History Review Of Outsourcing

Published Date: 02 Nov 2017

Outsourcing is not a trend which appeared some decades ago, but it is a phenomenon whose roots are found many years ago. When people firstly started to develop societies, they understood that would be impossible for them to meet their needs by themselves. Thus they start to specialized themselves in order to be more efficient and effectively (India, 2012). This was the pioneer type of outsourcing and was used by households to fulfill their needs. Until the industrial revolution, which started in 1750, a successful company was considered that one which could manage all of its assets by itself. The industry evolution was the historical point that changed this philosophy. Between 1770 and 1790, the competition among companies had been increased and became gradually global. Companies then started to look for new ways to maintain their profits and flexibility. The obvious solution was outsourcing. Companies started to delegate non-critical functions to other companies which were experts on the field. That was the first step in developing the outsourcing as we know it today. In the early 90’s, outsourcing had really caught on. In 90’s the vast majority of the companies were focused on low cost strategy and outsourcing was the best choice to cut-off some inefficient functions. After the entrance of 21th century the outsourcing was not just for the achievement of low cost, but became a strategic tool for the managers (Corbett, 2004)

1.2 Definition of outsourcing

Taking in account the historical information, the reasons that managers’ changed their philosophy and how outsourcing is used nowadays by managers, as a management tool, which help’s companies to achieve their goals and objectives efficiently. Outsourcing could be defined as a method, with which a company cut-off some of its inefficient functions, because they are too expensive or the company does not have the required knowledge to make these functions working efficient or the changes in technology are so fast that makes impossible for a middle or a large size company to monitor or afford. Thus, these companies choose to delegate these functions into other companies and let the experts to manage inefficient functions of the company in a more efficient way. So, outsourcing is a technique that helps’ companies to maintain or even increase flexibility, profitability and competitive advantage over competition, increase diversification and synergy and also we have the achievement of decentralization, cooperation and teamwork (Lankford and Parsa, 1999).

2 Types of outsourcing

Through the last decade more and more companies, such as EDS, IBM, IKON and etc.(Corbett, 2004), have started to use outsourcing as an alternative solution to overcome inefficient functions. The type of the outsourcing that a company would decide to implement is strongly linked with the companies’ industry, but some common functions could implement into the vast majority of the industries are the following:

Human Resources

Information Technologies, Systems

Accounting and Payroll Processing

Facility Management

Order Fulfillment

Customer Call Center

2.1 Human resources

Human resource as an outsourcing aspect is more likely to be used from a large company than from a middle or a small one. The movement from an internal human resources department to an external leads to a more strategic role of the department and the restructure company’s philosophy. The wanted outcomes of such a decision are to promote empowerment, innovations, flexibility, diversity, but also to maintain or increase the quality of services. The external human resources can train the employees in a daily sequence in order to develop their skills faster than seminars, classroom training or role playing do. (Sheehan and Cooper, 2011)

2.2 Information Technologies, Systems

Information Technologies (IT) is the general term which includes Information Systems (IS), IT and IS are two terms which their meanings are too close. Information technologies and information systems cover a large amount of functions in a company such as software development, hardware maintenance and hosting into websites. IT and IS are a fast developing industry which can be implement into a wide range of the company’s functions and because of this, is the most common outsourcing pattern. IT/IS can be implement successfully in departments such as human resources to control employees in a more efficient way and in logistics function, where helps to execute transactions faster and minimize human errors (Karyda et al., 2006)

2.3 Accounting and Payroll Processing

Another important department is accounting and payroll processing. The use of the right IS in this department can change in a more functional way the entire company. Managers would have better information about the profitability of the company and also the payments will be in a better control and price comparisons among suppliers are easier, thus a combination of suppliers is an easy process and not time-consuming.

2.4 Facility Management

IT and IS can provide an effectively managing in the storage and cataloging raw materials and final goods in order to increase production process or to make deliveries faster and avoiding human errors.

2.5 Order Fulfillment

With the help of facility management the order fulfillment becomes an easy process for the company. Middle managers by the power of an IS could easily handle the lack of raw materials or to execute orders from customers faster and efficient by providing to their customers a better service in the same price.

2.6 Customer Call Center

This type of outsourcing is one of the most common in telecommunications’ industries, because a call center binds many employees and is inefficient for a company to pay employees just for answering the phone and also a call center requires facilities like computers and an empty space.

