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    Paper Details    
    How does outsourcing affect the business internally & externally? What are the pros & cons to outsourcing?


Subject Business Pages 7 Style APA



A company is involved in outsourcing when it buys services or products from an outside supplier instead of performing the same work inside its own facilities, with the aim of cutting costs. In the business context, outsourcing can also be defined as contracting out of a business process to an external party (Deepen, 2007). The decision to outsource by a company is very crucial since it comprises weighing the prospective cost savings in contrast to the outcomes of a loss regulation over the product service. Major examples of outsourcing include computer programming services, manufacturing components, tax obedience and other accounting roles, payroll, training administration, transportation of products, compensation and benefit planning, customer services and human resource functions. Recently, employees have also been leased, in which skilled vendors recruit, train, hire and pay their customers’ employees along arranging for the healthcare coverage and other advantages (Egger & Falkinger, 2001).  According to a study quoted in Industrial Management showed that the global outsourcing marketplace was growing at a rate of 10% annually and it was anticipated to reach $121 billion by 2000 (Hubler, 2009).  This paper will advance that while outsourcing may be advantageous to companies both internally and externally, it is equally disadvantageous to companies both internally and externally. The paper will begin by examining the origin of outsourcing; then to discuss both the advantages and disadvantages of outsourcing.

An overview of Outsourcing

The concept of outsourcing is partially the outcome of a general change in business philosophy. Before the mid of 1980s, several firms sought to obtain other companies and diversify their corporation interests with the intention of reducing risk (Grauman, 2000). As more firms realized that there were inadequate advantages to managing a large group of dissimilar companies, many companies started to divest affiliates and refocus their energies on a small number or one of closely related areas of business. Companies therefore struggled to develop or identify a core area of competence through a unique blend of expertise and experience that would offer a spring of a competitive benefit in a given industry (Rushton, at el, 2007). This implied that a company’s processes were aligned around the core competence and any other functions or undertakings that were never regarded necessary to preserve it were outsourced.

Outsourcing can be considered in two main categories: total outsourcing and selective outsourcing. Total outsourcing is that outsourcing that involves dismantling entire divisions or departments and transferring all the workers, equipment, complete responsibility and facilities for a function or product to an external vendor (Innocenti & Labory, 2002). Conversely, selective outsourcing is that outsourcing that targets a single, time-consuming role within a division or department, like manufacturing a minor component or preparing payroll, that can extra efficiently be handled by an external specialist (Oshri, Kotlarsky & Willcocks, 2015). The vendors that offer outsourcing services are generally categorized into two models: Business Process Outsourcing (BPO) and Application Service Provider (ASP) (Sudi, 2010). According to the BPO model, the major assets and resources are transferred from a company to a vendor. According to the ASP model, vendors focus on the provision of selected services for a number of customers. According to Osmond, there exist several variations within the ASP and BPO models that limit the operations of the models. He states that each salesperson has a certain focus and/or entry point to the market, especially in the ASP model space (Osmond & Schnaper, 2000). Additionally, he stated that there is a variety of pricing options and models. However, there is an apparently continuous combination of pricing, delivery and service, offering an answer to most cases. On the contrary, it is complicated to compare salespersons on an apple-to-apple ground.

Advantages of Outsourcing

Companies may resolve to outsourcing for several reasons, which are mainly based on realizing benefits in business efficiency and profitability.  First, companies outsource to save on costs. A number of companies embrace outsourcing as an approach to realizing cost savings or healthier cost control over the subcontracted function (Schniederjans et al, 2005).  Usually, a company does outsource to vendors that are specialized in a particular function and executes that role more effectively than the company could, mainly due to transaction volume.

 Secondly, companies outsource to acquire a given staffing level. Companies outsource with the intention of minimizing variations in staffing that might occur due to alterations in demand for a service or a product or achieving a headcount cutbacks (Gouge, 2003). Additionally, businesses may outsource with the aim of reducing the workload on their staff or providing extra development openings for their workers by setting them free from wearisome tasks.

Thirdly, focus is another reason for outsourcing. Companies outsource to eliminate interferences and compel themselves to focus on their areas of core competencies (Sudi, 2010). Outsourcing can set free the entrepreneur from tiresome and time consuming duties, like payroll, so that he/she can focus on the sales and marketing activities that are greatly essential to the company’s prosperity and long-term growth.

Fourth advantage of outsourcing building on morale.  By engaging in outsourcing relationship, morale is acquired. Usually, a company’ lack of dedication or internal expertise to non-core duties lead to poor attitudes hence poor performance (Grauman, 2000).This can lead to duplication and overlap of internal energies. Nonetheless, an effectively planned and ongoing process of communication originating from one or extra outsourcers can significantly eliminate or reduce these duplications. 

The fifth advantage of outsourcing is flexibility. Companies outsource to obtain greater financial stability (Sudi, 2010). This is because by selling assets that hitherto aided an outsourced role can better a company’s cash flow. However, the limitation associated with this is that most merchants demand long-term contracts, which subsequently may reduce flexibility.

