Advantages and Disadvantages of Outsourcing

Advantages and Disadvantages of OutsourcingOutsourcingRobert and Gordon (1996) claims that reve as well asurcing has expanded intimately over the be two decades. The reason behind this expansion is that economies of outgo became more app atomic chip 18nt in the recent years than it was earlier. Outsourcing is a perplexity approach that involves delegation of an body subprogram to an external service provider which was previously practiceed intragrouply (Lankford and Parsa, 1999). The act must pee-pee been performed internally before outsourcing to trey disjointy. If the military action is delegated to a nonher marketer without performing internally then it would be externalization alternatively than outsourcing. The call outsourcing itself shows from out source (i.e. external source). In the earlier phase of 1960, outsourcing was merely considered as begetual agreements wherein a supplier does processing or is providing services for another ships fellowship. B ut, it is different from regular buy agreement as outsourcing is not selling off a part of the handicraft. The Out-contracted services or processes must be replaced by the supplier in outsourcing. This is the basic difference between regular purchasing agreement and outsourcing. Outsourcing is not simply a make it or buy it last, the activities outsourced must be of signifi arset interest for the company (Bryce and Useem, 1998).The term outsourcing oft leads to confusion in what is meant by outsourcing, when engrossd in place of a more proper(postnominal) term (Andrade and Chapman, 1998). fit in to Johnson (1997) Contracting-out, contract manufacturing, employee leasing, sub- detection, consulting, contract services and contract programming, atomic number 18 of 10 mistaken as mere outsourcing as all of these items argon similar to outsourcing. But, on the other hand these items bear different characteristics as well which differentiates them from outsourcing.3.1.1 Motives fo r outsourcingA company will decide to outsource an activity when such an activity can be performed by other companies at a lower price by using economies of scale (Kakabadse Kakabadse, 2002). Nowadays, companies use mutual sourcing scheme of outsourcing as a tactical quick welter at the terms of financial difficulty and rely on outsourcing scheme to come out of financial crisis or provide cash infusions (Johnson, 1997).Outsourcing decision also erupts from the search for competitive advantage. Porter (1980) images that a company ineluctably to identify its competitive advantage. Once the company identifies its centre clientele activities then it can outsource other non- content activities to focus more on core avocationes.According to Jumah and Wood (2000), weeer companies be likely to solve the best results from outsourcing. Their main motive is to prosper from the advantage of economies of scale. Smaller companies very much find it difficult to achieve economies of scale within their internal activities and social occasions as they lack the ability. But, they are more flexible in absorbing replace and innovations into their arranging. Thus outsourcing may come as a saviour for small companies to achieve functional efficiency similar to those of grownup companies (Jumah and Wood, 2000). Jumah and Wood (2000) argue that larger companies theoretically benefit less from outsourcing as compared to smaller companies in terms of cost reduction as large companies already enjoy the benefits of economies of scale in many cases or at least possess the capability or expertise to achieve it internally. In despite of this, the most frequent users of outsourcing are larger companies.There are apparently other reasons underlying for outsourcing other than realizing benefits of economies of scale from competitive advantage. According to Fan (2000) the other motives to outsource are reduced costs, improved managerial focus, improvised quality, enhanced fl exibility to facilitate revision. Fill and Visser (2000) identifies the same drivers with more or less additions such as increased knowledge and capacity, potential for creating strategic business alliance, reduction of investment, technical considerations, increased access to functional capacity, and fewer internal administrative problems.Outsourcing is generally accepted as a view of contracting out or disposing parts of business to achieve tactical benefits. However, Johnson (1997) in contrast cited a new view on outsourcing viewing outsourcing as a way to offer structural change. According to the new approach, the company undertaking the activity (outsourcee) is viewed as being brought in by the outsourcer rather than contracted out. The author further developed these views and classified reasons to outsource into tactical and strategic reasons. Both these reasons differ from each other on the groundwork of their focus on short-term (tactical) and long-term (strategic) benefi ts.The tactical reasons for outsourcing comes from the functions outsourced which are beyond the defend of the company and difficult to manage. Smaller companies generally go for outsourcing with the view of achieving economies of scale tour large companies often benefit from outsourcing activities which are out of their control. Another reason of this category may be that the company outsource activity at times of financial distress to obtain detonating device funds for core activities. But, these tactical reasons to outsource are of short term nature (Douglas and Meehan, 2001).Apart from tactical reasons, there are other strategic reasons to outsource which focuses on longer term and are associated with gaining access to world-class knowledge and expertise, the risk sharing and the focus on core competencies. An organisation can reduce its risk significantly by means of outsourcing. The inaugural strategic reason for outsourcing is to increase company focus on core competenci es of the governance (Douglas and Meehan, 2001).Problems with outsourcingOutsourcing poses a number of rewards to an organisation such as cost reduction, focus on core competencies, improved quality. But, there are number of disadvantages also underlying to outsourcing namely enhanced dependency on supplier, employee redundancy, prejudice of control, increased expenditure due to hidden outsourcing costs (Douglas and Meehan, 2001). According to Prahalad and Hamel (1990) both organization needs to identify, cultivate and exploit their core competencies in circumstances up to grow. Competitive advantage baron be lost if core business are outsourced. Therefore, it should be seen by the company that no mistakes are make in identifying core competence. Significant Knowledge of the company will top off if core activities are outsourced which is difficult to rebuild once lost.Bonifaziet al.