3 Outcomes of implementing outsourcing

Nowadays, outsourcing is a widespread strategic in companies, but how a manager can choose among a variety of outsourcing and how he/she can decide which of the inefficient functions of the company should delegate to another company, as an external help, in order to be cost efficient. A study on the outsourcing results has been made by Jiang B. and Qureshi A. (2006) on the following aspects:

Cost reductions

Productivity

Profitability

Risk control

3.1 Cost reductions

Cost efficiency was the first factor that leaded companies to outsource. Companies evaluate outsourcing in the operating functions of the company to reduce the functional cost and then this savings could be used for investments to increase competitive advantage over competitors. Another factor that makes outsourcing cost-efficient is that outsourcing companies have access to economies of scale and the knowledge of the expert that only an outsourcing company vendor can provide. Furthermore, a third factor that makes outsourcing companies cost-efficiently is that outsourcing companies have a large number of customers so they can provide the same or a better service (through the experts) with a less amount of money because they divide facility and human cost into many different companies (customers) and that’s why they are more effective than an individual company and efficient because of the knowledge of the expertise (Jiang and Qureshi, 2006).

3.2 Productivity

There is a numerous of studies that have researched how outsourcing is connected with productivity. A research that Abraham and Taylor have done and published in 1996 with title "Firms' use of outside contractors: theory and evidence. (Journal of Labor Economics, Vol. 14 pp.394-424)" showed that companies outsource with the purpose of smoothing production cycles and advantaging from the specialization, a second research by Ten Raa and Wolff (2001) with title "Outsourcing of services and the productivity recovery in US manufacturing in the 1980s. (Journal of Productivity Analysis, Vol. 16 pp.149-65)" have showed that outsourcing is positively linked with productivity growth. Thus a company which operates rational, allocates its resources to functions from which it gains competitive advantage and outsource functionalities that does not enjoy such competitive advantage, to external suppliers (Jiang and Qureshi, 2006)

3.3 Profitability

The traditional pattern for almost all companies when economy is booming is to hire facilities, to employ more staff and stop outsourcing in order to have a better cost control. The international experience, have showed that companies should perform the opposite of the traditional pattern, because nowadays the knowledge shows that even in economic booming, a company through outsourcing can achieve high rates of profitability. Some functions that a company could use outsourcing even in economic booming are:

3.3.1 Staffing

The use of outsourcing companies makes the working environment flexible and the company uses outsourcing employees just for the amount of time that they are needed.

3.3.2 Capabilities

Is in the same logic as staffing, the company does not have to have an advertising department with experts in the field, but it could advertise itself by renting the capabilities from an outsource provider.

3.3.3 Facilities

When companies need additional facilities in order to achieve a short-term goal, is inefficient to buy this space because after the short-term goal is achieved this space is useless and the amount of money used to buy the space could be used to increase competitive advantage over competitors.

3.3.4 Services

Some services could be cheaper as outsourcing, because experts are more efficient and effective on their field. Some services that could be outsourced are HRM and recruiting.

(Jiang and Qureshi, 2006)

3.4 Risk control

One of the major’s reasons that a company implements outsourcing is that the function is very complex, difficult to manage, expensive and low efficient. In this case the outsourcing company should be chosen carefully by the strategic planning department and also should be considered the possibility of financial loss, decreased shareholder value and damage companies reputation. Thus, top-managers should evaluate these risks and the impact that they may have to companies’ functionalities. However, the risk may not be visible at the beginning of the contract with an outsourcing agency and after the agreement is signed could be break and contract’s conditions could be renegotiating from the beginning. If even the renegotiation fails, the company should address to another outsourcing agency and if this fails again, the company should hire its own staff to provide in-house services and use innovative processes to minimize inefficiency (Jiang and Qureshi, 2006).

4 Advantages and Disadvantages of Outsourcing

4.1 Advantages of Outsourcing

Through this paper I have mention briefly some of the advantages that a company could gain through outsourcing. In this part I will discuss extensively about the advantages that outsourcing can offer to a company.

4.1.1 Cost savings

Cost saving is one of the essential factor that motivates a company to decide the use of outsourcing. Cost saving, does not comes just from the economies of scale that outsourcing agency uses, but comes also and through the differences in salaries between the company and the outsourcing agency because outsourcing agency is established in a different country and the salary average there is lower. A second factor could be that the outsourcing agency has many customers and so can divide its cost into many clients and thus the individual companies’ cost is lower. For some of the company’s functions such as systems development or data entry in the system or call center salaries is the most important cost (Gonzalez et al., 2006).

4.1.2 Technical feasibility

Through outsourcing in information technologies, a company could have a more efficient function, thus could have the ability to implement new ways of doing things and as a result achieves to operate in a more efficient level of productivity (Gonzalez et al., 2006).

