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Outsourcing has become one of the main factors of hiring services for certain businesses as it has seen phenomenal growth since early 90's. The companies started adopting this as soon as the global economy changed and an increasing competition evolved between the companies in order to search for any possibility to get efficiency gains and the desired profit targets. The firms moved their internal manufacturing and operations to low cost countries in order to get cheap labour with innovative capabilities. And now the firms can access to external technologies as well as they can increase their operational flexibility whereas the core functions of their business can be dealt with more efficiently meanwhile and they can concentrate on their innovative new projects. Outsourcing, with the emerging global economies and wealth growth is a change in the structure of business from internal capabilities to network capabilities (McEvily and Marcus, 2005).
IT sector was the main field outsourced the most. According to Kavanagh (1997) 25% of all IT work and services were being outsourced in the UK in 1996 whereas in 1993 this ratio was only 15%. Human resource recruitment, other facilities and building services management, IT networking management, application hosting and payroll are all the other departments which are being outsourced.
Types of outsourcing:
Advantages and Factors for success:
This is certain that all the investors usually expect a value for shareholders by adopting outsourcing (Hayes et al. 2000). In a broad scenario there is a significance of outsourcing as it (1) lowers the purchase price by taking advantage of low costs of external suppliers, (2) improves the quality of certain inputs and by purchasing from various suppliers with multiple choice. Cost saving and purchasing the superior quality can be classified in the terms of low cost from the firm and improved quality. The potential benefits of outsourcing are discussed as under:
The organisations that embrace outsourcing and take their other functions out for contracts and focus on their core business, make the lead in future market competition believing those functions critical to their success (Nicholas, 2006). But the high degree of outsourcing may result in technological dependence and external inefficiency (Kotabe, et al. 2008). It has been listed in Harvard Business Review that outsourcing one of the most practicable and vital part of management ideas and practices of 20th century. A famous scholar and business visionary, James Brian Quinn of Dartmouth College, has regarded outsourcing, "One of the greatest organisational and industry structure shifts of the century". Harland et al (2005) further elaborate that it may reduce operation costs and free up assets.
In an example, in the late 1980s Chrysler was on the verge of bankruptcy but government loan and the leadership of Lee Iacocca saved it from this disaster. By 1997, this Chrysler was among the one of the best automobiles in the industry and emerged as a low - cost producer and was named 'Company of the Year' by Forbes Magazine. How did it arise again was by outsourcing its sources when it classified its non-core functions and core functions for improvement and planned the structure of the company employees to gain maximum output using least resources. Non-core functions were dealt by outsourcing while concentrating the company's internal efforts on an emerging set of core competencies. It outsourced much of its service work i-e logistics where it introduced the concept of "lead logistics"- engaged an external logistic supplier who produced and facilitated the entire logistic needs (Michael, 2004).
Disadvantages and failures:
Momme (2001) defines outsourcing as a process to establish and manage some contract with any external vender or supplier to manage the services those have previously been provided in-house. Although there has been a great research on this process yet there is not significant number of framework available to describe the process of outsourcing.
The outsourcing process is a complex structure which consists of various activities and sub activities. Thus the companies outsource their non-core activities to suppliers for the purpose of securing some specialize expertise and lower costs. Since its occurrence, the outsourcing has been defined in many ways in order to help the academics and for the general application to manage the process successfully. Although this phenomenon can be classified in many ways yet it has been approached through numerous theories. This has caused a great confusion among the researchers. There are a mentionable numbers of authors who have classified these theories and helped understanding the outsourcing phenomenon (Gotttschalk and Solli-Sæther, 2005: pp 685-702).
2.12 Outsourcing theories:
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Capabilities." STRATEGIC MANAGEMENT JOURNAL 26(11): 1033.
Harland, C. et al. (2005). "Outsourcing: assessing the risks and benefits for
organisations, sectors and nations." International Journal of Operations & Production
Management 25(9): 831-50.
Momme J. (2001). Outsourcing Manufacturing to Suppliers, PhD dissertation, Department
of Production Aalbrog University, Aalborg
Gottschalk P., Solli-Sæther H. (2005). "Critical success factors from IT outsourcing theories: an empirical study", Industrial Management & Data Systems, 105, 6, pp. 685-702
Levina N., Ross J.W., (2003). "From the Vendor's Perspective: Exploring the Value
Proposition in Information Technology Outsourcing", MIS Quarterly, 27, 3, pp. 331-364
Barney J.B., Hesterly W., (1996). "Organizational Economics: Understanding the
Relationship between Organizations and Economic Analysis", in Clegg S.R., Hardy C.,
Nord W.R. (Eds.) Handbook of Organization Studies, Sage Publications, London
Arrow K.J., (1985). "The economics of agency", in Principals and Agents: the Structure of
American Business, Harvard Business School Press, Boston
Jensen M.C., Meckling W.H., (1976). "Theory of the firm: managerial behaviour, agency
costs and ownership structure", Journal of Financial Economics, 3, pp. 305-360
Kotabe, M., M. J. Mol, et al. (2008). "Outsourcing, performance, and the role of e-commerce:
A dynamic perspective." Industrial Marketing Management 37(1): 37-45.
Kavanagh, J. (1997), "Trend towards Contracting-out", the Financial Times, 4 June.
PA Consulting Group, (1996), Management Summary -International Strategic Sourcing