The Outsourcing Concept Is Rapidly Growing Commerce Essay


The outsourcing concept is rapidly growing in numerous industries in the past few decades. In tradition, the companies produce goods and services in-house, now they go into outsourcing due to various factors. There are several trends on the outsourcing value.

After review more than 20 journals, much of the literature identifies that outsourcing able to save cost (Amold, 2000 ;Aubert et al.,1996 ;Bienstock and Mentzer,1999,Kriss,1996 s ;Meckbach, 1998; Hendry, 1995; Welch and Nayak, 1992). The savings of cost are due to the vendor or service provider able to supply the goods or services much more cheaper even with added transaction costs, operating cost( Bers,1992;Harler,2000,Gurbaxani and Whang,1991).

Lately, some researchers argue that outsourcing actually cannot save cost. Although many firms outsource because they think that through outsourcing they can save cost, there are no guarantees that expected savings will be realized. There is increasing proof that expected savings have been overestimated and costs sometimes elevated after outsourcing. (Welch and Nayak 1992 ; Pepper,1996 ; Cole-Gomolski,1998 et al). According to Barthelemy,(2001), the respondents who participate in outsourcing method had said that they entered the outsourcing agreement as they believe that they had understood all the major costs, but that in the end the costs that they had not predicted ended up halving or even canceling out the company's potential savings from outsourcing.

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More recently, the main motivation of outsourcing has switch from cost savings into core competencies.(Mullin 1996; Muscato,1998; Robert.V,2001 ; Mclvor,2002,et al ;Grover, Cheon and Teng, 1996; Smith, Mitra and Narasimhan, 1998; Lacity, Hirschheim and Willcocks, 1994; Willcocks, Feeny and Olson, 2006). The firms decided to use outsourcing mainly due to the organization can give more attention on their core business internally by outsourcing the non-core competencies functions of a business to vendors or service providers in which this will be an essential success factor in the continuing survival of a company in long run.( Quinn and Hilmer,1994; Brandes et al,1997; Sislian and Satir,2000). Core competencies of a business refer mainly to the core skill, capability skill, and expertise of the employees of the firms which should be retained in-house rather than outsource. According to Ulli, 2000, core competencies of a business should include three elements, which are their characteristics must be relevant and is distinctive from competitors, the product must be unique enough to gain competitive advantage which can protect it from imitation by competitors over time, and the resources are usable for multipurpose. These core competencies of a business should remain in a company and should not be outsourced as the core competencies of a business able to provide a company competitive advantage for a business. For example, a supply chain management competency, if it is a core competency as with Dell computers, then it will directly affect the delivery of products and services. (John Power et al 2006). In contrast, for the non-core competencies activities including two elements where first, they do not make a distinction themselves from others in the marketplace, second, they do not directly impact on the organization's products and services. So, it is encouraged that the companies should outsource the non-core competence of a business and retains the core competence of a business for competitive advantage purpose.

It is not long after the researchers say that core competencies is one of the reason for a company to do outsourcing, a few researchers challenge the statement. According to Lankford and Parsa (1999), it is tricky when determining the core competencies of one's organization and the impact of making such mistake is very costly. Firms are continuously facing with the decision of whether to make or buy, that is to expand resources to create an asset, resource, product or service internally or purchasing it from an external party. (John Power and Kevin Clyde Desouza and Carlo Bonifazi, 2006 ; Kakouris, Polychronopoulos and Binioris, 2006). IBM can be used as a frequent example as this company outsources the "wrong" things, operating systems. If a company outsources the wrong functions, they may develop gaps in their learning or knowledge base which may prevent them from future opportunities. ( Earl,1996; Prahalad)

Other than cost saving and core competencies are the reasons for a company to do outsourcing, lack of resources within the companies is also one of the outsourcing value trend for a company nowadays. (Prahalad and Hamel, 1990) Most of the small and medium sized enterprises (SMEs) have a tendency to fail in marketplace because the employees lack of knowledge, expertise, absence of overall administrative skills, and capabilities to perform the job tasks. (McIvor, 2009; Hadjimanolis,2000; Dyer and Ross, 2008). By outsourcing, it has creates new opportunities through optimized utilizing of external resources (Mahmoodzadeh et al., 2009). By relying on outsourcing, SMEs can acquire the capabilities, competences and expertise that they require from external service providers.( Gilley et al.,2004).

