Advantages and Disadvantages Of Outsourcing Business Functions
Table of Contents:
Table of Contents: 1
Introduction 2
Objective of this project 2
Project Scope 2
Literature Review 3
Advantages of outsourcing 3
Disadvantages of outsourcing 6
Conclusion 8
References 9
Introduction
Organizations in the global business arena are facing stiff competition and organizations are arming themselves in all possible ways to make their business stay relevant and profitable. Cost control is an important aspect in the various ways to keep companies lean, mean and strong in their quest for reaching their targeted objectives. One among the many initiatives to keep a tight leash of the cost is outsourcing. The phenomenon of outsourcing is a very recent one and has gained popularity in the recent few decades. Outsourcing began as a business when large American companies decided to get mundane job functions within their organization to be done for them by third party organizations or other companies. (Sobol and Apte, 1995) This was mostly the customer care work and such similar other activities which were not the core functions within the organization. However, in the recent years, it has been seen that outsourcing has evolved into a big industry by itself and outsourcing of various business functions and or activities are the order of the day.
Objective of this project
This project is aimed at studying the advantages and disadvantages of outsourcing. As in any business function, any activity has its pros and cons. We shall attempt to understand the same with a critical review of the advantages and disadvantages of outsourcing.
Project Scope
Outsourcing refers to a practice where a job function, activity or any form of work is delegated to another person or organization. What began as an attempt to stay away from mundane job functions in the organization has grown in a big industry by itself. Apart from being an industry sector, outsourcing has seen as a business practice which makes sense in given circumstances. For example, a company may want to manufacture and sell a particular product. However, it is not necessary that the same company manufactures the product in its home country where the cost of manufacturing could be very high as compared to manufacturing in another country. This practice also comes under the category of outsourcing.
Literature Review
Core outsourcing as such is mostly referred to wherein companies outsource certain functions within the organization to another company. For example, a large telecom company or a bank may outsource their customer service function to another company who will do the job for the telecom company or the bank. (Kuruvilla and Ranganathan, 2010)This example becomes outsourcing as a business practice, and this has now become a big industry by itself popularly known as Business Process Outsourcing(BPO). In the same way, mundane job functions such as janitorial services or housekeeping services of large office buildings are also outsourced and this has led to the evolution of facility management as a new stream of business(Tate et al., 2017).
Advantages of outsourcing
A business practice outsourcing is certainly an advantage for organizations as it helps to give more focus on their core competencies rather than wasting time, money and effort on mundane yet necessary tasks activities (Magtibay‐Ramos and Estrada, 2008). Outsourcing has many forms as discussed in the above paragraph and most of the companies engage in outsourcing as an activity as it helps them save on the cost to a great extent. To highlight this issue, we will have a brief peep into history on how the outsourcing as a business activity started happening.
About couple of decades ago, banks and other financial institutions such as insurance companies wanted to cut costs desperately.(Tate et al., 2017) They were willing to go any extent to save costs thereby reducing their operational expenses. Given this background, a few entrepreneurs in India saw a business opportunity in this (Davé, 2017). The customer care function which calls for the need for a large number of manpower is one of the major cost in the operations of such banking and financial institutions such as insurance company(Abreu and Faoro, 2017).
Moreover, customer care was not a core business functions for these organization. Hence, they outsourced this function to Indian companies, and the cost for the same was less than half when this function was done in America with American employees. This triggered a chain reaction of sorts with many other industry segments joining the outsourcing bandwagon. Hence the prime reason for the start of outsourcing as a business function was to save on cost.(Ketler and Walstrom, 1993) However later on many reasons were attributed and more activities of business organizations began to be outsourced.
Apart from cost saving as a primary advantage of outsourcing, it has many other important advantages to offer. Management is trying to focus more on their core competencies, and other routines and mundane job functions are outsourced to other specialist organization who will do the job function on behalf of the management. Simple and necessary activities such as factory maintenance, building maintenance, janitorial services, housekeeping etc.; which may not be the core competencies of some companies, are outsourced to other vendors who have maintained their core competencies in activities such as factory maintenance, building maintenance, janitorial services, housekeeping etc (Mosca and Bordelon, 2017) By going in this fashion there can be a team of people who are outsourced for a particular function as mentioned above and can spend more time and effort in the maintenance of assets which have been heavily invested for.
When companies invest in large assets such as machinery, factories, and buildings the upkeep of the same is equally important as the amount of investment involved is pretty high.(Heywood, 2001) It certainly makes sense to invest in people who do a dedicated job which is focused on maintenance of such assets so that more life can be extracted from the asset by doing activities such as preventive maintenance activities etc. with an aim to keep the asset intact and also ensures that the investment is good for a long period.
In today’s world, managements of organizations would want to get a task done yesterday; this statement is just impressed upon the speed at which business organizations are run in the present-contemporary world. Large organizations find it easier to fix a vendor who has people trained and specialized in specific functions rather than hire a person within the organization and then get him trained for the specific job function. In such scenario, a vendor who has the credentials and experience in a specific job function can be selected, and a standard operating procedure could be developed and applied from day one of the jobs (Creon, Grover, and Teng, 2017).
Today outsourcing as a business function is here to stay because organizations are run in times of stiff competition, and those who operate in a lean manner are bound to the winner than the one who carries the excess “fat” on them. The shredding of this excess “fat” can be done through outsourcing thus creating a winning situation (Caruth and Haden, 2013). To understand more about the advantages of outsourcing as a business function one needs to comprehend that more focus on a job function can be had when it is being outsourced to a vendor. This can be highlighted with the same example of customer care department is outsourced.
