Outsourcing is relatively one of the most recent management strategies that emerged in response to demands of having an efficient way to address organizational competiveness. Although there is much debate in the management definition of the term outsourcing, it is generally agreed that
"Outsourcing is used to describe many different kinds of corporate action: all sub-contracting relationships between firms, all foreign production by US firms, hiring of workers in non-traditional jobs such as contract workers, and temporary and part-time workers, etc" (Harland et al., 2005).
In an age where management has to carefully weigh the benefits and costs of the organization of each money invested, outsourcing has emerged due to response in demands for a more efficient manner in which organization competitiveness issues are addressed. This is mainly because outsourcing can be executed with not only a lesser cost but also with high quality services thus enabling organizations remain competitive in a globalized market (Willett, 1998). In outsourcing, the control of the service remains with the service provider and not the parent company. This implies that the parent company delegates some of its in-house operation to a third-party who takes control of all the processes involved.
Many firms seek lower costs by producing in the less developed countries. These countries have better workers than in the developed countries. It is evident that American students are not good in science and math as compared to Asian students who happen to be in a less developed country. Outsourcing mainly occurs in many businesses in the developed countries because the work force in the less developed countries such as India and China is motivated, better educated and cheap to boot (Schniederjans & Schniederjans2005).
Motivations for Outsourcing
There are several reasons why companies want to outsource their services to another different independent organization. Below is a list of some of the motivations of outsourcing;
- Reduce costs and free up assets in the immediate financial period. Some organizations outsource parts of their in-house operations and make enormous savings as a result (Jiang & Qureshi, 2006).
- Outsourcing helps in access of cheap and efficient labor and even cheaper and better technological innovations saving the organization on expenses.
- Outsourcing enables firms to focus on their core activities according to the operations structure of the organization (Jiang & Qureshi, 2006).
- Other benefits include partnering that accrues as a result of outsourcing as it allows them to exploit more advanced organizational strategies. This implies that outsourcing allows organizations to be more flexible and be able to meet an organization’s changing business demands and conditions. This is done by creation of smaller and flexible workforce that can effectively carry out its mandate (Jiang & Qureshi, 2006).
Large populations in the lees developed countries helps in the provision of cheap labor. Studies clearly show that less developed countries have high birth rates that lead to large populations. This results to high levels of unemployment because the firms in these countries cannot absorb all the labor force. There are no shadow wages which makes the workers to get low wages that do not reflect their efforts. These wages are much below those in the developed countries which makes organizations to capture business sites in these countries and open up subsidiary firms that will provide the same product but at lower costs.
Outsourcing helps in reducing costs since the overhead costs associated with production of a good are reduced (Bragg, 2011).The overhead costs in the developed countries are high because of the need for more office space and most at times it happens that the current location is very expensive and unavailability of room for expansion. This makes the firms in these developed countries to outsource simple operations that help in reducing the need for large office space therefore cutting down the costs.
Increased profitability is realized because the firms focus on their core activities. Outsourcing thus help the firm to expand as it produces relatively quality and low priced products as compared to other firms in the market. This helps in creating greater market share. Increased output leads to larger sales which in turn results to higher profit abilities.
Outsourcing helps increasing access to advanced technology which will help in achieving cut in technology cost. Firms are able to evaluate where cheap technology prevails and establish there. This highly helps in reducing the ultimate costs of producing the product (Bragg, 1998).
It will be realized that outsourcing leads to loss of managerial control. When the firms in these developed countries sign a contract with the firms in the less developed countries to produce the good then its management and control is transferred to these firms (Bragg, 2011). This may have adverse effects on the output produced which reduces the profitability of the firm. These subsidiary firms set in the less developed countries may decide to sell part of the output produced to other organizations which reduces the amount of output realized by the firm in the developed country hence the profitability levels goes down.
There are hidden costs associated with outsourcing. The country intended to outsource may have strong administrative rules that ensures taxation of its imports and high charges to any organizations that may be willing to establish in these countries. Transportation costs may be very high. These hidden costs may be more than those costs that are cut by producing the good in the less developed countries. Therefore this contrasts the idea that outsourcing helps in reducing costs (Bragg, 2011).
Outsourcing may yield to low quality products. Some of the less developed counties have poor systems of technology and thus produce goods that are substandard. Low quality goods do not add value to the customers and they will not be willing to purchase them. Reduced demand leads to inventory buildup resulting to reduced sales and low profitability of the firm.
Outsourcing leaves the firm held up to the financial status of the other firm. The firm from the developed country turns some of its operations to the other firm in the less developed country. This makes it to be tied to the financial status of that company. This would actually lead to bankruptcy to the outsourcing firms because it may fail to obtain the desired profits.
There is lag time service that arises from the outsource provider. This occurs due to increase in distance which increases the delivery costs. Increase in costs can be tracked down from the fact that changing the agreement in outsourcing is associated with high cost penalties. There are also transition costs that arise from training the outsource providers. These factors show that outsourcing leads to increased costs.
The expenses that arise from enforcing and maintaining agreements set out in outsourcing in most cases offset the accrued benefits. Negotiating and maintaining the outsourcing agreements generally increase the costs which contrasts with the main objective of outsourcing. In summation, outsourcing may not necessarily help in reducing the costs of producing the good but in other cases the costs may be more than the benefits.
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