Introduction to Outsourcing and its Benefits

Discuss about the Factors and Performance of Logistics Outsourcing.

Outsourcing has become a global trend in business for several decades. In outsourcing process, an organization hires an outside third party company for performing some of its non-core business activities that were traditionally performed by the organization’s own employees and resources (Zhang et al. 2018). Organizations having strengths in other areas may contract out their manufacturing, payroll, marketing, accounting, legal, data processing and other aspects for concentrating on their core activities. It helps organization to reduce overall business cost and strengthen core business activities. Likewise, Vodafone has outsourced some of its business activities to the third party outsourcing company. Such outsourcing has assisted the company to improve its business performance by getting expertise on their outsourced business activities. This literature review will provide theoretical background of outsourcing for getting an overall idea of the process. This section will also provide previous literature regarding the topic of the research.

• To determine the extent of outsourcing on business performance
• To assess the issues of outsourcing in relation to business
• To identify the impact of outsourcing on business performance
• To suggest effective process of outsourcing

This literature review will rely on the theoretical underpinning of the topic outsourcing. Such theoretical underpinning will clarify the concept of outsourcing. Moreover, the linking outsourcing process with the business performance will attract the attention business person towards this process. The empirical evidence of the literature review will prove the authenticity and practicality of the research topic. Furthermore, this section can also be an effective secondary source for the future researchers.

Global trends of globalization have led some organizations to outsource some of its non-core business activities to specialized firms for emphasizing much on organizational competitive advantage. According to Lahiri (2016), outsourcing is the process of contracting and subcontracting some non-core business activities to other third party company. Most of the companies outsource their non-core business activities like human resource management, accounting, marketing manufacturing, data processing and many more. Liu, Wang and Huang (2017) stated that the process of outsourcing frees up some valuable time and resources of the organization that can be used crucially for leading business competitive advantage. Moreover, organizations can concentrate on their core business activities by outsourcing some of their non-core business activities to some specialized third party organizations. On the other hand, Uluskan, Joines and Godfrey (2016) opined that outsourcing is growing at a rapid pace around the world, as most of the organizations have considered it as an effective way of achieving strategic goals, improving customer satisfaction and enhancing overall business performance. The third party providers cost effectively manage the labor intensive back office support properly.

Global Trends of Outsourcing

Business performance indicates achievement of an organization in respect to certain criteria. Marshall et al. (2015) pointed out that business performance include three particular areas of an organization, which incorporates product market, financial performance and share holder return performance. Moreover, business performance depicts the effectiveness of organization. However, Eggert, Böhm and Cramer (2017) argued that measuring business performance is quite a tough area. It is not a one dimensional theoretical construct and not likely to be measured through single operational measures.  The most common and frequently used measures of business performance are like financial market measures, mixed accounting, survival and subjective measures. In this aspect, balance scorecard explicitly covers the domain of customer outcome, financial outcome, internal and innovation process. Valid measurement of business performance allows business practitioners to take effective business strategy.

Transaction Cost of Economics theory is the most commonly used outsourcing theory. It suggests the best decision making tools for assisting an organization in deciding upon which business activity should be outsourced. Handley and Angst (2015) opined that TCE theory prepares the organizations to implement the necessary changes arising from outsourcing process. The organizations can also use this theory for evaluating and selecting outsourcing contracts, which is an extremely tough process. Forward, lateral and backward integration set the boundaries of the organizations for each distinctive activity, which is based on relationship of each activity to the core activities of the organizations. The base of this theory depicts that it is not possible for the organizations to completely contract in outsourcing. However, incomplete leads to renegotiation, while the balance of transacting parties shifts. Espino-Rodríguez, Chun-Lai and Gil-Padilla (2017) opined that the attribute of the organizations’ transaction is positively associated with the transaction costs like specific assets, necessity of investment in durables, task complexity, inefficiency of transaction and uncertainty.

As per TCE perspective, outsourcing becomes important for the organizations, when marketers are not able to provide adequate resources and reduce uncertainty. In such situation, outsourcing is the best method of reducing selection, negotiation, renegotiation and controlling cost, when the organizations are largely dependent on availability of resources for achieving organizational success. On the other hand, Oshri, Kotlarsky and Gerbasi (2015) opined that TCE theory has explored the role of research and development on outsourcing process, where the organizations must emphasize on safeguarding the intellectual property of patents. Moreover, the inter-firm division of labor leads to lower production cost in markets than in organization due to efficiencies in resource allocation.