4.1.3 Flexibility, speed

Almost every company needs to be flexible in order to overcome fast external changes. Especially, now that the technology changes with high rates, flexibility and speed are two factors that can make the difference between a profitable and an unprofitable company. The outsourcing industry comes and can help a company in order to increase flexibility and speed up the development process of a new product or service or software. By outsourcing this two major component in order for a company to be cost efficient could be achieved, because the vast majority of the outsourcing customers are from USA and Western Europe and the large number of outsourcing companies are located in Asia. Thus the time differences provide a comparative advantage and a project could be developing at the same time in both companies, so the time required is limited to the half (Gonzalez et al., 2006).

4.1.4 More quality

Outsourcing companies’ customers nowadays, do not looking for just cost efficiency, but also they want good quality. The competition among companies is huge so the better price than the competitor does not make the wanted difference. Thus the majority of companies which outsource seek not only the cost-efficiency. In this logic many outsourcing providers have been certificated be the CMM certification which guarantees the maximum quality level of service (Gonzalez et al., 2006).

4.2 Disadvantages of Outsourcing

Outsourcing is a tool that expand in-house functionalities to a third company and just this reason is an important disadvantage for outsourcing because private information are going to be out of the company, but this is not the only disadvantage. In this part of the essay will be an analytically analysis on disadvantages of outsourcing (Gonzalez et al., 2006).

4.2.1 Hidden costs

Hidden cost is an important aspect that managers have to consider before find the outsource provider and starting outsource functionalities of the company. As hidden cost could be the differences in culture and ethic between the company and the provider, this problem becomes larger, especially if the two companies are located into different countries which is the most common. Another hidden cost is the cost of transferring knowledge from the provider to its customer and the cost of ensuring the safe data transferring by increasing security measures. Additionally, an extra cost for the "consumer" company could be the labor layoffs that could have a negative impact on company’s reputation. Furthermore, the supervising of the outsourcing provider is a difficult process because of the distance and the potential fluctuations affecting the exchange rates could make this relationship cost inefficient and managers should take all these into account before they decide to outsource (Gonzalez et al., 2006).

4.2.2 Poor infrastructures

Another disadvantage for outsourcing is that in many developing countries in which many outsourcing providers operate are characterized with lack of telecommunication infrastructures and this lack leads in a weakness into the most basic infrastructures such as the power supply cut. For example, in India in 1980 the infrastructures had a very low quality and communication between customers and provider was inefficient, now Indian companies’ uses a satellite in order to overcome the inefficient communication with their customers (Gonzalez et al., 2006).

4.2.3 Different time zones

Flexibility and speed could be both an advantage and a disadvantage. They are considering a disadvantage when the time zone differences are large because is the risk that few working hours will overlap between customer and provider. This makes difficulties in communication from both parts, this problem may seem simple and easy to overcome by the use of IS but it is not. Thus companies are looking for providers in closer time zones (Gonzalez et al., 2006).

4.2.4 Deficient quality

One of the most important issues in outsourcing industry is the lack of quality. Deficient quality may happened because outsource provider does not have required human resources or its employees are not trained enough and they do not have specific knowledge. Also, another important aspect is the knowledge of the language that the two parts use to communicate because speaking a language is totally different with deeply understands it, and if this lack of knowledge is in managerial skills and not in technical makes communication even worst. For example, the employees in Ukraine, which is a country with many outsourcing providers, shows an advantage in mathematics and physics but they have limited knowledge in business, marketing and management (Gonzalez et al., 2006).

5 Conclusion

Outsourcing nowadays has become a powerful tool for managers in order to increase company’s functionalities. Top-managers should seek for outsourcing providers and extensively assess them before they decide to expand company’s functions. Outsourcing as we have extensively discussed in this paper, is a management tool that can provide to a company the opportunity to expand and enlarge with cost-efficiency into new markets with a strategic advantage. The first step in order to outsource is that top-managers should evaluate companies function and decide which function/s would be better to outsource. Then, in the second step, top-managers should take in account company’s objectives and orientation in order to decide if they will focus on low-cost ignoring company’s culture and ethic or they will focus on differentiation. In both decisions the company will probably be cost-effectively, but the first decision is more cost-efficient than the second one. Finally, before the last step top-managers have already decided the function/s that are needed to outsource and which orientation will follow and the last aspect that top-managers have to take in account and measure are the advantages and disadvantages that outsourcing company provides. If advantages overcome disadvantages then top-managers can proceed in an agreement with the chosen outsourcing provider company.