Decision to Outsource and the potential Advantages and Disadvantages
Outsourcing has transformed global business. Outsourcing is when a company appoints a third party, in another country to complete a specialized task, whether it is making a product or providing a service such as human relations or information technology. These specialized tasks are unable to be fulfilled within the organization which is why the business goes "out" to find the "source" their company needs. The decision whether or not to outsource is a complex thought process in an organization. Over the past few decades, companies have engaged in outsourcing to enhance their competitiveness, reduce costs, increase their focus on internal resources, and gain a competitive advantage. There has been and continues to be a lot of debate concerning the decision to outsource and the advantages and disadvantages obtained by the company.
The business case for outsourcing varies depending on situation but has increased dramatically. To implement a successful outsourcing it requires a strategy and framework of the business processes, including manufacturing, logistics, and design. Effective outsourcing requires analyzing the vital dimensions such as the relative capability of the process, the contribution to competitive advantage, and the potential for opportunity within outsourcing. Analyzing these dimensions provides the organization with multiple sourcing strategies that are important when determining outsourcing decisions.
When the organization is deciding whether to perform internally or outsource they take into consideration the key dimensions. A crucial element in the competitive strategy involves understanding why one establishment differs in performance to another. Some companies gain advantage over others as they conduct certain processes in a superior manner compared to their competitors. This analysis is concerned with and identifies the performance disparity between the current organization and the potential third party. It allows the organization to determine whether it will be detrimental to their competitive position to outsource.
Establishing how a process contributes to the company's competitive advantage is critical to the outsourcing decision. Processes that currently possess a strong capability and competitive advantage should remain internal and uphold that position. Processes that are significant to achieve competitive advantage such as lower costs and higher levels of differentiation from competitors may surpass competition when outsourced to a foreign country. It is possible that a process does not have any impact on the organizations ability to achieve economic advantage. While these processes should perform well, any performance improvement will not factor into the competitive advantage because a consumer would not view that process as a differentiator when buying a product.
While deciding to outsource, the business must consider the opportunism given from vendors. The existence of investments in physical or human assets devoted to a particular relationship will create switching costs for an organization. This problem is worsened if there are a small number of capable suppliers in the supply market. These situations make the organization prone to opportunism during the contact and when the contract is expected to be renewed. Difficulties with calculating supplier performance in addition can create problems within the relationship, as the company must disburse additional resources to monitor the supplier. Furthermore, the different interpretations of efficient performance can create problems. For instance, where effective performance measures have not been adequately stated in the outsourced process, it will be difficult to determine whether the supplier has implemented the process better than when it was executed internally.
As the reasons for outsourcing differ upon circumstances, the benefits that businesses receive from outsourcing generally are similar. Benefits can include lower cost and higher quality products or services, greater flexibility, and a faster response to change in consumer needs. Outsourcing allows organizations to seek out and hire the top qualified experts for specialized work. Using outsourcing also allows organizations to keep more cash on hand and is cheaper in terms of salaries and benefits. The company will increase their efficiency and have a tighter control of budget through its predictable costs. Using a third party gives the business the capability to focus on core competencies by ridding the peripheral ones. It is at times faster and more efficient to hire a specialist to do something than it is to train your company. An outsourced company responds faster to changing circumstances and tends to be more innovative. Outsourced service functions can include call centers, payroll and bookkeeping, and advertising and public relations. Nearly every business has at least one of these functions which illustrates why outsourcing has impacted most segments of the business world.
These companies have benefited greatly from accessing the specialized abilities of suppliers through outsourcing. On the other hand, some companies fail or choose not to outsource. Outsourcing can go wrong in various ways and has some inherent disadvantages. Outsourcing overseas can lead to communication problems and language barrier issues. If a company chose the wrong partner for outsourcing, some problem areas include sub-standard quality, inappropriate layout of responsibilities, and stretched delivery time frames. Sometimes vendors overpromise in order to create a contract and then fail to execute. When an organization uses outsourcing on confidential data such as HR and Payroll services, it involves a risk of exposing that information to a third party. If outsourcing goes wrong the company faces unexpected difficulties as they typically eliminate the department previously conducted the job internally.
Outsourcing is an intricate issue to tackle and everyone, enthusiasts and critics agree on one thing-that outsourcing cannot be eliminated completely. With all of the pros and cons of outsourcing to consider before actually approaching a third party, it is advised to specifically determine the importance of the processes that are going to be outsourced. It is valuable for an organization to consider the advantages and disadvantages to outsourcing before actually committing to it.
Bibliography
Crosby, Tim. "How Outsourcing Works" 11 February 2008. HowStuffWorks.com.15 November 2011.
