Outsourcing of Activities in a Sales Company

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This review has the purpose to look for definitions and stages of developing of outsourcing strategies; it will observe also the described risks and methods for analyzing the risks; will look for description of strategic decision frameworks in which outsourcing can be made and will look for relation between outsourcing and achievement for a given company of competitive advantage.

Definitions of outsourcing

As basic definition, outsourcing is transfer of a company’s business activities to an external organization that is providing relevant services. (Chamberland, 2003) says that external service provider is handling the transferred activities and berries responsibility for their outcomes. Depending on what company is targeting through outsourcing, two general types are observed (Clott, 2004), (Murphy, 2004):

- Short-term, or tactical, outsourcing, which has the aim to improve operational efficiency, to maximize the effect of the daily activities or to decrease costs of given operation.

- Long-term, or strategic, outsourcing, which seeks for business improvement in general. It goes beyond simple cost saving and is supporting company’ long-term strategic goals e.g. focus on core activities, creation of competitive advantage etc.

There is also other perspective for characterization of the outsourcing and it is based on what is transferred to external service provider. This definition also represents the historical development of the outsourcing and make-or-buy decision (Boyd and Juras, 2008). As authors explain, there are three specific definitions since outsourcing is developed:

- Manufacturing outsourcing – it is the production of a part, component or service for ultimate delivery to end customer.

- Information technology (IT) outsourcing – comprises the outsourcing of numerous information processes as net management, development, maintenance, data center operations etc. This type supported also the concept of outsourcing beyond particularities of given industry i.e. IT management is similar in heavy industry as well as in SPA centers. (Beasley, Bradford and Pagach, 2004).

- Business processes outsourcing (BPO) – the external service provider is taking the responsibility for entire business process e.g. finance, logistics or human resource.

Outsourcing strategies could be split also by territory, considering where is located the external service provider. We could separate local outsourcing (company and service provider are in one country) from offshore outsourcing, when service provider is situated abroad. (Chamberland, 2003).

Advantages and disadvantages (risks) of outsourcing

Advantages of the outsourcing are many and are rather visible. Transferring processes to low-cost provider or country returns back cost saving. However, benefits could appear from many other sources. (Boyd and Juras, 2008) describes some of them:

- Saving from reduction of overall overhead;

- Saving from external’s service provider economy of scale;

- Increased financial flexibility by transferring of fixed costs into variable costs, thus companies pay only what necessary;

- Outsourcing will free some fixed assets, that could be transferred to cash;

- Working with specialized external provider, company could get access to new technology;

- Strategic enhancement – by focusing on activities, that create their success, and outsourcing the others, companies have the possibility to use resources for further development and creation of competitive advantage.

(Kakumanu and Portanova, 2006) consider the same reasons, but they also add the problem with lack of skilled labour force if such appears in given market. The authors show also that via outsourcing a company could gain world-class technology at lower prices. However, (Clark, Zmud and McCray, 1995) argue somehow with the last statement, as they consider increased competition between service providers first is leading to price decrease, but then could be corrupted with general decrease of the service quality. They also add the possible benefit from taxes by selecting the right BPO destination companies.

Disadvantages of the outsourcing are also rather visible. (Beasley, Bradford and Pagach, 2004) gives in their article general idea about sources of disadvantages:

- Possibility that service provider would cease their business e.g. bankruptcy

- It’s possible company to be unable to control the process

- Outsourcing is a potential source of redundancies

- Possibility company’s competitors to use the same service provider. Therefore, the interests of the vendor may be weakened by other users.

- Attempting to control the outsourced process, company may lose focus of the core activities and customers.

- When outsourcing, company could lose some of internal talented people.

- Employees may have negative reaction to outsourcing and respectively to worsen their quality of work.

(Barthelemy and Adsit, 2003) are supporting above statement, by expressing the hypothesis that outsourcing programs fail mainly because in companies:

- Outsource activities that should not be taken out of the company – poor analysis of the value of given process or activity

- Selected service provider is not the proper one – poor analysis of the value, that vendor will bring against its fee.

- Personnel issues are not taken in the account

- Company could loose control over the activity

- Overlook about hidden costs of outsourcing – e.g. cost of controlling the service provider functions.

- Missing exit strategy – related to the above stated disadvantage of possible fail of the service provider for instance.

(Kakumanu and Portanova, 2006) argue that only few researches are analysing deeply the possible security risk, especially when transferring business processes or IT services. No doubt, for a company is easier to protect its information and equipment, when they are on its site. Security issues, at least, may influence the customers’ satisfaction