Outsourcing in the Business Environment (Encyclopedia of Business and Finance)
Outsourcing is an option for managing internal tasks. A staffing tool, outsourcing is an arrangement whereby an organization contracts with another organization to perform tasks or functions traditionally handled by internal staff (Boone and Kurtz, 1999).
When an organization decides that more personnel are needed, it must first decide whether to hire more employees, contract workers, or outsource the functions. The focus is on efficiency and cost-effectiveness when deciding whether to outsource. This decision-making process involves internal analysis and evaluation, needs assessment and vendor selection, and implementation and management (Outsourcing Interactive, 1999).
Organizations should remember that outsourcing does not mean abdicating management responsibility. Therefore, companies should
avoid acting compulsively when deciding on an alternative solution. If the requirements, expectations, and needed resources are not clearly understood, outsourcing does not improve the situation and may even cause it to become worse.
Internal analysis and evaluation involves examining the need for outsourcing and identifying the implementation strategy. Top management of an organization makes these kinds of decisions. People internal and external to the organization provide needs assessment and vendor selection. To assist in identifying qualified vendors, research is focused on the needs of employees and on companies outsourcing the same functions.
Implementation and management allow for administration of the relationship as it evolves between the twoutsourcer and client. Strategy includes ways to monitor and evaluate performance, communicate issues, resolve conflicts, and help employees adapt to change.
ADVANTAGES OF OUTSOURCING
There are several advantages for organizations that choose outsourcing as an alternative to hiring full-time employees. The ten most important reasons for organizations to outsource, as identified in a Survey of Current and Potential Outsourcing End Users in 1998 by the Outsourcing Institute, are:
- Improved efficiency: To improve efficiency, a company must aim for dramatic improvements in critical measures of performance such as cost, quality, service, and speed. In some instances, the need to increase efficiency can directly conflict with the need to invest in the primary focus of the business. Outsourcing secondary functions to a specialist allows the organization to realize the benefits of maximizing efficiency.
- Access to experts and specialists: Experts and specialists make extensive investments in technology, procedures, and people. Expertise is gained by working with many clients facing similar obstacles.
- Asset infusion: Outsourcing often involves the transfer of assets from the customer to the provider. Equipment, facilities, vehicles, and licenses used in the internal operations have value and are sold to the supplier. Certain assets sold to the supplier reveal a winin approach between outsourcer and client.
- Freeing of resources for other purposes: Every organization has limits on the resources available. Outsourcing permits an organization to redirect its resources, most often people, from noncore activities toward activities that serve the customer. Employees whose focus is on internal tasks can now be focused externally toward the customer.
- Better control over difficult or complex functions: Outsourcing is a smart option for managing complex tasks. When a function is viewed as difficult to manage or out of control, the organization needs to examine the underlying causes. The organization must understand its own needs in order to communicate those needs to an outside provider.
- Improved company morale and focus: Outsourcing lets a company focus on its primary business by having operational functions assumed by an outside expert. In turn, the employees will have increased motivation and morale, since their jobs will be less routine and more meaningful.
- Reduced capital expenditures: There is enormous competition within most organizations for capital funds. Deciding where to invest these funds is one of the most important decisions that top management makes. It is often hard to justify secondary capital investments when primary departments compete for the same money. Outsourcing can reduce the need to invest capital funds in these secondary business functions. Instead of acquiring the resources through capital expenditures, they are contracted on an "as-used" basis.
- Reduced operating costs: Companies that try to do everything themselves may incur very high research, development, marketing, and deployment expenses, all of which are passed on to the customer. Outsourcing the secondary functions to experts whose only function is one particular task can be much less expensive in the long run. By outsourcing a task and avoiding hiring full-time employees, a company does not have to pay for insurance, retirement, 401K, or vacation benefits. These benefits can add up to huge expenditures by companies each year.
- Reduced risk: Tremendous risks are associated with the investments an organization makes. All aspects of the environmentuch as markets, competition, government regulations, financial conditions, and technologieshange rapidly.
- Utilization of resources that are not available internally: Outsourcing is a good alternative to adding a new department or creating a costly task force to complete a function. New organizations, spin-offs, or companies expanding into new geographic areas or new technology should consider the benefits of outsourcing from the beginning.
The Survey of Current and Potential Out sourcing End Users (1998) also identified factors leading to successful outsourcing. The most important factors identified were: (1) effective and open communication with the individual and/or groups involved, (2) top-level support and involvement, (3) choice of right vendor, (4) continuous management of the relationships, (5) clarity of company goals and objectives, (6) a visionary plan, (7) availability of external resources, (8) contractual agreement, (9) awareness of personal concerns, and (10) justification of financial involvement.
