Outsourcing: Key Points to Know

Outsourcing

Outsourcing is the process of transferring internal operational tasks and procedures to outside businesses. Notably, businesses from all over the world use outsourcing services to save operating expenses, boost competitive advantages, and raise product quality. Management occasionally uses outsourcing from abroad as a strategy to introduce cutting-edge methods and practices to the company (Caruth, Haden & Caruth, 2013). For instance, Voice App, a mid-sized software company, aims to contract out its technical support system in order to lower the escalating cost of IT maintenance. Notably, the firm must first identify the pros and cons of outsourcing, analyze the long-term and short-term consequences, and arrange the advantages and disadvantages in their order of priorities.

Preliminary Advantages and Disadvantages of Outsourcing

Prior to outsourcing in the business enterprises, the company must understand the merits and demerits of allocating special services to external service providers. In most cases, the advantages of outsourcing outnumber the demerits (Caruth, Haden & Caruth, 2013). For instance, off-shore sourcing has potential benefits such as risk sharing, reduced operational and recruitment costs, swiftness of the expertise, and concentration on core business activities rather than subsidiary services. To elaborate, companies prefer outsourcing services from the vendors that specializes on their field. Furthermore, the external service provider has technical skills and specific equipments, thus, promoting swiftness of expertise (Caruth, Haden & Caruth, 2013). Second, due to outsourcing, the business can create more time to concentrate on core activities and strengthen their processes. Third, the outsourcing of some components of business activities helps the company to shift responsibilities to the third party who plans risk mitigating factors based on their expertise. Importantly, the management deploys outsourcing as a method of acquisition because of its cost effectiveness. For instance, managers evade in-house hiring of employees to reduce the recruitment and operational cost.

The Limitations of Outsourcing

The outsourcing as well has some limitations such as insufficient customer focus, availability of hidden costs, synchronization of the deliverables, and risk of exposing confidential data (Gurung & Prater, 2017). Through external acquisition, the company is likely to reveal the information regarding human resource capabilities and other confidential company data to the third party. Occasionally, the firm may not choose the right partner. As result, the company experiences demerits related to synchronization such as sub-standard quality, stretched delivery time frames, and inappropriate categorization of responsibilities. Third, the management incurs hidden costs which include signing of contracts and travel expenses. Finally, outsourcing can result in customer lack of focus. Notably, the vendor may focus on multiple organization activities at a time (Gurung & Prater, 2017). Therefore, the partner shifts its attention from the enterprise activities.

Long-Term and Short-Term Impacts of Outsourcing to the Firm

According to the research conducted by IT and business consultant LogicaCMG and the London School of Economics, firms that regularly outsource its IT projects risk losing their talents to the competitors. To elaborate, the firms retains limited pool of IT talent in the long-run (Gurung & Prater, 2017). Therefore, the firm must not outsource their core activities in totality to improve smooth governance, control the flexibility outsourcing activities, and mitigate risks. Notably, a company outsourcing most of its business activities may lose control of internal leadership, and possess limited say in contract negotiation. Furthermore, outsourcing leads to fragmentation and disintegration of the supply chain. To explain, through outsourcing, the firm invites new competitors in the market, thus, undermining profitability and pricing power. In the short-run, experts from the firm gain knowledge and skills through sharing of ideas with outside vendors. The outsourcing activities enable the company to generate better revenue and reduce the cost of operation in the long-term (Schniederjans, Schniederjans & Schniederjans, 2015). Lastly, management Voice App can gain competitive advantage through outsourcing in the long-run. To explain, the firm can buy quality products from reliable sources which they eventually use in manufacturing. Consequently, they produce attractive items and services that easily sell in the market.

Advantages and Disadvantages in Descending Order

According to the order of priority, IT firms view cost reduction as the prime advantage of off-shore sourcing. Voice App Company is currently facing the problem of rising cost of maintaining IT technical support, hence, they need to reduce the cost of operation. According to Schniederjans et al. (2015), cost reduction is the prime advantage of outsourcing followed by improvement of quality, sharing of risk, swiftness of activities, and concentration on core business activities respectively (Schniederjans, Schniederjans & Schniederjans, 2015). Conversely, experts argue that outsourcing disadvantage with the highest negative impacts on the firm is risk of exposing confidential information to the competitors because it leads to the collapse of the company. Gurung & Prater (2017) states that factors such as hidden cost and lack of customers have least impacts on the firm’s operation respectively (Gurung & Prater, 2017).

Conclusion

In summary, research reveals that advantages of outsourcing outnumber the disadvantages. Therefore, management of Voice App can take appropriate measures to reduce the limitations of outsourcing. For instance, the leadership of the organization must only outsource non-core business activities to stop disclosing important information to competitors. Nevertheless, the company can deploy strategic outsourcing to improve the quality of the services and reduce the cost of operation.

References

Caruth, D. L., Haden, S. S. P., & Caruth, G. D. (2013). Critical factors in human resource outsourcing. Journal of Management Research, 13(3), 1.

Gurung, A., & Prater, E. (2017). A research framework for the impact of cultural differences on IT outsourcing. In Global Sourcing of Services: Strategies, Issues and Challenges (pp. 49-82).

Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2015). Outsourcing and insourcing in an international context. Routledge.