Challenges and Opportunities of Outsourcing

RESEARCH PROPOSAL

Outsourcing: Challenges and Opportunities

Executive Summary

Many businesses have over the last several decades sought to outsource some of their noncore activities to third parties in an attempt to improve efficiency by focusing on the activities they deem core. In recent times, however, there has been a trend among businesses – especially multinationals – to outsource core functions such as manufacturing. Although outsourcing has been associated with some benefits, there is evidence that it could have some unintended and negative effects on businesses. The research will expound on the challenges and opportunities of outsourcing. The research will survey 25 sampled restaurants and determine whether the effects of outsourcing are adverse or not. From a general perspective, firms that do embrace outsourcing appear to be more profitable than those that do not. The implication, therefore, is that outsourcing does have a positive impact on the profitability of an enterprise.

Introduction

Various companies and institutions have embraced outsourcing over the last few decades. It should, however, be noted that despite its present popularity, outsourcing happens to be a rather recent concept. As a matter of fact, the concept happens to be less than 7 decades old – having only emerged in the 1950s. Businesses, however, started to identify with the concept of outsourcing as a sound strategy in the 1980s. Today the concept happens to be a standard in the conduct of global business. At present, companies operating in the U.S. and seeking to benefit from lower labor costs in countries such as China have pursued offshore outsourcing. The various approaches to outsourcing often embraced by enterprises are inclusive of, but they are not limited to; operational outsourcing, process outsourcing, project outsourcing, professional outsourcing, etc. An example of outsourcing would be whereby a company hires a marketing team externally from an enterprise that has ventured and specialized in marketing and related services (i.e. a third-party provider). In this case, the outsourcing company avoids creating and managing a marketing department on its own. The purpose of this research is to determine whether outsourcing has an impact on an enterprise’s bottom-line. The first section of this proposal will focus on the problem statement. The problem statement entails the researchable scenario of our research. The second section of this proposal will focus on the literature review. The literature review is essential since it will enable us to determine what others have found out about the experiences of various enterprises with outsourcing. The research will focus on restaurants that have for over a period of more than 10 years contracted external companies to market and advertise on their behalf rather than partake in the same by themselves, i.e. via the creation of a marketing and promotions department. In so doing, a determination will be made as to whether outsourcing does impact performance (measured in terms of profitability).

Problem Statement

Many businesses are interested in finding out whether outsourcing is a viable strategy in efforts to promote performance and compete more effectively in a business environment that happens to be increasingly competitive. Further, businesses are interested in determining whether it would make business sense for them to outsource some functions (both core and noncore functions). We hypothesize that outsourcings lead to increased profitability for a company or firm.

Literature Review

In basic terms, outsourcing has got to do with the move by an enterprise to contract out some of its functions (Agbury, Anza, and Iyortsuum, 2017). This is the very same definition that Iqbal and Dad (2013) assign to outsourcing. Some, like Ishizaka, Bhattacharya, Gunasekaran, Dekkers and Pareira (2019), however, feel that in today’s business context, such a simplistic definition of outsourcing fails to capture all the aspects of outsourcing. For this reason, the authors propose a more comprehensive and all-encompassing definition. Thus, according to the authors, outsourcing is, essentially:

A business agreement, either domestic and/or international (known as offshoring), and strategic management initiative for gaining a competitive advantage of a firm by contracting out their existing internal and/or external non-value added functions, and/or value-added functions, and/or core competencies to competent supplier(s) to produce products and/or services efficiently and effectively for the outsourcing firm. (p. 4188).

This is the definition to outsourcing that has been embraced in the present project. According to Bewal, Singh, and Dexit (2005), businesses have traditionally sought to outsource only those services considered peripheral, i.e. security, catering, cleaning, etc. This is, however, changing. At present, there is an increasing tendency to outsource key areas such as distribution, manufacturing, and even human resources. As Iqbal and Dad (2013) observe, in the present highly competitive business environment, outsourcing is largely inevitable. This is more so the case for those businesses that would wish to operate in various diverse locations across the world.

There are a wide range of reasons as to why businesses seek to outsource some of their business functions. One of the most prominent reasons for the move, as Agbury, Anza, and Iyortsuum (2017) observe, is so that they can focus on the functions they deem core. This is also one of the advantages of outsourcing that Dinu (2015) highlights. In focusing on the core activities, businesses can be able to further enhance their efficiency as well as effectiveness. It is also important to note that in outsourcing some of their business functions (such as manufacturing), businesses are able to reap the benefits of technology and innovation without necessarily incurring both the cost and risk of implementing new technology.

