Outsourcing advantages and disadvantages for multinational firms

Outsourcing: Advantages and Disadvantages

Over time, a number of businesses have embraced outsourcing for various reasons. This is more so the case for companies operating in the global arena. In this text, I discuss the various advantages and disadvantages of outsourcing. In so doing, I will utilize a hypothetical example of a multinational firm by the name Company X.

In basic terms, outsourcing according to Haberberg and Rieple (2007) is "the contracting out of part of an organization's operations to a separate company." In the next section, I will discuss some of the key benefits and disadvantages of outsourcing.

To begin with, Company X could make some cost savings should it resort to outsourcing. According to Hill and Jones (2012), an entity could have its costs reduced if the price the said entity pays to a particular specialist firm to have a particular activity completed happens to be less than the costs the entity would incur should it choose to perform the activity internally. For example, assuming that Company X is a multinational that concerns itself with oil exploration, it would not be prudent on its part to maintain a fully fledged legal department. In that regard, Company X would make some cost savings were it to outsource such a service to a specialist law firm and thus engage the contracted firm on a need basis. Secondly, outsourcing would enable Company X to concentrate on its core business activity, i.e. oil exploration. It is important to note that in a way, non-core business activities could in addition to consuming an entity's resources unnecessarily also limit the efficiency of the said entity. By concentrating on oil exploration and outsourcing all the other non-core activities including but not limited to website maintenance, legal services, recruitment and selection, etc., Company X would be able to strengthen its core business thus enhancing its profitability and/or chances of success. Indeed, as Hill and Jones (2012) point out, outsourcing non-core activities allows managers to train their sights on those activates which would amongst other things lead to the creation of both value and competitive advantage. Lastly, in the opinion of Hill and Jones (2012), outsourcing would enhance a company's ability to differentiate the goods it offers for sale. The authors however point out that "the quality of the activity performed by specialists must be greater than if that same activity was performed by the company" (Hill and Jones, 2012). To enhance its chances of striking oil, Company X could for example outsource soil sampling to a company that specializes in such an activity.