they serve at the same time, there always remains a possibility that the vendors may not be able to fully dedicate themselves to one company and thereby, the services may suffer.
5.0 Case Studies on Outsourcing and Real-life Implications
5.1 Thomas Cook and Accenture Agreement
Thomas Cook, one of the leading leisure travel groups in the World, established a 10-year wide co-sourcing arrangement with Accenture with the establishment of a shared services centre in the Ireland headquarters aimed to provide cost-efficiency. To ensure effective execution of the plan, about 250 employees from the organisation were sent to Accenture. The company, as a result of the outsourcing and more intensive focus on its core competencies, was able to lessen its cost-based by 140 million GBP (Accenture, 2002). It was further able to cut costs invested in back-office functions by as much as 30%. Currently, among the significant competitors in the travel and leisure industry, Thomas Cook has the lowest cost model.
5.2 Bank of Ireland and Accenture Agreement
The Bank of Ireland is another enterprise that outsourced its functions to Accenture which is considered to be the world's leading outsourcing vendor. The Bank of Irelands outsourced the development of end-to-end learning services through the incorporation of various training, as well as, development program in the financial year 2014. To fulfil the objective, the outsourced vendor provided the Bank of Irelands with an LMS that has been accessed by over 16,000 employees of the bank to obtain training based on core management, as well as, banking competencies (Accenture Strategy, 2015). Consequently, e-learning was introduced in the client organisation is the delivery of high-quality training programs led by instructors consistently emphasised the strategic priorities of the bank.
6.0 Gap of Literature:
The above analysis has identified that outsourcing business functions allows companies to cut costs and at the same includes some hidden charges. It is also identified that outsourcing leads to better business output whereas it also creates risks of unsynchronised business operations. However, the research has not been able to find out the business aspects that are better for outsourcing and at the same time, can help in developing global teams that can support and manage the outsourcing activities properly for better business output. Therefore, further research on this task will be towards carrying out research on the business operations that are beneficial for outsourcing and business operations that are risky for outsourcing. 7.0 Summary:
The literature review sheds light on three different theoretical constructs of outsourcing and explains the notion of outsourcing from the perspectives of resource-based view, transaction cost theory and core competencies theory. It was clarified that there are several types of outsourcing including full and partial outsourcing, as well as, external and internal outsourcing. The advantages of outsourcing for business corporations include financial and operational flexibility, cost-effectiveness, access to knowledge and new capabilities, as well as, performance improvement due to economies of scale. On the contrary, the drawbacks of outsourcing included exposure to confidentiality risks, inefficient synchronisation of vendors and clients' objectives, lack of consumer focus and hidden charges. Therefore, the literature review has shed light on the different issues that must be considered and evaluated by prospective outsources before deciding to outsource. Additionally, it was identified that companies may outsource the non-vital and non-core functions to third parties as it saves organisations significant time and costs. Nevertheless, if the selection process of the companies for selecting outsourcing vendors is flawed, there may be several issues degrading the operational performance rather than improving it. The next section of the project is the research methodology that defines and justifies all tools, techniques and methods that are used for the research study.