Sixth, companies outsource for knowledge. Some specialists vendor outsourcing of computer programming and other technology-related information functions as an approach to obtaining access to new know-how and external expertise. Small businesses may adequately benefit from this because they are unable to develop their own in-house proficiency or hire computer experts to maintain a high-level of technology (Osmond & Schnaper, 2000). When such duties are outsourced, the small companies gain access to new technology that can aid them to contend with larger companies.

Lastly, outsourcing enhances accountability. Outsourcing is centered on the understanding, shared by vendor and business alike, that such planning need quality service in exchange for compensation. Paying for a company service creates the anticipation of performance (Grauman, 2000). Outsourcers are verily aware that accountability is both legal and practical, with fiscal implications. However, the same can never be stated about internally offered functions. Other advantages of outsourcing include: risk-sharing, focusing on core process instead of the supporting ones, reduced recruitment and operational costs, obtaining of expertise and swiftness that would not be realized from an internal operation.

Disadvantages of Outsourcing

While outsourcing is both internally and externally advantageous to companies, there are disadvantages that are associated with it. To begin with is loss of managerial control. By assigning a vendor the duty of a single task or an entire department, a company’s control and management is turned to the vendor. This implies that the vendor takes the role of management of the company’s department. Since the hired company will not be compelled to operate within the confines of the company’s mission and standards but instead be driven by making profit, the management is likely to be paralyzed.

Secondly, outsourcing carries with it hidden costs. While contracting an external company to carry out some services, not all factors may be adequately taken care of. In such cases, the hiring company must cover for any inadequacies.  Additionally, there will be need for a lawyer who will be reviewing the terms of contract in case there is misunderstanding between the parties.

Thirdly, there is threat to confidentiality and security. The building block of any company is the information that defines the vision, mission and objectives of the company. When a company has to outsource its medical records, payroll or any other confidential information that pertains it, its confidentiality may be bargained (Oshri, Kotlarsky & Willcocks, 2015). Additionally, if the subcontracted function encompasses sharing of a company’s knowledge or data, it is important that confidentiality is considered.

Fourth, there quality problems. In most cases, the outsourcing companies are driven by profit.  However, since the agreement will fix charges, the outsourcing companies will try to decrease expenses so as to increase their profit. So long as they satisfy the contract’s conditions, they will be paid (Sudi, 2010). This implies that extra charges are to be met so that quality services may be obtained.  Additionally, the company will lose the capability of speedily responding to the changes of the business surrounding.

Fifth, outsourcing is tied to the commercial well-being of extra company. Since outsourcing involves turning over the roles of a company to another, the well-being of the contracting company will be dependent on the financial well-being of the contracted company. Lastly, outsourcing may result into ill-will and bad publicity to a contracting company. 


In conclusion, outsourcing is the purchasing of services or products from an outside supplier instead of performing the same work inside its own facilities, with the aim of cutting costs. To be successful in outsourcing, a company must have a proper understanding of its future direction and capabilities. Outsourcing has several advantages that are mainly aimed at gaining extra competitive advantages. They include: cost saving, flexibility, acquiring a particular staffing level, focusing on core competencies and improvement of morale. Conversely, outsourcing has advantages such as poor quality control, a lengthy bid process, decreased company loyalty and loss of strategic alignment. It is thus important to observe that while outsourcing is advantageous, it is equally disadvantageous.




Deepen, J. M. (2007). Logistics outsourcing relationships: Measurements, antecedents, and effects of logistics outsourcing performance. Heidelberg: Physical Verlag.

Egger, H., & Falkinger, J. (2001). A complete characterization of the distributional effects of international outsourcing in the Heckscher-Ohlin model. Munich: CES.

 Grauman, K. (2000). The Benefits of Outsourcing. CPA Journal. 6(4), 78-98.

Hubler, M. (2009). The labour market effects of outsourcing parts and components: Adverse Carnot competition. Kiel: Kiel Inst. for the World Economy.

Innocenti, A., & Labory, S. (2002). The advantages of outsourcing in terms of information management. Siena: Universitỳ di Siena.

Oshri, I., Kotlarsky, J., & Willcocks, L. (2015). The handbook of global outsourcing and offshoring: The definitive guide to strategy and operations.

Osmond, T. A. & Schnaper, B. M. (2000). Tips, Traps, and Travails: How to Hire the Right Outsourcing Vendor for Your Organization. Benefits Quarterly, 8(8), 789-890.

Gouge, I. (2003). Shaping the IT organization: The impact of outsourcing and the new business model. London: Springer.

Rushton, A., Walker, S., & Chartered Institute of Logistics and Transport in the UK. (2007). International logistics and supply chain outsourcing: From local to global. London: Kogan Page.

Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2005). Outsourcing and insourcing in an international context. Armonk, N.Y: M.E. Sharpe.

Sudi, L. (2010). The Lived Experiences of Federal Agency Information-Technology Employees in Times of Outsourcing.


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