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Outsourcing is the contraction of business processes to other parties and may involve the transfer of employees or assets from one company to another. It might incorporate offshoring or foreign and domestic contracting. The ulterior objective for outsourcing is reducing the need to hire and bring fresh expertise at reduced capital and operating expenses.
How Outsourcing Impacts a Business
The impact of outsourcing is subjective to the industry. It depends on the purpose (goods or services) that a company considers to outsource. If used appropriately, it can be an effective cost-saving strategy. The reason for that is the fact that it is cheaper to purchase goods or services from companies with comparative advantages. The overhead expenses will also decrease because the costs of performing certain back office operations are high (McIvor, 2010). Outsourcing converts fixed costs into variable ones. Therefore, it will release capital for investment. Thus, more financial resources will be directed towards revenue generating activities. Doing so will result in overcoming recessionary sales (Parlour, 2014). After all, it is economically sensible to outsource services that require significant investments in capital assets.
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Corporate decisions pertinent to making or buying are changing, and this explains why outsourcing has an impact on businesses. Similarly, such type of activities within the company’s environment vary depending on the externalization of support ones (Hess, 2011). Outsourcing can significantly influence businesses. It may lead to improving the quality of products, processes, systems, and services that can increase the productivity and efficiency of an organization. Moreover, the company will also have sufficient time to focus on its core activities pertinent to company’s growth as well as back office operations.
Outsourcing can also be beneficial to a business because it streamlines production by improving the quality of work. In fact, business owners may not have the time to focus on all tasks such as marketing and accounting (Parlour, 2014). Therefore, outsourcing will offer superior products the company has never achieved before. However, even though outsourcing is beneficial to businesses, it may have a negative impact when services such as communication and customer service are outsourced (McIvor, 2010). This is more likely to happen when outsourcing is combined with offshoring activities in localities with different cultures and first languages.
For instance, a foreign call centre may use a language that local one cannot comprehend, and this might cause language barriers (Roebuck, 2011). Therefore, it can be detrimental to a business. Miscommunications will impede customer understanding and this fact, in its turn, will affect sales. Poor post-purchase customer service will also result in a loss of revenue as a particular client will go elsewhere next time to make a purchase. In addition, the benefits of outsourcing cannot be noted upfront, and the hidden costs are always looked down upon (
Another impact of outsourcing on businesses is confidentiality issues that stem from the violation of intellectual property. However, this is more prevalent in nations that lack confidentiality rules that are similar to what the
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Different Strategies in Outsourcing
An outsourcing strategy revolves around assessing the strategic plan that works best for a company. The procedures are also known as sourcing engagement models. They involve the determination of activities importance level that ought to be performed in satisfying the customer’s needs (Tavana, 2014). The different strategies in outsourcing include comprehensive business outsourcing, selective business process outsourcing, licensing agreement, and contracting.
Contracting is where a supplier is paid at precise time intervals after accomplishing a given task. It can be effective while limiting the breadth and complexity of certain business processes. The licensing agreement is an engagement used to outsource tangible assets. Technology is an apt example. Selective business process outsourcing reduces the integration of functional processes by entrusting a partner with the management of multiple purposes in a given professional area. However, the suppliers involved in this process are less complicated compared because of the few processes involved (Roebuck, 2011).
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Comprehensive business process outsourcing is an intricate and demanding process because it means entrusting a supplier with multiple organizational business operations. However, the fact that the outsourcing strategy is comprehensive does not imply that the provider will do everything for the company (Tavana, 2014). This is because some processes such as customer relations are crucial and should always be considered as an organizational management function. Business process outsourcing incorporates statements of work, multiple service levels agreement, and master services agreement.
Outsourcing can be an effective cost-saving strategy when used correctly. It involves the procurement of supplies or services from legally dependent firms. Even though outsourcing contributes different challenges to providers, domestic one can also have positive and negative impacts on a business. Before a company engages in outsourcing, it will be vital to acknowledge that it can be overdone or underestimated. Therefore, due diligence should be exercised lest a business loses critical aspects of its competitive edge.