Organizations, that aim to achieve sustainable competitive advantage and increased profitability, need to adjust their corporate structures and focus on alternative business practices. Within the context of rapid technological changes, fierce competition and globalization, outsourcing is widely regarded as the tool of organizational change and constant adaptation to the new market realities.
Outsourcing denotes the hiring of employees in a foreign country, where expanded operations are planned, to do the work that regular employees would do in-house. The functions and processes, which are outsourced most frequently, are information technology by 43%, supply chain by 36%, learning – training by 31%, human resources by 25%, finance and accounting by 21% and customer relationship management by13%.
Outsourcing a firm’s operations is a rather difficult and complex process as the changes required to enhance profitability may be harsh and thorough. However, being strategic management model, where business practices are transferred to another entity, outsourcing provides several advantages for the firm.
Outsourcing primarily achieves the necessary change at a low cost. Due to a constant effort and specialization of the external service provider to achieve enhanced quality and productivity, production volumes increase, while unit costs decrease. The economies of scale achieved and the improved TATs (turn-around time) make the cost effective factor is a win-win situation for all parties involved. It is reported that in some cases the cost saving ratio for the organizations that outsource is between 60% and 75%.
Through outsourcing, firms have the ability to plan by having control in consistency, cost variability and strategy implementation. Similarly like in financial investments, where diversification leverages the investment risk by allocating it in different classes of assets, outsourcing achieves economies of scale by spreading the workload across corporate boundaries. In that way, organizations are allowed to implement their strategies effectively and achieve organizational change at a steadily quick pace.
Outsourcing eases the headache of the corporations as far as the processes of setting up the plants in the foreign country are concerned. The advantage is that by outsourcing, the organization invests in its core competencies, while eliminating the risk of setting up the plant. By hiring the local talents and managing the huge investment required organizations can save up also on taxes. Moreover, they avoid dealing with labor unions like at home saving a lot of money in employee compensation, insurance, labor lawsuits etc.
Other advantages related to outsourcing may be stimulating entrepreneurship in small managerial entities, improvement of the labor skills, increased customer satisfaction and innovative focus on the firm’s core competencies.