Measuring Business Performance

Core competency theory is based on collective learning of an organization, which integrates several streams of technologies and brings together diverse production skills. The activities of an organization can either be completed in house or by some external service providers based on effective make or buy decision. Lacity and Willcocks (2014) opined that non-core business activities should be outsourced to the best quality service providers, who are expert in the particular fields. However, there are some important non-core business activities that have huge impact in competitiveness of the organizations. Such non-core activities should be performed in house.

According to Liu and Deng (2015), core competency theory refers to collective knowledge of business activities associated with specific knowledge for best optimizing and integrating the business activities. Moreover, the organizations should always contract the best quality outsourcing organizations for outsourcing their non-core business activities. Such outsourcing service providers must have expert knowledge in the allocated business activities. In this way, the service providers will be able to provide expert knowledge performing the specific activity towards leading core competencies for the parent organizations. The competence level of the vendors is extremely important for influencing the success level of the outsourcing arrangement.  Vodafone has renewed its IT sourcing with IBM India for virtualization of its operation and migrating to hybrid cloud architecture. The organization does not have to look after their IT department through its outsourcing process (Gomez-Conde 2015). Hence, the organization can concentrate on their research and development department for better fostering innovation in their business.

In most of the time, business activities are outsourced to the vendors, who have specialized skills and knowledge in the particular field. Gomez-Conde (2015) opined that outsourced vendors are equipped with specialized equipments and technical expertise. Most of the time, such vendors are better than the outsourcing organizations. On the other hand, Awino and Mutua (2014) opined that the outsourced companies can complete the task quite faster and with high quality with their specialized skills and knowledge. While considering the evidence of Telstra, it can be found that Telstra has successfully outsourced its technical department to IBM. In this way, the Telstra is now highly capable of offering highly quality technological service to the customers with the expertise knowledge and skills of the IBM (Zailani et al. 2017). Hence, it is proved that outsourcing has helped Telstra in enhancing its ultimate business performance. Furthermore, Vodafone has started to outsource its information technology contract with IBM India. Such outsourcing has helped the organization to standardize its IT processes and improve the overall quality of the technical and telecommunication features provided by the organization (König and Spinler 2016).

Theories of Outsourcing: TCE and Core Competency

Risk sharing is the most crucial factor for determining the outcome of outsourcing process. According to Gorla and Somers (2014), outsourcing facilitates the organizations to shift some specific responsibilities to third party vendor. Being specialized in the field, such outsourced companies can better plan the risk mitigating factors of the parent organizations. On the other hand, Raassens, Wuyts and Geyskens (2014) opined that outsourced companies always apply their years of experience and knowledge to perform any outsourced business activity. Hence, such outsourced companies can lead to increased productivity and efficiency in process. In this way, the outsourcing vendors can contribute to the bottom line of the parent company.

Outsourcing can effectively minimize the overall business cost of an organization. Zailani et al. (2017) pointed out that outsourcing process eliminates the need of hiring employees for in-house operation. Hence, the cost of recruitment and selection is reduced to a greater extent. Cost advantage is the most visible and obvious benefits brought by outsourcing process to business. The same kind of job can be done in a much lower cost at developing countries as compared with the developed countries due to wage differences. Furthermore, cost saving does not indicate low quality of the business activities. In this way, outsourcing business can reduce the overall business cost and add to the overall profit margin of the parent organization. While considering the evidence from IINET, it can be found that the organization gets tech support from India and outsource call centre service in South Africa. In this way, the organization has reduced 45% overall business cost by outsourcing its business activities to the countries having less wage rate of employees (König and Spinler 2016). With an intension to reduce the overall cost of the business, Vodafone has outsourced its non-core business activities like call centre and legal processing. Moreover, the organization has reduced the business cost to a larger extent by outsourcing their non-core business activities. The organization has outsourced in call center and legal process activities to India for hiring low cost employee towards completing their jobs (Eggert, Böhm and Cramer 2017). In this way, the low cost of employees in Indian has reduced the overall business cost of Vodafone.

Outsourcing process highly facilitates an organization to focus on core activities towards fostering high level of competitive advantage. According to König and Spinler (2016), outsourcing process frees up some energies and resources of the parent organizations and enables them towards focusing on their brand development. Moreover, Larsen (2016) stated that organizations can effectively invest in their research and development process through saving their capital and manpower through outsourcing their non core business activities. In this way, the organizations can move on to provide higher value to their core business process leading to high level of competitive advantage.

