Uyai Lizamay Useh

A00021061

MGT 406

Dr. Hassan Yusuf

21/04/2021

OUTSOURCING: MEANING, TYPES, ADVANTAGES & DISADVANTAGES

Outsourcing is defined as “ the business practice of hiring a party outside a company to perform

services and create goods that traditionally were performed in-house by the company's own
employees and staff”(Twin, 2021). Here, jobs and operations of businesses are assigned to third
parties that can carry out the activities faster, cheaper, effectively and efficiently. In his article;
History and evolution of outsourcing, Usifoh (2021) explains that “outsourcing emerged in the
1950s, but it wasn’t until the 1980s that it began to be perceived as an attractive business strategy.
The growth of outsourcing in the 1980s was largely driven by the “focus on core competency”
strategy that was developed in the 1970s.” It wasn’t until 1989, that outsourcing was formally
identified as a business strategy (Mullin, 1996).

TYPES OF OUTSOURCING
There are several types of outsourcing. They include;

TACTICAL OUTSOURCING: This type of outsourcing is used to achieve specific short term
objectives/problems in businesses. It’s used by businesses when they is a/are lack of financial
resources, poor internal competence of the firm’s management, poor skills or qualified employees, or
when the firm wants to downsize (Brown, Wilson, 2005, pg. 20). E.g. of Tactical outsourcing are
Casualisation, security services, Janitor and catering services. Tactical outsourcing benefits include;
cost and financial effectiveness, flexibility in the amount or type of staffs they have, generation of
cash from sale of assets, etc (Ghodeswar & Vaidyanathan, 2008, p. 26).

STRATEGIC OUTSOURCING: In strategic outsourcing, firms conduct business (partnership) with

a smaller number of integrated suppliers, in order to do business in the best possible way. The main
aim of businesses in this type of outsourcing is to create a long-term value and common benefits for
both parties in a partnership (Letica, 2016, pg. 79). This outsourcing is relevant for business in terms
of their future core capabilities, organizational structure/architecture, cost, business performance and
competitive position (Maurice & Greaver, 1999, p. 8). Examples of strategic outsourcing are;
 Information Technology Outsourcing (ITO): where firms employ external suppliers to
maintenance or redesign the IT architecture within an enterprise such as application
development IT infrastructure management, testing and validation services for IT
applications, implementation and maintenance of computer networks activities,
services for monitoring and IT security, data recovery services, etc. (Andone &
Păvăloaia, 2010, pg. 164).

 Business process outsourcing (BPO): Here businesses outsource organizational activities

such as accounting, economic and financial diagnosis/ analysis, marketing, administration,
customer service, scheduling, etc. (Andone & Păvăloaia, 2010, pg. 164).
This type of outsourcing helps businesses improve their organizational performance, in terms of
quality output.

TRANSFORMATIONAL OUTSOURCING: Here, business partner with the outsourced firm who
would provide a management team that is experienced/has expertise in the capability/ area of the
business the company needs changes in (Chew & Gottschalk, 2013, pg. 338). The main benefit of this
type of outsourcing lies in the innovations and quality changes that are brought by the outsourced
firm/team, as the suppliers (outsourced team) are not only a means of achieving greater efficiency but
also allies in changes necessary to make so the company could stay present in the market (Letica,
2016, pg. 80). These long-term partnerships help firms “to stimulate continuous business change by
encouraging organisational change, implementing new strategies, or reshaping company boundaries”
(Yoro,2018.)

PROCESS OF OUTSOURCING
In his book “The outsourcing Handbook”, Mark et al (2006) explains the steps and process
businesses that want to carry out outsourcing activities should follow. They are;

Strategic Assessment: Here companies analyze what part of business has to be outsourced, and the
benefits of outsourcing. This would be analyzed based on the firm’s core competences, its financial,
risk, and operations level, and this would be done by a selected executive team.
Needs Analysis: Here; the outsourcing project(s) is/are placed, in priority and a more detailed
evaluation than the strategic assessment is carried out. Analysis of how special the needs are, and how
they can affect the broader aspect of the business is carried out. After carrying out the needs analysis,
a proposal is prepared to present the needs to potential vendors.

Soliciting, evaluating and choosing the vendor: Here, vendor(s) are solicited, evaluated and
chosen based on factors like; their qualifications, cost, expertise, etc. if the right vendor is selected,
there will have a potentially lasting relationship, but a wrong vendor could damage and thwart a well-
intentioned outsourcing project.

Contract Negotiations: Here, contracts would be negotiated on the basis of; high-level issues, deal
breakers, price schedules, performance standard, terms and conditions, etc. After the negotiation has
been accepted and contracts signed by both parties; a legal binding relationship is formed, and the
relationship sealed and announced.

Project Initiation and Transition phase : the client firm here starts to give control of the
outsourced work to the outsourcing vendor. Transition issues like Human resource, communication,
supporting production factors would be addressed. This stage/process marks the foundation of the
continued relationship.

Relationship Management: Here, governance of day to day activities would occur. Activities in
this process include; communication between parties, meeting agendas and schedule, performance
reports, process and knowledge management, evaluation of relationship and problem resolution.

Continuation, Modification or Exit strategies: Here firms evaluate the current outsourced
contract to see if it is doing well, or it needs to be modified or terminated. If modification of
termination is the choice, the firm has to begin the process all over again to make changes or
adjustments to the current outsourced contract/relationship.
 ADVANTAGES OF OUTSOURCING
Concentration on Core competencies: By outsourcing supporting product part or organizational
activities, companies can focus properly on their core product, services and/activities can make them
unique (value proposition) and increases their competitive advantage in the market or industry they
are in.
Cost Saving/Effectiveness: In the situation where it is more expensive to hire an in-house
employee or specialized personnel to carry out task in an organization, the firm may decide to
outsource a job or task to a cheaper firm or personnel that can execute the task effectively and save
costs like training, requirement and operation costs.

Expertise: By outsourcing production of products (goods and services) to external suppliers who are
specialists and highly qualified in the particular field, firm can get good quality products.

Time saving: By outsourcing production of products to specialized firms/people, a lot is saved on

time, energy and resources on training staffs to become specialist in the designated areas.

DISADVANTAGES OF OUTSOURCING
Security and Confidentiality threat: By outsourcing services, companies give out vital
confidential information about themselves to the outsourced firm/personnel and are the risk of having
that information exploited and abused by the outsourced firm.

Poor Quality: If there’s a wrong choice of outsource partner, there would be issues such as product
defects, substandard quality output, and inappropriate categorization of responsibilities (Somjai,
2017). This would lead to customer dissatisfaction, market share and competitive advantage, which
would lead to loss for the company.

Hidden Cost: Some outsourced companies may have hidden cost charges attached to their contract,
which would force the company outsourcing to indirectly pay additional fees.

Lack of focus: A company being outsourced by have many customers, and so won’t put in
dedication and effort to carrying out the task set for it, by the company outsourcing them
(Wongleedee, 2016).
 REFERENCES

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2021, Web.

Usifoh, Daniel (2021), Outsourcing: A Brief History. GATEWAY PROCUREMENT, USA,

accessed April 21, 2021, Web.

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April 21, 2021, Web.

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