Outsourcing Is a Business Strategy That Firms Essay

  • Length: 6 pages
  • Sources: 3
  • Subject: Business
  • Type: Essay
  • Paper: #10229359

Excerpt from Essay :

Outsourcing is a business strategy that firms employ to reduce costs and sharpen their competitive advantages. With intention to increase revenues, reduce costs, and achieve performance improvement, large number firms are continuing outsourcing part of their business processes to focus on their core business activities. With pressing demand from the stakeholders, corporate executives area constantly looking for strategies to deliver better short-term and long-term results that could enhance corporate market advantages. (IBM). While some firms believe that it is better to in-house all their business activities, some firms believe that it is better to outsource part of their business process in order to concentrate on the core competence of their business in which they could derive competitive advantages. Thus, some businesses believe that in-house all their business processes is inefficient and excessively expensive. (Roy and Benoit 1).

Scenario

A notable organization is pondering whether to in-house all its advertising department or outsource all advertising functions to another agency. This paper intends to investigate what other organizations in the similar condition have done to find the advantages and disadvantages of each business decision.

Body of Research

Advertising is a part of the business activities within a business organization. Many firms create advertising departments to improve their public images. One of the main functions of an advertising department is to advertise the products and services of the company to the public. The advertising department may use the advertising techniques such as internet advertising, TV advert, radio advert, newspaper or magazine adverts or press release. The main advantage of advertising department is to enhance the public image of a firm and persuade the public to buy organizational products and services. Despite the advantages of leaving advertising department in-house, recent development in Information Technology (IT) and globalization have made firms to face more competitions in the contemporary business environment. To remain competitive, large number of firms is continuing outsourcing part of their businesses processes to concentrate on the core business activities. Despite the decision to outsource, outsourcing is embedded with risks. While some firms may enjoy benefits from outsourcing their advertising functions, there are other firms that believe that there are no benefits that they could gain from outsourcing the advertising department, and it is better to in-house their advertising functions. However, Lankford and Faramarz argue that firms can no longer assume that all their business activities must be operated internally (310). To determine whether to outsource or in-house the advertising functions, many firms examine the advantages and disadvantages of outsourcing, and in-house advertising before making decisions. Appropriate evaluation of the two business techniques makes firms to determine whether outsourcing will be appropriate for their business activities.

Advantages and Advantages of Outsourcing Advertising Functions

"Why do senior managers sometimes prefer to entrust outside firms with critical tasks? The fact is, senior management often finds outside firms to be more cost-effective." (Lankford and Faramarz, 310). Cutting costs are the major advantages many firms derive from outsourcing. Typically, many firms that have already outsourced one of their business activities are pleased with the results they are getting from outsourcing. Evaluation of outsourcing reveals that many outsourcing agencies perform their advertising functions cheaper than in-house advertising department. Moreover, the job are delivered on time and in a predictable manner. Lankford et al. argue that 91% of firms that have outsourced part of their business activities are satisfied with results, and 93% are planning to outsource in the next three years. In the era of virtual organization, outsourcing has become more popular. Some consultants argue that firms should consider outsourcing when it is believed that certain part of their business functions could be completed faster, cheaper and more efficiently. Rishi and Saxena revealed that between 2000 and 2004, U.S. companies saved up to $6 billions by outsourcing part of their business activities to India. Moreover, outsourcing saves firms from laying off their employees because many firms are able to enjoy competitive market advantages with outsourcing. A report from McKinsey Global Institute reveals that better quality of work is the main driver firms consider outsourcing. (7).

Moreover, many firm opt for outsourcing because of the competitive advantages they enjoy from the outsourcing process. By allowing the outside vendors to handle the advertising functions, many firms have gained competitive advantages because the services are delivered effectively and efficiently. Since the outsourcing agencies specialize on business functions that they believe they could perform better, they deliver better services and firms are able to enjoy strategic and operational advantages from their services. Operational advantages are short-term benefits while strategic advantages are the long-term benefits that firms enjoy from outsourcing. With the advantages that firms are deriving from outsourcing, more than 20% of Fortune 500 is already outsourcing their advertising activities.

McIvor argue that with the advantages that firms are deriving from outsourcing, firms are no longer outsourcing their peripheral activities alone, many firms are now outsourcing greater part of their business activities to outside parties. Outsourcing allows firms to enjoy strategic benefits such as rapid adoption of new technology. Firms will be able to be more responsive to customers needs because firms will concentrate better on the product demand. (8).

Another advantage that firms will enjoy with outsourcing their advertising functions is that the vendors will deliver the services with expertise. With years of experience in the job, many outsourcing agents have developed expertise in the job, and most of them have better facilities and resources to deliver the job effective, efficiently, and at reduced costs.

Despite the advantages that business may derive from outsourcing, there are arguments that outsourcing is risky. To enjoy the benefits of outsourcing, specialized knowledge of the outsourcing agency is required before venturing into the outsourcing contract. Although, there are sound financial benefits from outsourcing, however, there are disadvantages in outsourcing. Firms may lose total control of part of their business to an outside party. When a firm decides to outsource one of their business process to a third party, firms may not have total control of this function. Thus, firms may lose in-house control of this business activity.

Another disadvantage of outsourcing is the loss of confidentiality. By allowing external party to control the advertising functions, a firm will not be able protect vital information of their business functions from the external party.

With identification of the advantages and disadvantages of outsourcing the advertising functions, the paper also evaluates the advantages and disadvantages of keeping the advertising department in-house.

Advantages and Disadvantages of keeping advertising functions In-House

A major advantage that firm gains in keeping the advertising function in house is that firms will be able to keep confidential information from the third party. Typically, sharing confidential information with outside party may jeopardize the business functions if appropriate contract agreement is not put in place.

Another advantage of keeping advertising function in-house is that employee will be able to develop more skills in the advertising functions with increase in the years of experience within the department.

Moreover, firm will gain more loyalty from employee because employee will believe that their jobs are secured by keeping advertising department in-house.

Despite the advantages that firms stand to enjoy by keeping an advertising department in-house, there are disadvantages of keeping the advertising department in-house. One of disadvantages is that firms may lose competitive advantages by keeping advertising department in-house. It is essential to realize that effective advertisement is the lifeblood of any business. Many companies spend millions of dollars to put their company in the limelight. Without the effective advertising, firms may lose their public image, and this may led firms losing their competitive market advantages. For example, if a firm does not have the effective resources in-house to implement effective advertising functions, firms may lose market advantages to other firms, and the results may lead to revenue decline, and decline in grow rate.

While the advantages of outsourcing the advertising functions may outweigh the disadvantages, firms need to design a correct strategy before entering into the outsourcing contract.

Recommendations

Firms needs to enter outsourcing contract with cautious to enjoy the full benefits of the outsourcing. There are criteria firms need to employ before embarking on the outsourcing contracts.

First, a firm needs to be cautious before selecting an outsourcing partner. Before selecting an outsourcing partner, a firm needs to carry out a background check on an outsourcing partner before entering into an outsourcing contract. According to Williamson, a firm needs to incur transaction costs to enjoy the costs saving in outsourcing. The transaction costs are the associated costs of finding a suitable outsourcing partner to manage the outsourcing function. Thus, firm should set apart certain amount of money to investigate the outsourcing partner before entering into the outsourcing agreement.

In addition, a firm should draw a solid contract agreement with an outsourcing partner before allowing an outsourcing partner to take control of the advertising function. Williamson argues that the outsourcing contract is attributed with uncertainty, and information asymmetry. Williamson reveals in a contract theory that information asymmetry always…

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