Business Function Outsourcing -

Business Function Outsourcing

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Business Management Question

What are the Advantages and Disadvantages of Business Function Outsourcing?

Business Management Solution


The globalisation of economies, lessened trade barriers and advances in transportation have increased the opportunities for manufacturing organisations to access global resources. Developments in the field of information technology have offered a similar environment for service-based jobs.  These scenarios have played a vital role in the creation of the outsourcing concept (Oliveira, Hartung & Wendling 2010). Outsourcing is a process in which an organisation hires an external service provider to carry out selected business operations. This ranges from outsourcing production system and back-office functionalities for a lower cost with the primary aim of reducing operational costs. Apart from its various benefits, outsourcing is also subject to risks due to proximity issues, characteristics of the global workforce, service quality and satisfaction issues.  This report reviews various articles that depict the pros and cons of outsourcing business functionalities. It begins with the definition of outsourcing, types of outsourcing, reasons for outsourcing, its advantages and disadvantages and gaps identified in existing researches.

1. Definition

Iqbal and Dad (2013) refer to outsourcing as an approach that organisations adopt to shift their conventional operations to external service providers located in the home country or different countries. Multinational companies majorly adopt this as a strategy to reduce their operating cost. Harland et al. (2005) state that under outsourcing, one or more business functions are handed over to an external vendor or a service provider to conduct those activities hassle-free. Mankiw and Swagel (2006) state that the decision to outsource varies according to the type of organisation and its organisational structure. However, the cost is a dominating factor considering the fact that some countries offer a low-cost advantage. The major strategic reasons to choose to outsource are enhancing cash flow, strengthening payment control, scalability of workforce and improvements in business performance. Though the decision is based on lowering operational costs, the basis is to achieve competitive advantage (Gilley & Rasheed 2000)

As customers have become more demanding requiring low cost and high-quality products or services, companies are forced to take initiatives to cater to their requirement by taking advantage of the global talent through the 24-hours knowledge factory in the form of contact centres (Owens 2014). Companies which decide to outsource tend to assess the cost factor to determine if the lessening their exiting operating cost is attainable through outsourcing so that the available resources are reinvested for organisational advantage and developing its core competencies. It is observed that despite the potential risks in outsourcing arising from security threats and cultural issues, companies are expected to benefit from the low-cost advantage. Nowadays, organisations in all sectors ranging from government institutions to small and medium enterprises adopt outsourcing.

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