Examples of Successful Outsourcing: Vodafone, Telstra, and IINET

Outsourcing involves signing a contract with another company for performing the function of an entire department or any single task. According to Uluskan, Joines and Godfrey (2016) the outsourcing organizations are to hand over the control of outsourced function and rein of management over the outsourced organization. Moreover, the managerial control nonetheless belongs to the parent company. In such situation, the managers of outsourced companies may be incapable of maintaining the standards of the parent company within the outsourced function. It can ultimately lead to low standard business function for the parent company (Liu and Deng 2015).

The proprietary information that keeps business operating is extremely important for any organization. Eggert, Böhm and Cramer (2017) opined that confidentiality can be compromised in outsourcing, when the parent company outsources transmits the confidential information like payroll, marketing, accounting and others to the outsourced company. Moreover, the parent companies may face threats of confidentiality and security, if the outsourced company mistreats the secured company information of the parent company. On the other hand, Liu, Wang and Huang (2017) opined that unethical usage of proprietary company information can lead to huge damage and business loss to the parent company.

Organizations may face damage of customer perception, while outsourcing the call centre function to any overseas subcontractor. Zhang et al. (2018) opined that the subcontractors may be incapable of providing necessary information and resources to provide customers having a satisfactory experience. Moreover, the subcontractors may not be able to provide necessary and satisfactory information to the customers with lack of proper knowledge regarding the parent company.

Oshri, Kotlarsky and Gerbasi (2015) stated that outsourced companies are often reluctant to accept any changes to be incorporated in the outsourced functions. In such situation, the parent companies can face huge issues in leading any changes in their business process. Furthermore, Butler and Callahan (2014) opined that the outsourced companies often demands extra charges for incorporating any changes in the outsourced business function. In such situation, the parent companies face the issues of hidden cost, which increases the overall business cost.

Lack of communication with the outsourced companies may leads to deviation from actually goals of the outsourced functions. In this way, the overall goals of the outsourced function may get hampered with lack of communication. In such situation, the parent organizations should maintain regular communication with the outsourced company for keeping them in track for meeting the actual standards and schedule of the business function (Zailani et al. 2017). Regulation communication will also help the outsourced organizations to understand the actual standard of the business function. Hence, they will be able to provide high quality business result towards leading business success.

Lack of quality and skills of the outsourced companies can hamper the overall success of the outsourced business function. Moreover, such incapable outsourced vendors can not involve required equipments and skills for achieving the success of the outsourced business function (Butler and Callahan 2014). In such situation, the parent companies should choose right outsourced vendors, who will have desired skills, expertise and equipments for successfully completing the business function. Selection of right outsourced vendors can definitely leads to success of outsourcing process.

The outsourced companies are not able to complete the outsourced business function without having proper set of goals from the parent companies. Lack of proper goals deviate the outsourced vendors from the actual standard of the outsourced function. Hence, the parent companies should set and communicate clear goals of outsourced business function to the outsourced vendors (Raassens, Wuyts and Geyskens 2014). It will help the vendors towards achieving the success of business function by being on right track.

The organizations always face the threats of confidentiality to protect the sensitive information from the outsourced companies. In such situation, the parent companies should have proper control on the outsourced information to protect them from mistreating by the outsourced companies (Liu and Deng 2015).

Every academic research is likely to face somewhat limitations, which can ultimately hamper the outcome of the overall research. This literature is also having some problems and gaps that can ultimately hamper the ultimate research outcome. Moreover, the literature review is having lack of adequate authentic sources for incorporating proper information. The literature review may also have lack of presence of proper academic model towards accessing adequate research information.

H₀: Outsourcing function does not have impact on business performance

H₁: Outsourcing function has impact on business performance

Conclusion

While concluding the literature review, it can be said that outsourcing function can improve the business performance, while leading it with adequate control. The parent companies can have access to specialized experts and equipments to perform certain non-core business activities through outsourcing business functions to outsourced companies. On the other hand, the parent companies can also save their overall business cost, while outsourcing some of their business activities to outsourced companies. However, the organizations often face threats of information security after outsourcing important and sensitive business information to the outsourced vendors. Hence, the parent companies must have proper managerial control over the outsourced business information towards protecting it from mistreatment.

Reference List

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Espino-Rodríguez, T.F., Chun-Lai, P. and Gil-Padilla, A.M., 2017. Does outsourcing moderate the effects of asset specificity on performance? An application in Taiwanese hotels. Journal of Hospitality and Tourism Management, 31, pp.13-27.

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