McIvor, Ronan. "Outsourcing Done Right." Industrial Engineer: IE 43.1 (2011): 30-35. Academic Search Complete. Web. 15 Nov. 2011.
"Outsourced Forever." Forbes 188.5 (2011): 38-41. Academic Search Complete. EBSCO. Web. 2 Oct. 2011.
The business case for outsourcing varies depending on situation but has increased dramatically. To implement a successful outsourcing it requires a strategy and framework of the business processes, including manufacturing, logistics, and design. Effective outsourcing requires analyzing the vital dimensions such as the relative capability of the process, the contribution to competitive advantage, and the potential for opportunity within outsourcing. Analyzing these dimensions provides the organization with multiple sourcing strategies that are important when determining outsourcing decisions.
When the organization is deciding whether to perform internally or outsource they take into consideration the key dimensions. A crucial element in the competitive strategy involves understanding why one establishment differs in performance to another. Some companies gain advantage over others as they conduct certain processes in a superior manner compared to their competitors. This analysis is concerned with and identifies the performance disparity between the current organization and the potential third party. It allows the organization to determine whether it will be detrimental to their competitive position to outsource.
Establishing how a process contributes to the company's competitive advantage is critical to the outsourcing decision. Processes that currently possess a strong capability and competitive advantage should remain internal and uphold that position. Processes that are significant to achieve competitive advantage such as lower costs and higher levels of differentiation from competitors may surpass competition when outsourced to a foreign country. It is possible that a process does not have any impact on the organizations ability to achieve economic advantage. While these processes should perform well, any performance improvement will not factor into the competitive advantage because a consumer would not view that process as a differentiator when buying a product.
While deciding to outsource, the business must consider the opportunism given from vendors. The existence of investments in physical or human assets devoted to a particular relationship will create switching costs for an organization. This problem is worsened if there are a small number of capable suppliers in the supply market. These situations make the organization prone to opportunism during the contact and when the contract is expected to be renewed. Difficulties with calculating supplier performance in addition can create problems within the relationship, as the company must disburse additional resources to monitor the supplier. Furthermore, the different interpretations of efficient performance can create problems. For instance, where effective performance measures have not been adequately stated in the outsourced process, it will be difficult to determine whether the supplier has implemented the process better than when it was executed internally.
As the reasons for outsourcing differ upon circumstances, the benefits that businesses receive from outsourcing generally are similar. Benefits can include lower cost and higher quality products or services, greater flexibility, and a faster response to change in consumer needs. Outsourcing allows organizations to seek out and hire the top qualified experts for specialized work. Using outsourcing also allows organizations to keep more cash on hand and is cheaper in terms of salaries and benefits. The company will increase their efficiency and have a tighter control of budget through its predictable costs. Using a third party gives the business the capability to focus on core competencies by ridding the peripheral ones. It is at times faster and more efficient to hire a specialist to do something than it is to train your company. An outsourced company responds faster to changing circumstances and tends to be more innovative. Outsourced service functions can include call centers, payroll and bookkeeping, and advertising and public relations. Nearly every business has at least one of these functions which illustrates why outsourcing has impacted most segments of the business world.
These companies have benefited greatly from accessing the specialized abilities of suppliers through outsourcing. On the other hand, some companies fail or choose not to outsource. Outsourcing can go wrong in various ways and has some inherent disadvantages. Outsourcing overseas can lead to communication problems and language barrier issues. If a company chose the wrong partner for outsourcing, some problem areas include sub-standard quality, inappropriate layout of responsibilities, and stretched delivery time frames. Sometimes vendors overpromise in order to create a contract and then fail to execute. When an organization uses outsourcing on confidential data such as HR and Payroll services, it involves a risk of exposing that information to a third party. If outsourcing goes wrong the company faces unexpected difficulties as they typically eliminate the department previously conducted the job internally.
Outsourcing is an intricate issue to tackle and everyone, enthusiasts and critics agree on one thing-that outsourcing cannot be eliminated completely. With all of the pros and cons of outsourcing to consider before actually approaching a third party, it is advised to specifically determine the importance of the processes that are going to be outsourced. It is valuable for an organization to consider the advantages and disadvantages to outsourcing before actually committing to it.
Bibliography
Crosby, Tim. "How Outsourcing Works" 11 February 2008. HowStuffWorks.com.15 November 2011.
McIvor, Ronan. "Outsourcing Done Right." Industrial Engineer: IE 43.1 (2011): 30-35. Academic Search Complete. Web. 15 Nov. 2011.
"Outsourced Forever." Forbes 188.5 (2011): 38-41. Academic Search Complete. EBSCO. Web. 2 Oct. 2011.
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