The Advantages and Disadvantages of Outsourcing

Topics: Outsourcing, Management, Offshoring Pages: 11 (3195 words) Published: March 1, 2011

In present-day society, outsourcing is playing an increasingly crucial role in international business. Globalization has offered motivation for outsourcing owing to the pressures of cost competition. (John Child, 2005) So organizations are increasingly turning to outsourcing in order to develop their competitiveness, increase profits and focus on their core business. (Steve Burdon and Ajay Bhalla, 2005) At the same time, the liberalization of trade and the development of modern information and communication technologies have made outsourcing an easy option for the international organizations. (John Child, 2005)

This essay discusses the definition of outsourcing in the beginning and then explains the different types of outsourcing. The main body primarily analyses the advantages and disadvantages of outsourcing together with relevant examples, as well as some implications for the international managers in international business.

Definition of outsourcing:

Until now, there is still no official definition of the term “outsourcing”. According to John Child, “outsourcing refers to the contracting out of activities that need to be undertaken on a regular basis, which otherwise would be conducted within an organization.” (John Child, 2005: 179) Alternatively, outsourcing was defined as “products supplied to the multinational firm by independent suppliers from around the world” and “the extent of component and finished products supplied to the firm by independent suppliers” (Kotabe, 1992:103). Additionally, outsourcing has been described as “the reliance on external sources for manufacturing components and other value-adding activities” (Lei & Hitt, 1995:836). In general, definition of outsourcing includes almost any goods or services that a firm procures from outside organizations. For services, outsourcing transfers operational control to the suppliers. Specific services which organizations are seldom needed, like legal advice, is not a kind of outsourcing. (K. Matthew Gilley and Abdul Rasheed, 2000)

Types of outsourcing:

Similar to the definition of outsourcing, different people have their own opinions about the types of outsourcing. Though there are so many different types of outsourcing now, however, noted by John Child, they can be divided into two main categories: one is the outsourcing of core value-chain activities, such as manufacturing, distribution and information technology; the other is the outsourcing of support activities like human resource, research & development and facilities management. (John Child, 2005)

The two most common forms of outsourcing around the world today are manufacturing and IT. According to the statistics collected by the Engineering Employers Federation in 2003, 30 percent of British companies had moved their manufacturing to foreign countries and 49 percent of larger companies which have more than 500 employees had some business abroad. (John Child, 2005) Due to the cheap labor cost, China had become one of the largest manufacturing centers in the world.

India, where has the biggest number of IT experts in the world, is influenced by the British educational system, math and science has been significantly emphasized. There are one hundred and twenty thousand skilled IT experts added to the labor force every year. So now India is regarded as IT center in developing countries and many companies especially those locate in United States choose to outsource IT or software there. The excellent reputation it creates makes India a leading country in IT outsourcing industry. (John Sampson, 2009) On the same day of March 2003, three large British service companies——British Telecommunications, Thames Water, and Powergen declared to move their call center activities from Britain to India. (John Child, 2005) Advantages of outsourcing:

1. Cost savings.

It is quite obvious that outsourcing will reduce the cost of the outsourcer. In most cases, outside...
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