Advancements in information technology and innovations have led to an ever-changing business environment, and in order for companies to survive, they have had to adapt to maintain their competitive advantage and stay afloat in this increasingly competitive market. It is essential that every organization carefully scrutinize and adopt any new business trends before its competitors to stay ahead of the game and reap profit. In the recent past, outsourcing has stood out as one of the major business trends, and companies have fully absorbed this not only in America but also across the world. This study seeks to take an in-depth look into outsourcing in a bid to foster an understanding of the trend.
Outsourcing can easily be defined as the act of an entity transferring internal activities or services to an external third party through agreements and contractors (Skipworth, Delbufalo, & Mena, 2020). This business strategy has been adopted by many great American companies, for instance, Google, Apple, and Microsoft, all of whom seem to be quite content and tested and proven advocates for this new trend. A company could outsource its services or products to a company within its own country; however, most entities go beyond their borders as they intend to save on production costs. This has led to the rise of economies like China, India, and the Philippines, which are significant hubs for outsourcing companies. Traditionally, outsourcing was limited to manufacturing; however, it has since made a shift to include services and other types of goods. Advancements in information technology have made the world a global village, therefore, making it quite simple for American companies to monitor their activities across the globe and ensure that quality is maintained.
The Advantages of Outsourcing
In understanding outsourcing, it is important to get the reason why companies are jumping onto this idea, which can easily be translated into the advantages of outsourcing. Cost-cutting is the main reason for outsourcing; this is because often, in countries like China and India, the labor cost is significantly lower than that in the United States (Lacity, Khan, & Willocks, 2009). First, this reduces the cost of production and could lead to a lower product price, which will give the company a competitive advantage or, alternatively, increases the profit margins realizable by the entity. Profit-making is the main reason for the existence of businesses, and outsourcing enables this; hence, most American companies have been quick to get into the trend. According to Lankford and Parsa (1999), outsourcing does not always guarantee lower costs, and a company should properly evaluate its specific environment and services to be able to make a suitable decision on whether or not to outsource specific segments.
Companies also outsource in order to get easy access to resources and talents not readily available in their vicinity (Lankford & Parsa, 1999). According to scholars, other people, companies, and countries have often specialized in certain areas. The contracted individual, for instance, can have a better understanding of marketing in comparison to the leading company. Therefore, it makes more sense as their increased knowledge will ensure that they are able to effectively compete with other companies in their industry and even go beyond them. Some resources are also readily available in other countries that specialize in their utilization and trade; therefore, a company might opt instead of importing specific goods, which might be more expensive and time-consuming. China is home to many manufacturers who make components such as screens, cameras, and microphones for phones (Ejet Sourcing, 2021). Therefore, it does not make logical sense for Apple to import all these products for assembly in America; it would rather have a local company be involved in the production, which will be more efficient and effective. External experts could also give new insights compared to the company’s traditional way of doing business, which significantly increases its competitive advantage. The country where a company outsources could also be an expert in mass production. For instance, this is the case with Apple, where China can produce about five hundred thousand iPhones a day, ensuring that the company can meet its high demand (Ejet Sourcing, 2021).
Outsourcing also allows companies to focus on their core competencies; for instance, Apple outsources its production and manufacturing to several Chinese companies. This helps them center their approach and resources towards product design, giving them a competitive edge. This makes even more sense in the scenario of a start-up whose niche, for instance, could be design, farming, or production. It does not fully understand the marketing bit and cannot correctly afford both in terms of time and money to get acquainted with the marketing aspect of the business. Therefore, this company would outsource its marketing to experts to allow them to focus on their expertise and grow their business.
Disadvantages of Outsourcing
The first major disadvantage of outsourcing is the logistical and communication issues; this is because outsourcing entails the coming together of two completely independent and different companies, sometimes even from different parts of the globe. This could present a challenge in that these two companies have entirely different ways of doing things, different organizational cultures, structures, and even different time zones. By having a different culture and structure from the third party, a company might find it hard to effectively coordinate and even supervise its tasks which could lead to inefficiencies (Jagdish, Panagariya, & Srinivasan, 2004). The issue of work ethic could also come to play; for instance, the debate about child labor in the recent past showed that some companies where labor is cheap to use children in their production, which goes against child rights in the world and America. Therefore, this might even lead to the boycotting of the company’s products and even prove to be quite costly in the grand scheme of things. In the case of different time zones, it might be challenging to coordinate a meeting, forcing some parties to be overly stretched and to work odd hours that could have a toll on their productivity. There could also be a language barrier when outsourcing in search of cheap labor, making communication quite tiresome.
When outsourcing, companies often share their information with the third party to ensure that they merge correctly and ensure the smooth running of operations. This presents some form of security vulnerability as it is pretty challenging to ensure that all company information is strictly used for the benefit of the company. Therefore, a company has to find alternative and more advanced ways to protect their data from being used negatively. This presents the aspect of hidden costs that are often unseen at the start of such ventures. In terms of hidden costs, the third party could also take advantage of their position to rip off the outsourcing company. The overall quality of the products can also decline when outsourcing; this is because the third party is not adequately conversant in how the company operates or might choose to assume and make confident decisions that end up affecting the overall quality of products that could prove detrimental to the business.
The Outsourcing Decision
Based on the facts raised in the previous section, it is pretty essential that an entity correctly understand and evaluate before outsourcing. This section raises the questions and approaches towards determining whether outsourcing is an excellent fit for an organization.
It is essential to have a proper understanding of the business and industry that one is involved in. In this regard, one has to understand the company’s core competencies, functions, processes, and resources. Through this, one is able to determine their current position and, in extension, what they can outsource and what aspects of the business have to be handled internally.
After establishing the aspects of outsourcing, the company looks for a third party to whom it can outsource its activities. The third party has to fit the specific functions required by the outsourcing companies; it is also important that they share some integral core values and practices, which would facilitate smooth communication and understanding between the two companies. The third party should also be a reliable company that prioritizes the best interest of the outsourcing company.
After establishing appropriate companies, one should then weigh the economic sense of the decision. A company should weigh how much they are currently using in a specific function against what the outsourcing company is going to charge them. In terms of cost, the company should also look at the hidden costs of the decision. For some entities, the cost could not be the priority; they could also be for improving the focus of the entity. Therefore, it should weigh all its alternatives and the reasons behind its decision.
Based on the previous evaluations, the company is able to make a decision and draft a contract of outsourcing with a third party. The contract should be detailed and cover all sectors that could affect the business; there should also be clauses for constant follow-up and expectations of the relationship.
In conclusion, the outsourcing decision has been quite effective and profitable for many entities, which have seen its continuous growth in the recent past. However, as demonstrated above, exercising this option with caution is essential instead of strictly jumping onto the bandwagon.
Ejet Sourcing. (2021, June 17). Why Apple is Manufacturing Products in China? Retrieved from https://www.ejet.com/apple-manufacturer-in-china/
Jagdish, B., Panagariya, A., & Srinivasan, T. (2004). The Muddles over outsourcing. Journal of Economic Perspectives, 93-114.
Lacity, M., Khan, S., & Willocks, L. (2009). A review of the IT outsourcing literature: Insights for Practice. Journal of Strategic Information Systems, 130-146.
Lankford, W., & Parsa, F. (1999). Outsourcing: A primer. Management Decision, 310-316.
Skipworth, H., Delbufalo, E., & Mena, C. (2020). Logistics and Procurement outsourcing in the healthcare sector: A comparative analysis. European Management Journal, 518-532.