The Perceived Impact of Outsourcing on Organizational Performance Dean Elmuti, Eastern Illinois University
In todays world of ever increasing competition, organizations are forced to look for new ways to generate value. The world has embraced the phenomenon of outsourcing and companies have adopted its principles to help them expand into other markets (Bender 1999). Strategic management of outsourcing is perhaps the most powerful tool in management, and outsourcing of innovation is its frontier (Quinn 2000).
Outsourcing is a management strategy by which an organization delegates major, non-core functions to specialized and efficient service providers, or as Corbett (1999). President of Michael F. Corbett and Associates asserts, Outsourcing is nothing less than the wholesale restructuring the corporation around our core competencies and outside relationships. The traditional outsourcing emphasis on tactical benefits like cost reduction (for example, cheaper labor cost in low-cost countries), have more recently been replaced by productivity, flexibility, speed and innovation in developing business applications, and access to new technologies and skills (Greer, Youngblood, and Gary 1999; Bacon 1999).
The market for providers of outsourced services of all types is growing rapidly. In 1996, American firms spent over $100 billion in outsourced business activities (Casale and Overton 1997). Other estimates place the total U.S. market for outsourcing at more than $300 billion by the year 2001 (Dun and Bradstreet 2000). Globally, outsourcing usage grew 35 percent in 1997 and the total market for outsourced services is expected to increase to $200 billion by the year 2001 (Greer, Youngblood, and Gray 1999). A recent study was conducted by Yankelovih Partners indicated that two-thirds of companies world-wide already outsource at least one business process to an external third party. This practice appears to be most common in the U.S., Canada, and Australia, where 72 percent of outsourcing is being sought (Goldstein 1999; Bacon 1999).
Successful implementation of an outsourcing strategy has been credited with helping to cut cost (Bowersox 1990; Gupta and Zeheuder 1994; Greer, Youngblood and Gray 1999), increase capacity, improve capacity, improve quality (Lau and Hurley 1997; Kotabe, Murray and Javalugi 1998), increase profitability and productivity (Casale 1996; Sinderman 1995), improve financial performance (Crane 1999), lower innovation costs and risks (Quinn 2000), and improve organizational competitiveness (Lever 1997; Steensma and Corley 2000; Sharpe 1997). However, outsourcing does generate some problems. First of all, outsourcing usually reduces a companys control over how certain services are delivered, which in turn may raise the companys liability exposure.
Companies that outsource should continue to monitor the contractors activities and establish constant communication (Guterl 1996). Another big problem with outsourcing comes from the workers themselves as they fear loss of jobs (Malhorta 1997). According to a recent survey 55 percent of outsourcing relationships fail in the first five years. Of these that do manage to stay together, 12 percent are unhappy with their arrangement and regret ever making the deal (Foster 1999).
This study was designed to explore why companies are undertaking outsourcing projects and identifies factors that my facilitate or impede outsourcing projects. This article also examines the relationships between outsourcing strategies and organizational performance. The paper is organized in the following manner: the next section reviews the outsourcing literature and develops the questions this paper seeks to answer; the third section presents the method used in the study; the fourth section highlights overall results of the study; the fifth section presents detailed results in answer to specific questions; and the final section summarizes company improvements in...
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