Dinu (2015) also considers outsourcing to be an effective cost control tool. For instance, as Jones (2009) point out, businesses that outsource some business functions to China benefit from lower cost of production. This is particularly the case given that production facilities in China can manage to keep costs at a minimum owing to the lower cost of living in the country (i.e. as compared to the U.S. or U.K.). According to Dinu (2015), the savings made in outsourcing efforts could be deployed to other business undertakings for continued success. As a matter of fact, as Iqbal and Dad (2013) point out, “if the reduction of the present operating cost is achievable through outsourcing then the available resources can be reinvested to gain and maintain competitive advantage” (p. 94). According to the authors, there a plenty of examples of firms that have made huge cost saving following the outsourcing of certain functions. A good example, as Iqbal and Dad (2013) observe, would be Procter & Gamble and its move to outsource its Java Programming. In this case, Iqbal and Dad (2013) note that the company reported a $28 million saving. Cost saving has also been cited by Ishizaka, Bhattacharya, Gunasekaran, Dekkers and Pareira (2019) as one of the key reasons as to why most firms outsource some business functions – specifically in offshore undertakings or operations. In the words of Pedregosa, Gonzalez-Zamora, and Palcin-Sanchez (2017), “outsourcing has been identified as one of the key factors for improving companies’ financial performance” (p. 23).

It would be prudent to note that in as far as human resources outsourcing is concerned, Fisher, Wasserman, Wolf, and Wears (2008) make the observation to the effect that “as organizations strive to be more efficient, the direction is to unburden the company from unprofitable departments, and HR is one of them” (p. 507). The authors are, however, categorical that business organizations ought to acquaint themselves with the pros and cons of such a move. One advantage of outsourcing HR, according to the authors is that businesses can gain access to specialists for less than it would take to hire the said specialists. However, outsourcing HR would mean that an enterprise is unable to build or develop a unique organizational culture.

As Agbury, Anza, and Iyortsuum (2017) point out, many of the firms that embark on efforts to outsource some of their services fail to achieve their set goals. Indeed, in the words of the authors, “some have experienced low productivity both in terms of quality and quantity, their profitability has not been stable, and their capacities are grossly underutilized” (p. 107). This is an issue that concerns most SMEs. Trust also happens to be yet another challenge in outsourcing engagements (Babin, Bates, and Sohal, 2017). As it has been pointed out elsewhere in this text, organizations are no longer outsourcing their peripheral functions (such as cleaning) only. Today, business entities are increasingly outsourcing certain important functions such as accounting and record keeping. This effectively means that there is always the risk of critical business secrets leaking out to third parties. It is for this reason that Dinu (2015) has identified confidentiality and security to be some of the key concerns for businesses in their deliberations on whether or not to outsource certain functions. To a large extent, when a business outsources some functions, it loses control over the said function (Gupta, 2017). This, according to the author, could be an issue of significant concern in the realm of intellectual property. However, as the author further points out, past studies have established that notwithstanding the risk of IP misappropriation, companies have much more to gain from outsourcing (Gupta, 2017). For the outsourcing relationship to work, businesses must not withhold crucial data related to the outsourced functions. It is for this reason that Babin, Bates, and Sohal (2017) make the observation to the effect that “it is critical that trust is present in all business relationships because by having it the partners communicate more openly…” (p. 41).

Yet another crucial downside of outsourcing, which could in some instances be overlooked, is that it could result in instability in certain aspects of business. This, according to Dinu (2015), is more so the case in those instances where the outsourced enterprise changes certain crucial operational aspects or goes out of business.

Is there a way forward? It is important to note that in the words of Babin, Bates, and Sohal (2017), businesses ought to promote “inter-organizational trust in global outsourcing relationships…” (p. 40). This is important as the said trust makes it possible for the concerned businesses to communicate in an effective manner. It should also be noted that according to Dinu (2015), enterprises must also undertake a cost benefit analysis so as to determine whether outsourcing a service will leave them better off or at a disadvantage. The cost-benefit analysis would also make it possible for companies to formulate workable strategies to reign in the challenges identified.

Benefits of the study

One benefit of the study is that it will result in increased awareness about the issue under consideration. This is more so the case when it comes to the benefits that businesses are likely to reap from outsourcing efforts. It is important to note that such information would be crucial for firms that are either considering outsourcing some of their functions or have already outsourced the said functions for other reasons unrelated to profitability and are unaware of exactly what lays in store for them on the profitability front.

Another benefit of the study is that the conclusions and findings from this study can be utilized in the conduction of further research. Since a wide range of factors have been taken into consideration on this front, and various recommendations made, the data presented can be used in another study’s literature review. Further, it should also be noted that the present research would likely enable other researchers to compare different results so as to further refine their findings.

Government agencies could also make use of the findings herein to formulate strategies on how to aid or promote the success of business enterprises. In this case, it should be noted that every government has an interest in the performance of enterprises within its jurisdiction owing to the fact that in addition to contributing to tax revenues, enhanced business performance also results in lower rates of unemployment. Thus, evidence of improved performance following outsourcing could motivate the government of the day to, for instance, engage countries with lower labor costs with an intention of securing viable and favorable outsourcing deals for businesses.

