Outsourcing Productivity Effect

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Evaluation of the effect of Outsourcing on Productivity in a Manufacturing Organisation


Outsourcing is contracting with another company or person to do a particular function. Almost every organization outsource in some way. Typically, the function being outsourced is considered non-core to the business. An insurance company, for example, might outsource its janitorial and landscaping operations to firms that specialize in those types of work since they are not related to insurance or strategic to the business. The outside firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, service providers.

Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carry out narrow functions, such as payroll, billing and data entry. Those processes could be done more efficiently, and therefore more cost-effectively, by other companies with specialized tools and facilities and specially trained personnel.

The phenomenon, however, appears to have entered into a new stage with outsourcing of services becoming increasingly important. This change in structure has been underway for some time, and is generally attributed to the interplay between three factors: technological advances, economic and competitive pressures to reduce costs and improve productivity, and institutional developments favouring trade liberalisation.

Advances in technology have reduced transportation costs considerably, but more importantly, the development and rapid dissemination of information technologies have had enormous economic impacts through the transformation of work processes, organisational structures, communication as well as their output. Large parts of the economy have become digitised which has enabled business activities to be conducted in entirely new ways, as well as across large distances. This has opened possibilities of trade in a variety of services that were traditionally non-tradable, and caused a growth potential in outsourcing of activities facilitated by the opening of markets at both global and national levels.

Outsourcing emerged already in the late 1980s and early 1990s with the contracting out of tasks related to customer services, but has since moved on to a broader range of activities including engineering, software development and other tasks requiring high-skilled human capital. Due to the significant size of the manufacturing sector in the Western economies, and the increasing broad range of tasks exhibiting outsourcing potential, the number of jobs, which could potentially be affected through this channel, is substantial.2 As a result, the subject has become increasingly politically charged.

The potential negative impact of outsourcing on wages and employment, and the consequential reactions from the public in the debate, is probably the main reason why most research on the phenomenon and its economic impacts has focussed on concerns related to manufacturing industries. However, proponents of outsourcing continue to argue that the phenomenon has long-term economic benefits, and that it eventually will increase living standards through positive productivity effects and reductions in factor costs. Yet, little rigorous research on outsourcing and its impacts on productivity or firm performance have been conducted. It is against this background that this study evaluates the effect of outsourcing on organizational productivity.

Aims and objectives

The main aim of this study is to critically evaluate the effect of outsourcing on organizational productivity. The specific objectives are to:

  • Examine the various forms of outsourcing in P and G.
  • Investigate the impact of outsourcing in making organisation focus on their core competences
  • Examine the effect of outsourcing on productivity in P and G.
  • Increased the already existing productivity gap between the manufacturing industry and the service sector.
  • Find out outsourcing role in providing the best quality services, products and people

Significance of the study

Data on the effect of outsourcing on productivity will create awareness on the hidden impact of outsourcing on productivity by revealing to managers opportunities of increasing profits, productivity, level of quality, business value, business performance and much more. It will provide adequate information to policy maker, planners and managers on the impact of manufacturing outsourcing on the service industry.


The study will be a descriptive survey type, which investigated the condition or relationship that exist or prevail between the outsourcing and productivity in P and G.

It will comprise both deductive and inductive elements. It is deductive in as much as the initial hypotheses are derived from analysis of empirical literature on the area. However it is inductive in that it seeks to test hypotheses, which also accord with relevant review both empirical and theoretical, using questionnaires and interviews specifically designed to be a suitable test of those hypotheses. The sample will cut across both junior and senior staff of P and G and the major instruments to be used in to facilitate data collection will be questionnaire, which will be supported with an interview technique. The questionnaire will be likert type with five point-scale of response and will be administered personally by the researcher himself.

Data collected will be analysed using simple percentage, chi-square and person product moment correlation coefficient method of statistical analysis.


Hanley, A. and Strobl, E. (2005). Productivity effects of international outsourcing: Evidence from plant level data. JEL 14(23).

Olsen, K.B. (2006). Productivity Impacts of Offshoring and Outsourcing: A Review. Paris: OECD.

Outline dissertation plan

Chapter 1: Introduction. This will introduce the study and discuss the research problem, providing a general account of the development of the outsourcing and its effect on productivity stating the aims and objectives of the study. It will also discuss the reasons behind the need for this study, the scope and limitations of the study.

Chapter 2: Literature review. This will examine related discussion of relevant theoretical and empirical literature on outsourcing and productivity. This will look critically on issues raised in the study.

Chapter 3: Methodology. This will discuss the design, methodology and administration of the instrument. It will also include a critical appraisal of the validity and reliability of the instrument.

Chapter 4: The research findings and analysis. This chapter will first outline the responses to the questionnaire. A profile of the respondents will be derived from the data, the results being interpreted in the context of both the preliminary survey of empirical literature and the developed hypotheses.

Chapter 5: Conclusions and recommendations. This chapter will summarise the main findings of the analysis, relating them both to relevant theory and to debates within the context of outsourcing and productivity. A section of the chapter will also discuss the implications of the findings for service industry, manufacturing and othe sector of the economy and appropriate recommendations regarding productivity through outsourcing will be suggested.