Outsourcing: Challenges, Opportunities, and Business Impact

Introduction

Various companies and institutions have embraced outsourcing over the last few decades. It should, however, be noted that despite its present popularity, outsourcing is a relatively recent concept — having only emerged in the 1950s and being less than seven decades old. Businesses began to identify outsourcing as a sound strategy in the 1980s, and today the concept is a standard feature of global business. Companies operating in the U.S. that seek to benefit from lower labor costs in countries such as China have actively pursued offshore outsourcing. The various approaches to outsourcing commonly embraced by enterprises include, but are not limited to, operational outsourcing, process outsourcing, project outsourcing, and professional outsourcing.

An example of outsourcing would be a company that hires an external marketing team from an enterprise specializing in marketing and related services — a third-party provider. In this case, the outsourcing company avoids the cost and effort of creating and managing its own marketing department. 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 focuses on the problem statement, which defines the researchable scenario. The second section presents a literature review, enabling a determination of what others have found regarding the experiences of various enterprises with outsourcing. The research focuses on restaurants that have, for more than ten years, contracted external companies to handle marketing and advertising on their behalf rather than managing these functions through an internal department. A determination will be made as to whether outsourcing impacts performance as measured by profitability.

Many businesses are interested in finding out whether outsourcing is a viable strategy for promoting performance and competing more effectively in an increasingly competitive business environment. Businesses also want to determine whether it makes business sense to outsource both core and noncore functions. We hypothesize that outsourcing leads to increased profitability for a company or firm.

Literature Review

In basic terms, outsourcing involves an enterprise contracting out some of its functions (Agburu, Anza, and Iyortsuum, 2017). This is the same definition that Iqbal and Dad (2013) assign to the concept. Some scholars, however, such as Ishizaka, Bhattacharya, Gunasekaran, Dekkers, and Pereira (2019), feel that in today's business context, such a simplistic definition fails to capture all the dimensions of outsourcing. For this reason, the authors propose a more comprehensive definition. According to them, 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 of outsourcing embraced in the present project. According to Belwal, Singh, and Dixit (2005), businesses have traditionally sought to outsource only those services considered peripheral — security, catering, cleaning, and similar functions. This is, however, changing. At present, there is an increasing tendency to outsource key areas such as distribution, manufacturing, and human resources. As Iqbal and Dad (2013) observe, in the present highly competitive business environment, outsourcing is largely inevitable — particularly for those businesses wishing to operate across diverse locations around the world.

There are a wide range of reasons why businesses seek to outsource some of their functions. One of the most prominent reasons, as Agburu, Anza, and Iyortsuum (2017) observe, is so that enterprises can focus on their core activities. This is also among the advantages of outsourcing that Dinu (2015) highlights. By focusing on core activities, businesses can further enhance their efficiency and effectiveness. It is also worth noting that by outsourcing 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 themselves.

Dinu (2015) also considers outsourcing to be an effective cost-control tool. For instance, as Jones (2009) points out, businesses that outsource functions to China benefit from a lower cost of production, given that facilities there can minimize costs owing to the lower cost of living compared to the U.S. or U.K. According to Dinu (2015), savings generated from outsourcing can be redeployed to other business undertakings for continued success. As Iqbal and Dad (2013) note, "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). A well-known example cited by Iqbal and Dad (2013) is Procter & Gamble's decision to outsource its Java programming, which reportedly resulted in a $28 million saving. Cost saving has also been cited by Ishizaka et al. (2019) as one of the key drivers behind most firms' decisions to outsource — particularly in offshore operations. In the words of Pedregosa, Gonzalez-Zamora, and Palacin-Sanchez (2017), "outsourcing has been identified as one of the key factors for improving companies' financial performance" (p. 23).

With regard to human resources outsourcing, Fisher, Wasserman, Wolf, and Wears (2008) observe 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 organizations ought to acquaint themselves with the pros and cons of such a move. One advantage of outsourcing HR is that businesses can gain access to specialists for less than it would cost to hire them directly. However, outsourcing HR may also mean that an enterprise is unable to build or develop a unique organizational culture.

As Agburu, Anza, and Iyortsuum (2017) point out, many firms that embark on outsourcing efforts fail to achieve their set goals. In the authors' words, "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 particularly concerns small and medium enterprises (SMEs). Trust is also a notable challenge in outsourcing engagements (Babin, Bates, and Sohal, 2017). As organizations increasingly outsource important functions such as accounting and record keeping — rather than merely peripheral services — there is always the risk of critical business information leaking to third parties. It is for this reason that Dinu (2015) identifies confidentiality and security as key concerns for businesses deliberating on whether to outsource certain functions.

To a large extent, when a business outsources a function, it loses direct control over it (Gupta, 2017). This can be a significant concern in the realm of intellectual property. However, as Gupta (2017) further notes, past studies have established that, notwithstanding the risk of intellectual property misappropriation, companies have much more to gain from outsourcing overall. For the outsourcing relationship to work, businesses must not withhold crucial data related to the outsourced functions. As Babin, Bates, and Sohal (2017) observe, "it is critical that trust is present in all business relationships because by having it the partners communicate more openly…" (p. 41).

Yet another notable downside of outsourcing is the potential for instability in certain aspects of business. According to Dinu (2015), this is particularly the case in instances where the outsourced provider changes crucial operational aspects or goes out of business entirely.

In terms of a way forward, Babin, Bates, and Sohal (2017) argue that businesses ought to promote "inter-organizational trust in global outsourcing relationships" (p. 40), as this enables effective communication between partners. Dinu (2015) also recommends that enterprises undertake a thorough cost-benefit analysis to determine whether outsourcing a service will leave them better off or at a disadvantage. Such an analysis would additionally enable companies to formulate workable strategies for addressing the challenges identified.

Benefits of the Study

One benefit of the study is that it will increase awareness about outsourcing — particularly with respect to the benefits that businesses are likely to reap from such efforts. This information will be valuable for firms that are either considering outsourcing some of their functions or have already outsourced them for reasons unrelated to profitability and are unaware of the potential implications for their financial performance.

Another benefit is that the conclusions and findings from this study can serve as a foundation for further research. Since a wide range of factors have been considered and various recommendations made, the data presented can be used in future studies' literature reviews. The research may also enable other scholars to compare different findings and further refine their own conclusions.

Government agencies could additionally make use of the findings to formulate strategies for supporting business enterprises. Every government has an interest in the performance of firms within its jurisdiction: in addition to contributing to tax revenues, stronger business performance also reduces unemployment. Evidence of improved performance following outsourcing could, for instance, motivate governments to engage with lower-labor-cost countries in pursuit of favorable outsourcing arrangements for domestic businesses.