DISADVANTAGES TO OUTSOURCING
Although there are many advantages to outsourcing, there are also a number of disadvantages. And in some instances, advantages can become disadvantages, depending on the organization and the problems involved.
"Outsourcing is no bed of roses" according to Ed Foster (1996). In order to get the most out of outsourcing, the best in management re sources are necessary. The drawbacks to out sourcing include the following:
- No benefit from a drop in cost of work outsourced: In some industries, when a long-term contractual agreement ends, a drop in the cost of outsourcing work does not necessarily mean a lowering of the cost to perform the work internally.
- Problems occurring in the aftermath of layoffs/downsizing: Morale becomes a concern in the aftermath of some outsourcing deals. Employees are doing more than before for less pay and struggling with problems such as meeting schedules, budget, and quality specifications.
- Outsourcing impeding the work of the organization: On rare occasions, organizations have experienced production delays caused by the outsourcing company. John Wyatt, president of James Martin & Company, states, "You rarely hear about the failures of these contracts, but there are many of them" (quotedin Griffin and Ebert, 1999).
- Managing long-term relationships: Several factors contribute to a not-so-perfect outsourcing relationship. The factors include (1) pricing and service levels, (2) differing buyer and supplier cultures, (3) lack of flexibility in long-term contracts leading to increased dissatisfaction, (4) both parties failing to make the most of the relationship at the expense of one another, (5) underestimating the time and attention required to manage the relationship or giving management responsibility to the vendor, and (6) lack of management oversight (InfoServer, 1999).
Peter Bendor-Samuel, editor of InfoServer, the Journal for Strategic Outsourcing Information, and president of Everest Software Corporation, an outsourcing management company, has definite views regarding outsourcing. He states: "Many companies have been dissatisfied [with outsourcing] and have ranged from being mildly annoyed to extremely unhappy. But there is no question that outsourcing is here to stay, so the question is how to get the most out of it" (quoted in Foster, 1996).
At one time outsourcing was limited to such services as housekeeping, architectural design, food service, security, and relocation. Today, however, outsourcing has become a popular choice in business and industry. Telemarketing, accounting, travel, data processing, manufacturing, and human resource management are some of the businesses utilizing outsourcing.
Although outsourcing began with small businesses, both large and small organizations are now outsourcing. Griffin and Ebert (1999) reveal that a study by the National Association of Purchasing Management in 1997 projected that at least $121 billion would be spent in the global outsourcing market by the year 2000. However, the Outsourcing Institute in New York projected more than twice that figure.
Outsourcing is no longer solely a domestic concern. Globally, organizations are considering and utilizing outsourcing. With e-commerce playing a significant role in the economy, out sourcing is expected to play a considerable role in the growth of e-commerce.
A number of factors contribute to the decision to outsource, such as improved efficiency, access to experts and specialists, resources avail able for other purposes, and better control over difficult or complex functions. Organizations utilizing the three-step outsourcing process must perform an internal analysis and evaluation, assess their needs, and select a vendor, and decide on how to implement and manage the function.
There are both advantages and disadvantage to outsourcing. Each must be carefully considered when determining the potential effect on the organization. In order for an organization to successfully outsource, a total commitment by both outsourcer and client is required so that a thriving relationship that benefits both can be formed.
Bendor-Samuel, Peter. "The Brave New World of Outsourcing." InfoServer. http://www.outsourcing-journal.com/issues/may1998/html. May 1998.
Bendor-Samuel, Peter. "ANew Way of Doing Business." InfoServer. http://www.outsourcing-journal.com/issues/apr1998/html. April 1998.
Bendor-Samuel, Peter. "A World View." InfoServer. http://www.outsourcing-journal.com/issues/aug1997/html. August 1997.
Boone, Louis E., and Kurtz, David. (1999). Contemporary Business, 9th ed. Fort Worth, TX: Dryden Press.
"Changing Nature of Outsourcing." InfoServer. http://www.outsourcing-academics.com/html/acad4.html. 1999.
Foster, Ed. (1996). "Outsource Sense." InfoWorld 18(37) (September 9):
Griffin, Ricky W., and Ebert, Ronald J. (1999). Business, 5th ed. p. 421. Upper Saddle River, NJ: Prentice-Hall.
Horowitz, Alan S. (1999). "Extreme Outsourcing: Does It Work?" ComputerWorld 33 (May 10):50-51.
Outsourcing Interactive: An Online Resource of The Outsourcing Institute. . 1999.
"Outsourcing Relationships: Why Are They Difficult to Manage?" InfoServer. http://www.outsourcing-mgmt.com/html/difficult.html. 1999.
Steen, Margaret. (1998). "Thinking Globally." InfoWorld 20 (November 20):73-74.
Survey of Current and Potential Outsourcing End-Users, Outsourcing Institute Membership. (1998). .