The Risks Associated with Outsourcing - Book Report/Review Example

Outsourcing is a cost reducing practice employed by business by transferring some work portions to outside suppliers rather than completing it internally. In outsourcing, two companies, the producing and the selling company, form a partnership to produce and sell to a specified locations, thus it involves handing over part of the business to a second and third parties. Outsourcing has continuously gained increased utilization for its effectiveness and profitability. Many businesses have gone for this approach as compared to the traditional method of going to establish and run a business from a local area. Consequently, many scholars have done a lot in the determination of the applicability of this approach in business. Researchers have shown this method of operating business to be economic, efficient and a profitable method of operating business. The review shows on the researches done on how outsourcing is an economical, effective and profitable. Also, the analysis focuses on the risks associated with outsourcing as an approach to doing business. 2.1Products and market choices in outsourcing Outsourcing approach is rapidly expanding in terms of market and the products offered. Drauz, (2014) studied the common types of commodities commonly using outsourcing. He carried out an exploratory study among six largest outsourcers companies in South America. He found the use of outsourcing in dealing with the full range of products offered on the market. In a different study, Handley (2009), finds outsourcing to be more prevalent in dealing with assembling and IT types of products than in any other range of products. He further found increased willingness of companies to represents others as outsourced partnerships. In a similar study, Gottschalk & Solli-Sæther, (2006) found the percentage of expenditure of firms on the outsource parties is on increase. Heeks & Arun, (2010) found many international companies dealing with automobiles spend about 40 to 60 percent on third parties, the majority being the outsourcers. In concern with the increasing trend in outsourcing, Handley & Benton (2009) conducted a survey to determine why outsourcing was a preferred mode of business. They found most business to prefer this method for being cost effective. According to the findings, firms fear to incur the switching costs to alternate providers. Therefore, they choose to incorporate other businesses as an outsourcer and run the business. Besides, Handley (2009) finds outsourcing as a way of preventing loss of loyal customers as the outsourcers will be selling in the name of the former company. Additionally, Heeks & Arun, (2010) ⁠ founds outsourcing to improve the client-provider relationships based on the resources and capabilities that eventually develop on the customer-producer attachment, producer loyalty and trust. Therefore, outsourcing favors long-term relationships in the business making them more economically viable. Besides, studies on the effectiveness of outsourcing in getting the product to the market show this approach is useful. ⁠Handley, Heeks & Insinga (2000) ⁠found the effectiveness of outsourcing is a reason for the rapid growth of outsourcing as a strategy in marketing and delivery of products to customers. When comparing it with other traditional approaches, Belcourt, (2006) found outsourcing as a best alternative and cost effective approach to the sale of products compared to any other traditional form of conducting business⁠. Besides, he discovered that the seller end partners are near the customers; hence, outsourcing facilitates easy selling to a larger market share⁠. Therefore, outsourcing is a cost effective method that is efficient and reliable way of delivering products and services to the customer (Insinga & Werle, 2000) 2.2 Determinants of success in outsourcing Drauz, (2014) ⁠ identifies three components that will determine the success of outsourcing. The first in the line is an experience. In this Drauz, (2014) finds the organizations with expertise in the local market set up do better in outsourcing when they form a mature outsourcing relationship. Similarly, Bei, Chen, & Shanshan (2008) found it necessary for the new business entering the outsourcing to seek guidance from the established better doing business in the market. Besides, Drauz, (2014) ⁠ identifies the essential matters as a determinant in the success of the outsourcing. In this, he finds that buyers are more likely to buy when they have a correct information obout the products as opposed to a simple explanation. Insinga & Werle (2000) agree with this explaining that, the guides in the outsourcing process should identify and employ the better-qualified employees in buying and selling of the products. Drauz (2014) found the third component to be understanding between the buyers and providers to be essential in the determination of the effectiveness of the outsourcing process. Similarly, Bei, Chen, & Shanshan (2008) ⁠ finds outsourcers appreciate openness collaboration and trust, which are crucial to the success of the outsourcing complexes. Even if most of the buyer organization highly relies on the traditional notion of managing, better outcomes have bindings to the mature interactions. 2.3 Risks associated with outsourcing However, outsourcing has its limitations as a method of getting the product to the market. In a study, Zhu et al., (2001) found customer satisfaction is low where third party delays in delivering the product to market. In this, they identified many factors in the outsourcer that can cause the delays in deliverly of the product to the market they also found that the outsourcing company may not have control over some of the factors. In a different study, Drauz, (2014) ⁠ identifies these factors to be customs delays, labors disputes and political unrests. In this, the lead-time and variability of the product to the market increases the levels of stock with the chain of supply stability deteriorating with the rise in cost buffers. Moreover, in a different study Insinga (2000) found the outsourcing to cause differentiation in the product or service quality, consequently affecting customer satisfaction. Therefore, Zhu et al., (2001), recommends to the companies to select carefully, qualify and manage their partners in outsourcing to prevent the deterioration of the quality. Bei, Chen, & Shanshan (2008) found this to need enough periods of transition or a combination with parallel production with cross training to achieve the required quality. Whereas it is well to save cost by avoiding this effectiveness outsourcing approach, it is well for a company that deals with automobiles to evaluate the impact it will have on the customers.   Drauz, (2014) ⁠ identifies that in the transitional phase, the outsourcing may also fail if achievement of the budgets and schedules fail due to inadequate resources. Therefore, the automobile should be run in the large scale to attain its full effectiveness. Outsourcing replaces some of the production and service functions of the car-producing firm in Korea the company may fail to meet its customer and shareholders’ commitments (Zhu et al., 2001). References Bei, W., Chen, J., & Shanshan, W. (2008). The analysis of R&D outsourcing in Zhejiang automobile manufacturing factory. In IEEE International Conference on Communications (pp. 5499–5504). http://doi.org/10.1109/ICC.2008.1031 Belcourt, M. (2006). Outsourcing - The benefits and the risks. Human Resource Management Review, 16(2), 269–279. http://doi.org/10.1016/j.hrmr.2006.03.011 Drauz, R. (2014). Re-insourcing as a manufacturing-strategic option during a crisis-Cases from the automobile industry. Journal of Business Research, 67(3), 346–353. http://doi.org/10.1016/j.jbusres.2013.01.004 Gottschalk, P., & Solli-Sæther, H. (2006). Maturity model for IT outsourcing relationships. Industrial Management & Data Systems. http://doi.org/10.1108/02635570610649853 Handley, S. M., & Benton, W. C. (2009). Unlocking the business outsourcing process model. Journal of Operations Management, 27(5), 344–361. http://doi.org/10.1016/j.jom.2008.11.002 Heeks, R., & Arun, S. (2010). Social outsourcing as a development tool: The impact of outsourcing it services to women’s social enterprises in Kerala. Journal of International Development, 22(4), 441–454. http://doi.org/10.1002/jid.1580 Insinga, R. C., & Werle, M. J. (2000). Linking outsourcing to business strategy. Academy of Management Perspectives. http://doi.org/10.5465/AME.2000.3979816 Zhu, Z., Hsu, K., & Lillie, J. (2001). Outsourcing – a strategic move: the process and the ingredients for success. Management Decision. http://doi.org/10.1108/EUM0000000005473 Read More