Outsourcing is defined as the contracting another person or company to perform a specialized function (Lacity and Hirschheim, 1993). Outsourcing can also be defined as contracting out a business process to a third party. In the current business environment, all business will outsource in some way. The term outsourcing not only refers to the large contracting of firms to perform specific functions, but also refers to any non-core activity that a business contracts out to another company. For example, an insurance company could outsource its janitorial operations to another company, which would ensure that the insurance company can focus on its core business. Outsourcing ensures that a business can concentrate on its core business and its overall strategy (Grossman and Helpman, 2005). The firms contracted to perform or offer the service have the necessary expertise and have specialized in the type of work been contracted out.
Outsourcing offers a company greater budget control and flexibility, because the company is able to limit its expenses (Feenstra and Hanson, 1996). Compared to providing the service or function been outsourced, businesses would prefer to outsource since this would offer reduced costs. Outsourcing is a cheaper way to carry out non-core functions of a business. Functions like human resource, information technology, finance and accounting, and call center can be easily outsourced to firms that have better expertise performing these functions. These would ensure that the business is able to focus solely on its core business. This is a strategic management concept because it reduces the resources required by a company or business. A company that is able to focus on its core business is more likely to succeed since it would invest and concentrate on its main activities. Focusing all its resources towards its main activity will ensure that the company remains on course and is not disoriented with the other functions.
Outsourcing is the practice used by companies to reduce operational costs by shifting portions of its non-core work to other companies instead of performing them internally. As a strategic cost-saving strategy, outsourcing could be effective if implemented properly. It is widely known that it is cheaper to buy goods or services from a company that deals exclusively with the good or service instead of producing the good internally. The advantages that a business reaps from outsourcing some of its business functions far outweigh having the function been performed internally. With that advancement of technology, companies are now able to contract some of their business functions to other countries where the services are offered at far lower rates. The contracted companies have the capability to perform and deliver excellent service, which makes them more attractive to the company. For example, many companies have outsourced their customer service function to call centers located in India. The call centers offer unrivaled services at very low rates. This is very attractive for a company that is looking to reduce its operational costs and to have a call center located within the company is too costly to run and operate.
According to Feenstra and Hanson (1999) many United States companies will choose to outsource in order for them to avoid certain costs like high taxes, labor costs, excessive government regulations, and high-energy costs. High corporate tax and mandatory benefits for employees is another incentive for a company to outsource. Outsourcing ensures that a company is not concerned with the additional costs that a company the business process. Once the process has been outsourced, the company will only be charged with paying for the service offered by the contracted company. The outsourced company takes care of all the other additional charges. This reduces the headache of ensuring compliance and paying of necessary taxes. Accounting responsibility is reduced, and the business managers can focus on productive or less restrictive functions.
It is widely known that companies have been struggling with how they can increase their profits, market, and exploit their competitive advantages (Duhamel et al., 2012). The models used in the past were not favorable for global companies, and they were only focused on assets. Many business factors are in play in the current business world that managers cannot only focus on their core competencies. Understanding how a business can reduce its costs and increase its productivity and customer service have taken center stage. Companies have realized that customer is king, and they are now looking for strategies that will ensure they are close to their customers at all times. Outsourcing of customer service and information technology is the two key areas that provide a company with benefits over its rivals. Having an outsourced customer service will ensure a business can cater to its customers request at all times irrespective of their location. Prompt response and follow can be carried out by the call center and al the business will receive are the reports.
The history of outsourcing
Kelly (2002) posits during the 20th century, the ability for a company to own, directly control, and manage its assets and processes was the measure used to determine its success. This was a nice strategy because the business could be able to monitor all its assets and processes and be in charge of the direction that the company moves. The diversification rallying cry began in the 1950s and 1960s. This diversification would allow a business to take advantage of economies of scales and broaden corporate bases. Diversification ensured companies were able to protect their profits and still expand their operations, which resulted in multiple management layers. The organizations that attempted to compete globally in the 1970s and 1980s were handicapped because they were not agile. The lack of agility was as a result of the bloated management structures within the organizations (Handfield, 2008). In order to increase their creativity and flexibility, many large organizations formulated a new strategy, which focused on the organization's core competencies. This required the organization to identify its critical processes and decide which processes could be outsourced.
As a business strategy, outsourcing was formally identified in 1989 (Lonsdale and Cox, 2000), but most organizations were not fully self-sufficient. Many organizations opted to outsource only those functions that they did not have any internal competency. In the evolution of outsourcing, the baseline stage was using external suppliers to deliver essential, but ancillary services. The outsourcing of support services was the next step in the evolution process. When organizations began to focus on cost-saving measures in the 1990s, they started to outsource functions that are necessary for running the company, but not specifically related to the organization's core business. Managers began to contract with emerging companies that offered services like human resources, accounting, security, data processing, plant maintenance, and internal mail distribution. In the 1990s, the organizations were more focused on increasing revenues while reducing costs. It was because of this desire that most organizations discovered the value of contracting out some functions of their businesses. The outsourcing of components in order to affect the cost saving initiatives in key functions is another stage in the evolution process of outsourcing. Outsourcing is mostly used to improve company finances.
Formulation of strategic partnerships is the current stage in the evolution of outsourcing. It is only recently that organizations began to outsource their core competencies. Core competencies are defined as the functions that provide an organization with strategic advantages or its uniqueness. Any function that comes close to the organization's customers is defined as a core competency of the company. In the 1990s, outsourcing of some of the core functions was considered a good business strategy and not the exception. Organizations realized that their vital functions were better handled by companies that had the capacity and capability instead of clinging on to them and trying to handle them in-house (Lacity and Willcocks, 2000). Outsourcing of core competencies like customer service became the norm rather than the exception, because companies now understood that in order for them to serve their customers better they needed to ensure that they could respond and attend to all their queries. Outsourcing was now evolving to become part of a business and not just for handling non-core functions.
When Eastman Kodak decided to outsource its information technology systems that protected its business in 1989, this was considered revolutionary for outsourcing (Hatonen and Eriksson, 2009). Kodak did this because the company had reanalyzed its business and what it was about. Many companies followed suit after their managers determined that they did not have to own the technology in order for them to access the necessary information. In the past outsourcing was driven by cost reduction and headcount. However, outsourcing is now seen as a strategic decision that focuses on core competencies. Some of the reasons for companies to outsource their business functions are improving business focus, sharing risks & costs, gaining access to better capabilities, requiring specific expertise, and freeing internal resources.
Relevance of outsourcing to today's business challenges
Technology has affected the way business conduct their day-to-day…