Outsourcing is a business trend that has greatly increased in recent years with more and more companies outsourcing part or whole of their functions/activities. Outsourcing can be defined as the transfer of a business function or activity previously produced in-house to an external supplier which then takes prime responsibility for fulfilling the task (Finn, 2007). Although companies may perceive outsourcing as an alternative to reduce costs as a result of access to economies of scale and improve performance as a result of unique expertise that a large outsourcing vendor can deliver (Roodhooft and Warlop 1999 cited by Jiang and Qureshi 2006), outsourcing has many hidden cost and risks that can lead to create various financial and non financial problems. This essay will discuss whether outsourcing achieves economies of scale. More specifically this essay will explore current trends in outsourcing. Then it will discuss how outsourcing vendors achieve economies of scale and cost reductions. Furthermore it will give an insight of hidden costs and disadvantages in order to give a complete picture of outsourcing benefits and drawbacks.
An estimation of the amount spent on outsourcing in 2001 was to be $3.7 trillion and it was expected to reach $5.1 trillion by the end of the year 2003 (Corbett, 2003 cited by Clott, 2004). Researchers estimated that by 2015, about 3.3 million jobs accounting for $136 billion in wages will move off shore (McCartney 2003). Further outsourcing industry trends are mentioned by a survey conducted in 1997-1998, which indicated that two-thirds of executive manager had outsourced a business process and that the outsourcing market penetration was expected to grow from 6% in 1995 to 10% in 2000. That predicted growth was surpassed with demand for outsourcing exceeding a global value of $100 billion in 2006 (Juras 2007)
Traditionally outsourcing was associated as tactical move with the main objective to reduce costs, but recently that notion of outsourcing has evolved from a tactical move to a more strategic tool. Strategic outsourcing not only intends to achieve the cost reduction benefit but also to helps towards the achievement of strategic goals since companies gain access to external expertise and quality improvement, at the same time companies are able to free up resources which allow them to focus on their core activities and strategic goals (Juras, 2007). The outsourcing deal between Barclays and consultancy group Accenture in a £400m contract is an example of strategic outsourcing were Barclays not only expected to reduce costs but as well to attain its strategy goals of “improving the agility, efficiency and capability” of its information technology operations (Cave, 2004).
There are many real life examples of companies outsourcing or considering outsourcing in order to reduce costs, improve performance or a combination of the two. Dutch financial services ING is one example of companies turning to outsourcing. The initiative behind this decision was to reduce operating cost of approximately €460m per year and to attain strategic goals of efficiency improvement and achieving a higher operational effectiveness for its retail banking operations (The Daily Telegraph, 2006). A company planning to outsource is Britain’s largest mobile operator Orange (White, 2005) as part of an initiative by its French parent Telecom to reduce costs and improve customer service quality in high demand periods. The initiative involves outsourcing 1500 jobs from UK to Indian call centres.
Kakadbase and Kakadbase (2002) identified the most common functions and activities being outsourced by large international companies in Europe and US. Figure 1 illustrates these findings:
Source: Kakabadse and Kakakbadse (2002)
Kakadbase and Kakadbase (2002) also identified the most cited motives for outsourcing as described by companies in Europe and US. Figures 2 illustrate this finding....