(2004) views ten traps in an outsourcing project that should be taken into consideration durin g the implementation of the project. To come out with, lack of management commitment lack of communication plan borderline knowledge and experience of supplier mischance to recognize outsourcing risks by companies failure to obtain outside outsourcing professionals failure to utilize internal resources by organizations go through vendor selection ignoring cultural differences minimizing vendor productivity the last trap described is the failure caused by not understanding the on-going outsourcing relationship with the vendor.Diminishing quality service and insufficient flexibility in achieving the desired results also contri savees towards outsourcing risks. All these risks should be considered at the time of contract formulation. By designing a proper contract outsourcing risks may be well protected (Andrade Chapman, 1998). The whole structure of the organization can be affected by a single outsourcing agreement.3.1.3 Common OutcomesOutsourcing is a coercive corporate strate gy that requires flexibility in the sense global business takes place. Used effectively, outsourcing can very well live up to the standards set in the beginning of the agreement (Bonifaziet al.,2004). But, if used ineffectively the agreement may culminate in search of another vendor or by legal transfer the outsourced activity back in-house (Andrade Chapman, 1998).BacksourcingBacksourcing currently lacks a common definition. However, Andrade Chapman (1998) gives a definition which is easier to understand once the term outsourcing is understood. He defines backsourcing as process of bringing back outsourced functions in-house. When an activity originally performed internally by the company and then contracted out to a vendor, is brought back in-house is referred to as backsourcing (Andrade Chapman, 1998). Backsourcing is often mistaken as insourcing. But, both of them deviate on the aspect that insourcing is bringing back the functions in-house that were never outsourced but init ially contracted out while in backsourcing the functions that were outsourced is brought back home. In other words, in backsourcing the activities must experience been previously outsourced.3.2.1 Motivesfor BacksourcingA company may end an outsourcing contract stock- silent if everything was all right. The reasons being behind this may be that the company would establish restructured its organization, might throw off entered a new market or would have been affected by law changes (Andrade Chapman, 1998). Some companies solve the problem of slimy outsourcing results by bringing the outsourced function back home. Kakabadse Kakabadse (2002) points out that such a remedy is often costlier to the outsourcer and discomfit to the vendor. Despite, of heavy costs for reabsorbing many companies still choose to undergo for backsourcing. Reverting back the outsourced functions also raises finger on the organizations previous decision and judgement. However, press reports show that backso urcing is becoming common now-a-days (Wong, 2008).The motley risks and problems associated with outsourcing explode motives for undertaking backsourcing. Deteriorating quality service and minimal elasticity in the agreement to respond to such deterioration is the single most common motive for backsourcing (Andrade Chapman, 1998). Loss of control, increased cost and trustworthiness are also drivers of backsourcing (Wong, 2008). According to Wong (2008) power and politics may also be a motive for backsourcing. He explains that power and politics among senior executives of the organization might play an important role at the time of outsourcing. When this set of executives are replaced by new executives who believe in internal development of an activity previously outsourced, then the strategy inside the company will change once again from outsourcing to backsourcing. In other words, embedding of knowledge about the outsourced function within the company may lead to backsourcing. Cha nges in vendor organization may also trigger backsourcing. If the vendor organization merges with other organization to form a new entity, then there is a conjecture of change in perception of new entity. The changed perception of the new entity on ongoing outsourcing contract may create disputes between the parties leading towards backsourcing (Wong, 2008). circuit board 1.1 Illustration of Backsourcing cases3.2.2 Backsourcing ImplicationsThe process of backsourcing can be a significant endeavour, but its activities are very intricate and require lot of attention unneurotic with hard work. If backsourcing plans are not formulated diligently, then it can easily cause employee fatigue (Azzouqa, 2008). According to Andrade Chapman (1998) staffing is the main issue since competence can rarely be found back-home. This is because at the time of outsourcing an activity, the staffs related to the activity is often either transferred to the vendor company or is resigned from the company . Therefore, one consequence of backsourcing is to hire staff from the contractor or from the market. The process of hiring might not be successful as the personnel might not have preferred competence as required by backsourcing company (Andrade Chapman, 1998).As a result of backsourcing, companies have to pay huge compensation to the vendor company to reabsorb the outsourced activities back into the organization, if the contract is terminated before its expiry. The strategy of backsourcing can also be adopted afterward the expiry of contract. However, in this situation also the company has to bear high cost for re-insourcing (Wong, 2008). Thus, in the both the circumstances organizations have to incur huge expenses. For example, Farmers group paid $4 million as termination fees to IBM to extricate itself from its agreement (Overby, 2003 cited by Wong, 2008).Technology procurement is also a significant matter that should be addressed at the time of backsourcing an activity. When the activity is outsourced, the technology used to perform those activities is often sold since it is rarely of any use to company after discontinuation of activity. Therefore, bringing an activity back in-house whether in terms of backsourcing or insourcing would almost require acquiring new technology. This may again be a costlier practice for the company and can take long time to internalize technology within the organization (Andrade Chapman, 1998).However, reducing costs and control of operating costs are considered as most significant drivers of outsourcing (Fan, 2000).