Research Design

The research design in this study will be quantitative. The quantitative nature of our research makes the quantitative research design the most viable method to be deployed on this front. The design will expound on the descriptive and inferential statistics of the data. The descriptive statistics will focus on the demographic nature of the restaurants’ data. Information such as the number of workers, departments, etc., will fall under demographic statistics. Our study's inferential statistics will determine whether there is a significant difference in profits and revenue after outsourcing the marketing and advertising roles to an external company.

To conduct this study, the method of sampling design will be random sampling. It is important to note that according to Lavrakas (2008), “under random sampling, each member of the subset carries an equal opportunity of being chosen as a part of the sampling process” (p. 311). However, our sampling frames will be a list of restaurants selected locally. A suitable sample size of 25 restaurants will be used in the study. A survey with a set of questionnaires will be sent to the directors or hotel managers to fill. The questionnaire will, amongst other things, make enquiries on the demographic information of the restaurant. The demographic information that will be sought on this front will be inclusive of; the size, location, name, and years of operation. The other information that will be sought in relation to the study is the restaurants' revenues and profit margins. The questionnaire also will enquire on the nature of the outsourced functions, i.e. with regard to what motivated the move, the selection process of an ideal third-party provider, etc. The data will then be analyzed using a statistical tool such as SPSS or R studio.

Ethical requirements will be followed and upheld during this study. One principle of ethics to be considered in this case is consciousness of multiple roles. In the present undertaking, efforts will be made to ensure that the roles selected in the research do not harm or have adverse effects on the respondents. Consent was also take into consideration when conducting the research. The restaurants are to sign a consent form before filing the questionnaires. It is important to note that the said restaurants have a right to refrain from participating in the study at any point and for whatever reason. The privacy and confidentiality of the respondents will also be considered during the research. The information given will not be utilized or deployed elsewhere for any other purpose outside of the present undertaking. The study will also consider acknowledging data and other work sourced from elsewhere.

Nature and Form of Results

In essence, the test statistics used in the present task or undertaking will be the t statistics. It is important to note that according to Lavrakas (2008) t statistics come in handy in those scenarios whereby the sample size is small. Further, t statistics could be utilized in those instances whereby the population standard deviation is unknown. The test statistics compare the mean of two independent variables. In this scenario, t compares the outsourcing hotels' mean revenues and the hotels that are not outsourcing. The anticipated result of this study is that the outsourcing restaurants tend to generate more revenue than those that are not. However, various factors can influence this outcome. The factors include, but they are not limited to; the size of the restaurant, the number of employees, etc. Yet another anticipation of the results is that bigger restaurants are likely to outsource some of their functions. This makes it easier for the said restaurants to focus on their primary roles. In most cases, bigger restaurants operate in multiple locations, have a bigger workforce, and actively seek new customers. Some of the restaurants selected in this case have presence or operate in multiple jurisdictions. Smaller restaurants, on the other hand and unlike bigger restaurants, tend not to outsource advertising and marketing functions owing to the scale of their operations. With their markets or areas of operation being limited, such restaurants largely rely on repeat customers as well as referrals – as opposed to new customers.

Budget

The estimated costs of the present undertaking will be approximately 3000 dollars. Fifty dollars will be used in the distribution and sending of the questionnaires to respondents. About 2500 dollars will be used for enumerators and the data collection process. Data analysis will use up approximately 450 dollars. A more precise breakdown of the said budget has been highlighted below;

Dispatch of Questionnaires to Respondents - $50

Data Collection Process and Enumerators - $2500

Data Analysis - $450

The relevance of budgeting in an undertaking of this nature cannot be overstated. To a large extent, in the present scenario, budgeting will be crucial since it will guide the research efforts and result in the wise and judicious use of scarce resources or funds. However, various factors can affect the budget. For this reason, it is important to note that the researcher can make suitable adjustments when (and if) the situation on the ground changes.

Schedule

The research will be broken down into four main phases. The first phase will be on sampling. The next step will be on data collection. The third phase will be on data analysis. The last stage of the undertaking will be conclusions. The four main phases will be completed within a period of six months. The first month will focus on sampling. A sample of 25 restaurants has been selected for the study. Three months will be allocated for data collection. The tool used for data collection will be a survey questionnaire. The questionnaire will be mailed and sent back to the researcher for analysis. In case the respondents do not give adequate information, the researcher and enumerators will seek make the relevant calls for clarification. The questionnaires that are not filled due to the restaurants' failed responses will be sent to other selected restaurants. The data will be recorded in Excel or an SPSS database, ready for analysis. Data analysis and results will take one month.