Paper Example on Advantages and Disadvantages of Outsourcing Business Functions

Business functions outsourcing is not a recent phenomenon. As noted by Smith (2012:5), business organizations have been outsourcing their non-core functions for many years. In this respect, outsourcing can be defined as a strategy that business organizations employ whereby some of the organizations functions processes and activities are move from the responsibility of the organization to a third party. Outsourcing is mostly employed by organizations in order to restructure its business guidelines while at the same time increasing its productivity. The relationship between the outsourcing vendor and the organization affords he organizations some benefits such reduction of overhead costs, improvement in productivity and increase in service qualities. However, the outsourcing has some drawbacks if the functions are not outsourced to an appropriate vendor. As such, there is a need for organizations managements to have a comprehensive knowledge of both advantages and limitations of outsourcing business functions before a final decision is made.

Advantages

One of the major advantages of outsourcing is the realization of reduction of cost. Gewald and Dibbern (2009:249) state that business functions outsourcing is viewed as one of the main strategies of cost savings. The special need for outsourcing arises when in a business, a particular resource, either human capital or equipment resources, is not required thought out in the operations of the organization or the efforts that are required to access these resources are not justifiable. In this situation, outsourcing is beneficial as the organization does not have to dedicate finances on some activity or personnel that is not fully required.

Tayauova (2012:190) further states that outsourcing enables an organization to access highly qualified personnel. Numerous research studies have proved that outsource vendors are typically highly specialized individuals who are readily available to client organizations. The organizations can trust in the competencies of such individuals due to the fact that they have engaged in a specific service or function for a significant period of time thus are aware of all the efficient strategies to utilize in delivering high quality services. As such, client organizations can thus exploit fully the outsourcing vendors specialist abilities, investments and innovations.

Moreover, by using third parties in some of the business functions and processes, the client organizations benefit in the form of risk alleviations. According to Schniederjans, et al., (2015) by utilizing vendor outsourcers, an organization benefits in that certain risks related to certain business functions are shared with outsourcing provider. Furthermore, since the outsourcing providers have specialized in that particular business process, they are in a better position and are best suited to analyze various risks involved in the business function and develop effective plans and procedures to lessen or entirely remove the effects of the risks. Additionally, due to the highly-specialized nature of business process outsourcing providers, they are able to perform these functions quickly thus providing quick turnarounds at affordable prices as they employ state of the art technologies and strategies coupled with highly skilled employees to produce first-rate output under controlled cost. This quick turnaround, as noted by Smith (2012:8) results to improved profit margins for the client organizations as the highly-specialized vendor partners high efficiency levels is vital in reducing redundancy at these affordable costs.

Outsourcing of business processes is not only advantageous to the businesses, but to the countries that the processes are outsourced. According to research, countries such as India amid other Asian countries have been known to reap huge benefits as a result of business functions outsourcing. Among the major advantages of outsourcing to these countries include the influx of foreign exchange which in most cases is generally in dollars as it is the reserve currency mostly utilized by the majority of the economies in the world (MSG Experts, 2017). With the vast flow of dollars into these economies, countries such as India have an advantage over countries that do not have huge dollar reserves.

Furthermore, researchers have determined that outsourcing of business functions generates significant employment as it absorb a significant number of the employable population in the countries where the business functions are outsourced. Consequently, the large number of jobs created as a result of outsourcing provide a buffer against huge unemployment rates typically experienced in the majority of the developing countries (MSG Experts, 2017). In this regard, numerous research studies have made clear this fact and proved that previously underprivileged economic sectors have experienced growth thus benefiting immensely as a result of increases in funds brought about by working in the business processes outsourcing sector. Many scholars have been known to state that outsourcing of business functions by developed countries is a blessing for developing countries as it facilitates the lifting of the individuals in these countries from a situation of economic backwardness and propels them towards upper class lifestyles (Schniederjans, et al., 2015:156).