When customer care department is operated by a bank, it has to have its employees who would have to be paid as per the pay scales that exist in the bank that would eventually result in costs being high. However, when outsourced at a lower cost, the same function can be done by a larger group of people at a low cost. The bank can concentrate on its core function of banking and at the same time can make conscious efforts to increase its customer base; since now the outsourced vendor be handles the customer care of the bank. This means more business opportunity can be tapped and at the same time, a dedicated group whose job is to provide for customer service only can give sophisticated levels of customer service as these outsourced functions are provided by specialized people. The vendor may improve the quality of customer service by giving feedback to the bank and give the option of improved customer care(Sparrow, Brewster and Chung, 2016).
Disadvantages of outsourcing
While it is a positive impact that management’s initiatives of outsourcing there are also some disadvantages too. The concept of outsourcing a business function means reducing the number of employees in an organization. Many people especially labor unions have strongly argued that this can lead to loss of job opportunities. As the popular saying goes, there are two sides to a coin, and in the same way, there are advantages as well as disadvantages(Rochester and Rochester, 1995).
Labor unions especially in the countries, which outsource services from other counties, which means getting outsourced services from other countries where labor is cheaper, have objected to this concept being implemented because of large layoffs and loss of job opportunities. Some governmental organizations too have recommended that this practice is an unhealthy one and can create a dent in the nation’s economy. (Petkov and Petkova, 2017)They have argued that when jobs are lost people lose purchasing power and reduced purchasing power is not good news for any economy. While it is a given fact that when one set of people lose their job, another larger set of people gain a job, maybe at a different location altogether. In such a scenario, the nation where job losses happen could get affected, and in the same way, there would be a gain to the nation which gets the outsourced business.
Outsourcing can be a potential risk that organizations expose themselves too. While it is certain that risk management initiatives are undertaken during outsourcing business functions, there is always the risk of losing crucial data. This can be a business hazard, and when it happens in the financial sector, there could be quite a substantial loss when critical data is lost due to outsourcing. (Bahli and Rivard, 2017)The same problem might occur when manufacturing activities are outsourced, where data that can be critical to organizations and these can fall into the wrong hands and can be misused leading to many problems. It is true that companies do make standard operating procedures to be adhered by the vendor which undertakes the outsourcing but there is a chance that they could deviate and small amounts of deviations when go neglected can end up being a recipe for disaster.
There could be ethical and legal issues in outsourcing as in the infamous incident related to Nike where the outsourcing vendor threw legal and ethical standards to the winds and had caused almost human rights violations in the outsourced manufacturing facility.(Rochester and Rochester, 1995) Another blot on outsourcing was the Bangladesh Tahreen fashions factory which went on fire; here too there were blatant violations of ethical and legal standards. (Ark et al., 2016)It resulted in the loss of hundreds of lives of innocent workers and this brought out many loopholes in the outsourcing business. This factory was producing Tees, shirts, etc. for famed American brands, but later it was found that the factory building did not have even the sufficient legal permissions to operate the premises. Moreover, they had lost a contract with one of the brand owners and took a sub-contract from another outsourced vendor, and hence this famed brand too was under scrutiny.
The loop holes while contracting any job work or job function to any outsourced vendor can be large at times. The organization which gives the contract must have the ethical, moral and legal responsibility to see that such issues adhere too. Another incident termed as the “ethical bra” also showed gross human rights violation that happened in a war torn Srilanka. (Ruwanpura, 2015).
The Business Process Outsourcing (BPO) industry in developing economies such as in India and Philippines are faced with many problems as the vendor companies who are contracted to work for large corporations tend to “extract” work from their employees causing many health issues, ethical issues, and other related problems. (Lockwood, 2017)
Quality of products and services can be affected when goods and services are outsourced. There can be chances that the vendor does not understand the implications of business process, quality standards adherence that can lead to loss of image for the company (which has outsourced its goods or services). Another major barrier in the outsourcing parlance is language especially when there is an off shore outsourcing (Tate et al., 2017). The BPO industry is most affected due to this language barrier though efforts are made in this direction it remains a hazard. When services are outsourced there is a grave danger of losing information from the vendor who has access to such information. People with a criminal mindset can wreak havoc by getting access to crucial information as in banking sector and other similar sectors. Apart from this, there are also many examples of data mishandling and leak from the BPO sector which has led to people losing hard earned money. (Gilley and Rasheed, 2000)
Outsourcing vendors can be unscrupulous by trying to extract more work from a lesser amount of people in an attempt to earn higher profits; this aspect can create a lot of health issues among the employees working in an outsourcing company. Psychological disorders, such as stress, sleeplessness, etc. are attributed to such people who work under great pressure while at work in these companies. (Mukherjee and Bhal, 2017)
Conclusion
As mentioned in one of the above paragraphs there are always two sides of a coin. Any new initiative, such as outsourcing has to be learned by experience. And outsourcing is a relatively new concept for business organizations all over the world. Technology has enabled organizations to conduct business from any part of the world, and this has a flip side to it. The same technology can be misused leading to many incidents and problems such as the data leaks etc. These loopholes that exist when new initiatives like outsourcing are undertaken should be thoroughly scrutinized and studied before undertaking such ventures. As in the case of Nike, the company came to know about the gross ethical and legal violations only when it was reported in a section of the process. But in the process, Nike had to suffer damage to its brand reputation because of the misdeeds of an outsourcing vendor.(Whittle, 2017) Such instances can be detrimental to the whole concept of outsourcing, however, the concept of outsourcing is here to stay.
References
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