Over the years,outsourcing has been employed by business managers in various industries acrossthe world, with the intention to have the edge in this ever-changing businessenvironment. By its very definition, outsourcing is the business practice when thefirm partly transfers its own tasks or processes to an outside source to improvebusiness efficiency. Machogu, Wanjala, Otieno and Kibe (2017), in their workindicated that firms may capitalize on outsourcing to reduce cost and becomemore competent in their core business, which has been now considered a strategichuman resource approach in such competitive business world. There is evidenceshowing that outsourcing practice has the potential to achieve performanceenhancement, however, it does not serve business without being challenged. As outsourcingbecome more and more popular in the modern business, every factor of theprocess must be taken into consideration in order to optimize businessperformance.
Hutchins and Gould (2004) referred to risk management inoutsourcing as a key competitiveness differentiator for a successfuloutsourcing implementation. Zhu, Hsu and Lillie (2001) implied that a decisionmaking process in outsourcing a function should address non-financial factorsin the overall consideration. This essay will provide a broad perspective toidentify relevant qualitative factors from a manager’s point of view in amake-or-buy decision.When it comesto dealing with other parties, like many other business decisions, the intrinsicand extrinsic factors of a business partner are among top priorities to betaken into account. In the outsourcing relationships, the well-being of acompany is strictly tied to the operational and financial status of theoutsource provider, thus, one should evaluate the provider’s quality ofmanagement as well as financial stability to ensure its technical competency. Itis also in the interest of the company that provider’s business attributesincluding its experience, reputation, creditworthiness are critically analysed,as the lack of consistent control may prove to be costly in the long run.
Machogu (2017) implied that the quality of resources, and subsequently outcomesin many outsourcing practices might be compromised as the outsourcing providermay perform its obligations with profit-seeking motivation. According to Shukla(2010), the risk of the supplier underperforming their obligation will forcefirms to adjust the outsourcing strategy, which urges the manager to evaluatethe supplier’s capability to adapt to changes in demand by adjusting productionlevel. The mutual understanding of the outsourcingimplementation plays a significant role in its success. Embleton and Wright(1998) indicated that for outsourcing, a mutually beneficial deal should benegotiated and the agreement must be at their comfort. Deckelman (1998)described outsourcing as contract intensive by their nature and argued that itis the responsibility of both parties that the contractual document are mutuallyunderstood about the strategic relationship. There is always the possibilitythat either or both parties are not operationally prepared to proceed with theimplementation. The process of outsourcing may vary with subjective point ofview of both client and supplier, resulting in the uninformed views about theprocedure.
Lewis and Radmore (2012) in their work indicated: “The servicedescription must be prepared in a logical manner, be sufficiently detailed toinclude firm’s requirement, describe the scope of the services and define allrelevant definition to ensure a mutual understanding of these” (p. 12). Thus,the negotiation process is crucial for an effective long-term outsourcingpartnership. “Regardless ofhow the task or process is being handled currently, outsourcing must be manageddifferently, often requiring new management skills”, (Embleton and Wright,1998, p.10). It is essential that manager properly consider the adaptability offirm to changes in management structure as well as effectively manage knowledgetransfer and training process.
Zhu, Hsu and Lillie (2001) identifiedoutsourcing as a top management issue, while Embleton and Wright (1998)expressed that the policies and procedures should be modified to sustainemployee productivity and consistency. Restructuring the management system incompliance with the outsourcing implementation is crucially important to avoidoverlapping and redundant processes, which necessarily results in businessinefficiency. Staff transition and allocation for outsourcing should also beappropriately managed as Zhu, Hsu and Lillie (2001) mentioned the complexity ofthe process due to economic, legal and social impact on both parties. Outsourcing, by its nature, almost alwaysmeans job eliminations, which can have negative effects on morale, loyalty andproductivity among remaining employees.
According to Shukla (2010), layoff mayresult in unstable morale among the “in house survivors”, leading todistraction, dissatisfaction and inefficiency. Embleton and Wright (1998)viewed the human aspect in the context of outsourcing as often overlooked. Questionsregarding outsourcing will create a confusing atmosphere in the workplace witha sense of insecurity among employees. Subsequently, rumours and speculations mightcause a breach in the employer-employees relationship. Noer (1996) indicated:”Business with a high morale factor have a competitive edge over otherbusinesses… It is an intangible feeling transmitted form each employee to everyother employee and to the customer”, (p.16), while Nanvran Assoc (1996) impliedthat an appropriate policy for communicating an outsourcing strategy is a keyto a successful transition.There is nodenying the fact that firm which outsources may have greatly reduced controlover part of the business.
As a result, there is the risk of compromisingsensitive information of a firm, which may lead to losing competitive advantageor being exposure to business risk. Outsourcing process, therefore, should beaccompanied with the information sensitivity being under control at the highestlevel. Gilley, Greer and Rasheed (2004) argued: “A firm could be vulnerable ifit outsources its executive compensation function and confidential informationis leaked to competitors that may then conduct raids on its executive talent”,(p.234). Shukla (2010) included the risk of service provider accessing firm’sconfidential information in an outsourcing partnership, which might include thepotentially personal information about customers and employees, posing enhancedsecurity risks. Lum (2004) indicated that breach of confidentiality may happenwhen outsourcing and the obligation of those who are responsible for theintegrity of sensitive information must be clearly stated to both parties.
In businesspartnership, the relationship and commitment of both sides play a key role inthe success of the plan. As for outsourcing, there exists a commercialrelationship between two sides, which may lead result in corporate clash. It isfollowed by the unwillingness to adapt to changes and the resistance to theprocess, whether intentional or not, leading to performance monitoring andmeasuring processes not being able to fully represent the effectiveness ofoutsourcing. The lack of participation and communication in such case will becostly in the long term.
Lacity and Willcocks (2017) argued that commercialconflicts are the most daunting challenge for a successful outsourcingimplementation as the relationships in this context based on commercialgrounds. Thus, resolving conflicts between the two parties is crucial in realizingthe long term strategic benefit of outsourcing. With the riseof conscious customers who pay a great attention to the ethical practices ofbusinesses, manager need to consider the reputation of the firm in anoutsourcing deal, based on how public would respond to it.
With the inevitablelack of control from the client, suppliers may practice environmentallydamaging processes or even involve in illegal activities. The process ofoutsourcing, which is based on specific expertise and cost advantage, in manycases has been deemed morally wrong. Over the years, there have been manyimplementations exploiting the low wages and poor working condition indeveloping countries. Nike Sweatshop throughout the 1990s is the case in point,when the sport giant was criticised for practicing and had to lay-off staff by1998, witnessing declining sales and stock price. (theguardian).Anotherimportant factor need to be considered thoroughly is the question regarding thebusiness strategy of the manager, which relates to the sustainability of thefirm in the industry.
Kotabe (1992) argued that the increasing dependence onoutsourcing may eventually result in innovation being diminished. Empleton andWright (1998) in their work suggested that by selling a potentially strategicresource in the process of outsourcing, firms may witness opportunity loss inthe long run.
