Outsourcing is a business phenomenon which needs to be understood first before its pros and cons could be evaluated. Outsourcing can be defined as the set of activities that involves procuring, managing, and controlling of business functions (tasks) by an external vendor or task-specialized firm. In simple terms, it is the process of farming out business tasks, the extent and significance of those business functions can vary, ranging from important tasks like managing the entire customer care department or trivial ones like conducting out a primary survey for which an external firm had to be consulted.
This literature review would cover different case studies to elucidate the importance of business functions externalization. Some articles would also be inculcated in this review to further strengthen both sides of the argument about whether outsourcing is beneficial for businesses or is outsourcing detrimental for the operational performance of the businesses.
The aim of this in-depth study and review is to explain the growing dependence of large multinational organizations and other large scale businesses on such small specialized firms that perform the outsourced tasks. The passage would further emphasize on what are the actual advantages and disadvantages of outsourcing for businesses and the stakeholder groups dependent on the operations of the business.
Before we unravel the extent to which outsourcing is beneficial or not, we first need to understand why businesses resort to the decision of giving their internal operations to external firms and how does the process of externalization take place. The official document by New Zealand government published in July 2016 named “Outsourcing Business” defines the outsourcing in a very simplistic manner and also gives guidelines regarding the role of a contract when outsourcing is being done. It states certain organizational responsibilities when outsourcing like accurate information regarding outsourced functions is kept in official records for future audits, ownership of business functions is clearly defined prior to the inception of operations to avoid any malicious claims in the future by either side, and lastly everything is done within the parameters of law (Govtnz, 2017).
Moving towards the second part which is why would businesses delegate their internal business functions to external firms. A case study by “achieveglobal” enlightens us with the importance of outsourcing by quoting the reasons from a survey they conducted with all the possible causes. Surprisingly, only 41% people believed that the prime movers of outsourcing activities were financial reasons. Majority of the people emphasized that the specialized firms are effective and efficient due to their proficiency in such specific tasks with a workforce that possess the skills perfect for particular tasks. Around 54% of the people opted for the option which stated that outsourcing saved time. Some least chosen options included the transfer of liability, responsibility, and accountability towards the outsourced vendors.
Externalization of business functions lets the outsourcing company to focus and concentrate more on the core objectives of the business. The aim of organizations is profit maximization. By handing over non-core business activities to external firms, the organization can invest more time, financial resources, and human capital in the core activities directly related to the value proposition and achieving edge against all competitive organizations in the market. The second most important advantage of outsourcing is its cost effectiveness. To study consumer behavior and collecting new ideas about the product from consumer base, instead of having an entire department for primary research in the organization on payroll and other fringe benefits for a year, the company can simply hire an external firm that specializes in conducting primary and secondary research by paying them their service cost once only. By quoting some statistics, the gravity of the situation could be clearly understood, according to an employment site named “Indeed”, the average salary of a web developer in UK is around USD $38,234 per annum, however with the same level of skills and expertise, an Indian website developer earns an annual salary of around USD $3608.24. Outsourcing saves financial resources and even time that have an opportunity forgone due to taking up tasks that could have been easily outsourced. These outsourced vendors have highly skilled, capable, professional, and proficient employees with pertinent skills that the outsourcing organization may not be able to recruit. The client organization can make lucrative gains from the innovative ideas and suggestions of these professionals that specialize in specific fields. An article “Outsourcing- What are the advantages and disadvantages?” calls this the operational efficiency. Specialization of tasks leads to a higher level of efficiency that leads to faster turnaround and better quality (IT Outsourcing News, 2011). One significance of outsourcing functions for some businesses is the transfer of certain degree of responsibility and answerability to that external vendor. An organization deals with several tasks every day, and they are accountable for the tasks they do and how they do. By outsourcing some tasks, this burden of accountability and fear of performing a task incorrectly transfer to the outsourced firm which is paid to get the job done without imperfections and within a particular span of time. In 2008, an article by AllBusiness.com published in New York Times which emphasizes on the long-term benefits of outsourcing business functions for small organizations. The article states that the option of outsourcing business functions gave these small businesses an opportunity and an arena to compete with enormous well-established organizations that had specialized departments for every facet of the corporate world. Externalization of resources can aid these small firms by giving them accessibility to economies of scale and business professionals that large corporations seek to benefit from. This process of externalization is a blessing in disguise for small businesses as with the availability of limited economic resources and fear of disappearance from the market due to competition, these small firms can simply buy the services of specialized firms. No capital investment would be required and the fear of putting everything at stake for the business would also mitigate. (Nytimes.com, 2008)
The drawbacks of outsourcing will be highlighted now which range from cyber-crime issues to infringement of sensitive information of the outsourcing organization. One significant drawback is the lack of cultural harmony and congruence of work ethics. The outsourcing organization and the outsourced vendor may have completely different work ethics and ways of carrying out tasks, this may cause resistance, conflicts, and eventually unsatisfactory services. For example, a multinational firm has outsourced its website’s work to a web developer company situated in a completely different time-zoned country, if the organization wishes to make certain changes or alterations, it would be difficult to get in touch with them in their non-working hours because of time differences. Another drawback is the chances of getting a product that does not meet the quality standards of the organization. The outsourcing company needs to ensure that everything is clearly understood in order to avoid any wastage of resources. The outsourcing company loses its operational and managerial control when the tasks have been externalized. To have a say and influence with the outsourced process, skills of process management, negotiation skills, and contract management are required. The major drawback of outsourcing business functions is the lack of privacy regarding the internal operations of the organization. There is a dilemma of confidentiality and privacy attached to the issue. The vendors may give out certain confidential information to competitive organizations which can have disastrous consequences. Outsourcing can be a demotivating factor for the workforce as they would always fear to be on the verge of getting replaced with the external firms if the organization decides to externalize certain business functions. This demotivation and lack of encouragement can negatively impact the performances of the workers affecting the quality of their tasks and diminishing the element of loyalty towards the organizations. Sometimes, these outsourced vendors have concealed costs that they don’t mention or shed light in the contract. Terms and conditions must be very clearly defined in order avoid any payments of additional costs in the future and lawsuits. The external vendors will treat the organization as a client and thus the production team would not invest all their time and intellect working on just one project.
To conclude one can say that, business outsourcing can be useful for organizations with the advantages of being cost effective, more operationally efficient, and yielding greater customer satisfaction, but at the same time, the ethical dilemma of getting business functions done by external firms in poor countries and not providing employment opportunities to the local workers for financial reasons can harm the reputation of the organization. The growing dependence of organizations on outsourcing benefits the outsourced vendors and even small businesses that cannot afford to employ such professionals, but at the same the domain of such sensitive strategic plans can be infringed if competitive firms use illicit means of acquiring information.