Another benefit of business function outsourcing is related to the moving up of the value of the economies of the developing countries. This upward movement, as noted by Gewald and Dibbern (2009:252) takes place when the base level work is performed in accordance to the laid-out specifications. That is, developing countries that start out with low level outsourced jobs such as low level back office tasks, and with time and continued work, these countries eventually end up performing the higher value adding tasks such research and development which in turn means that with even more time and work, such countries will be in a position to compete with more developed economies such as those of developed countries. And as various studies have proved, this improvement is a major advantage for the sources of the outsourced business functions as upward movement in the value chain will result in the longer term competitive advantage that is absent in the countries that are still in the low end outsourced work (MSG Experts, 2017).

Disadvantages

On the other hand, business process outsourcing also has some drawbacks associated with it. Several scholars have classified these drawback into several categories such as those related to performance, financial, strategic, psychosocial among others. When it comes to the performance of an organization, Gewald and Dibbern (2009:250) admit that engaging in the business functions outsourcing runs the risk of not delivering the expected level of services. As a result, the potential losses to the organization caused by the low quality of services provided can be significantly detrimental. According to Smith (2012:11), losses brought about by subpar services by the vendor are typically as a result of the inability by the vendor to provide resources, the vendors lack of prior experience or the degradation of the services provide over a period of time. Such thus can compromise the reputation of an organization and in some instances, can initiate the implementation of corrective actions by the industrys regulatory body.

Strategically, an organization losses the vital capabilities and resources that are required to stay competitive. The strategic effect of the outsourced back office function by itself can be limited, however, these functions form the basis of the front office functions. Additionally, due to the inhouse loss of back office functions, an organization is also at a higher risk of losing its flexibility capabilities of quickly reacting and adapting new external and internal forces which leads to the loss of control due to the high dependency on the service provider (Gewald & Dibbern, 2009:251). Furthermore, the loss of back office functions has also been attributed to the phenomenon of hollowing out.

Hollowing out as described by Schniederjans, et al., (2015) is the phenomenon of losing the knowledge and hence experience of a particular business function that is exclusively controlled and owned by the organization outsourcing its workforce. As a result of this loss, the organization would no longer be in a position to attract talented and experienced employees from the outsourced business function. Thus, if in the event the organization wishes to reacquire the knowledge process of the outsourced function in order to make it once more an inhouse activity, the switch back costs will make it difficult in terms of loss of money and time required to make the switch back. Thus, as noted by Tayauova (2012), it can lead to unscrupulously motivated behavior by the outsourcing company toward its clients with respect to reducing service levels and pricing a contract renewal. Transaction costs such as renewing and establishing the contract, and monitoring the agreement would affect the overall business of the firms if delays or litigation happen.

In addition to the performance and strategic drawbacks of business functions outsourcing, the phenomenon has also been observed to have negative impacts on the personal affairs of managers who are or were responsible for the functions that have been outsourced. As presented by the Gewald and Dibbern (2009:251) in their study, the career and personal reputation of the managers that are responsible for the outsourced functions are damaged when these functions are outsourced. This damage in reputation is due to the fact that outsourcing is typically associated with damaging claims that are constantly in the media about the loss of jobs to offshore companies. As a result, the careers as well as the personal reputations of managers is negatively affected amongst their peers as well as the loss of influence and power because of their loss of authority over resources.

Business function outsourcing is not only disadvantageous to organizations, there are several drawbacks that affect the countries in which the business functions are outsourced. One of the major disadvantage is in the adverse alteration of the lifestyles of the employees working in the business processes outsourcing sector. Several studies has presented this whereby it was observed that in countries such as the Philippines and India, which handle the bulk of the outsourced work, the outsourcing sector has been attributed with the increasing numbers of work and lifestyle related ailments generally because of the fact that the employees in these countries have to perform their tasks at night due to the time difference (MSG Experts, 2017). This phenomenon is ironical in that the major selling point of the business function outsourcing by most developing countries is that they can provide services to their clients for twenty-four hours a day for seven days a week. However, providing these services throughout is turning out to have unexpected but severe consequences to the employees in the countries where business functions are outsourced.

Another significant drawback associated with the process of outsourcing business functions is the fact that numerous organizations have not yet made the forward step of moving into higher value adding activities in the business operations. as a result, the employees in the business processing outsourcing sector are stuck performing the same low end tasks day in day out which as several studies have proved drains and wastes their energies consequently draining away that advantage on the fact that any business model...