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For example, the accounting function plays a important role in SME environment, but many SMEs have facing the difficulty in handling the accounting tasks.(Jayabalan et al.,2009; Krell 2007) Accounting functions require knowledge of generally accepted accounting rules in which the SMEs lack of expertise and the accounting knowledge. (Marriott 2000; Everaert,2006). For instance outsourcing is the only ways to solve the SMEs problems which will help SMEs sustain a competitive edge in the business environment. ( Jayabalan et al,.) It is also the same for Human Resource function. Large companies can develop comprehensive formal Human Resource Management system that match the organizational demand, but not for the SMEs. SMEs do not have enough capital to invest heavily in the knowledge that is required to address the area of Human Resource Management and also less likely to have a formal Human Resource Management approach (Bartam 2005; Klass 2003; Klass, McClendon and Gainey, 2001)

After the outsourcing reasons of lack of resources, now the outsourcing value trend moves to specialization, where the outsourcing firms have special expertise in doing specific area of tasks (Green,2000). Many specialist suppliers or service providers have a broad range of knowledge in the specific area of job tasks (Gottfredson et al., 2005). This specialization can be seen in the service outsourcing and the outsourcing company with specialized job area of tasks will be more productive.( Chinitz, 1961).

A common example of domestic service outsourcing because of specialization purpose is where a manufacturing company outsources part of its need for human resources job tasks to a company specializing in recruiting staff, training and development of staff, performance management for the employees, as well as compensation design to retain the employees. (Lily, Gray and Virick,2005) In 1990s, the major reason for IT outsourcing was due to specialization on computing and system development skills, and to special external functional capabilities (Nairn, 1999).

After few years, some researchers argue that the specialization that the outsourcing firm provided has brought out few problems and risks. According to Gavin and Matherly(1997) ,the risk of employees' emotional or mental tension, declining of loyalty rate to loss of internal expertise are brought out due to the outsourcing of human resource management. Malhorta(2007) also found that the outsourcing of human resource management has causes the declining in the morale, self-esteem and performance of the remaining employees. The troubles of potential loss of organizational skills and risk of depend highly to the expertise and fit of outside service providers may harm or damage the companies in long-run (Adler 2003; Lawler et al.2004). Another argument from Amiti and Wei (2009), although outsourcing tend to result in a job loss within the company but it in turns allow the service provider or vendor to increase their productivity, gain earnings, and thus expand their business .

The latest trend for motivation of outsourcing is the advancement of technology and flexibility. (Loh and Venkatraman,1992; Husain and Sushil, 1997 ;Eisele, 1994; Iyer and Kusnierz,b1996; Kakabadse and Kakabadse, 2000a; Lankford and Parsa, 1999; Large, 1999; Livingston, 1992; Pinnington and Woolcock, 1995). The speedy growth of technology in the current years gives many firms an opportunity to gain advantage through outsourcing for developing complex or multifarious systems, and improving the way business processes or services are managed.(Schumacher, 2005; Quinn, 1999) This is because they will avoid from becoming technology outdated and they do not want to make a large investment in technology which are costly, so they will choose outsourcing as the way to improve their productivity in this changing and expanding nature of the IT service markets. (Lacity and Willcocks, 2000, 2001). Moreover, by continuous redesign of their contract, it allows the organization to have a greater flexibility where the continuous changing contracts that let them to meet their information needs anytime.(Clark, Zmud and McCray, 1995). Furthermore, the greater flexibility makes it easier to face business level of flexibility in the utilization of IT resources and the service providers will be responsible to handle with fluctuations in IT workloads.( Jurison,1995) According to Quinn (2000) , outsourcing is not just for products or systems but outsourcing of innovation and innovation capabilities due to the increasing demand for products and services, and increased supply of scientist, technologists and knowledge workers.

There are also few risks in outsourcing of information technology and information system. According to the Bhattacharya et al (2003); Earl (1996),possibility of weak management, inexperienced staff of outsourcer, outdated technology skills, lack of organizational learning, loss of innovation capabilities and technological invisibility as key risk factors for outsourcing.

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