Lacity and Hirschheim (1993) defined outsourcing as “conducting one or more organizational activities using external agents” (p.3). Mosher and Mainquist (2011) defined offshoring as “the outsourcing of processes/activities to a non-domestic country” (p.39). Outsourcing as a means to improving performance has been around and has grown steadily over the years (Pouder, Cantrell & Daly, 2007). According to a 2005 survey, 82% of large and medium businesses in Asia, Europe and North America were involved with some sort of outsourcing (Gottfredson, Puryear & Phillips, 2005). The most common reasons to outsource can be grouped into Finance, Labor and Operations. For most firms, outsourcing was a means to achieve lower cost of operations (Richards, J., 2007). However, there are several other reasons why an organization outsources an activity or business function.
Organizations outsource to focus on their core business model (Richards, J., 2007). What is core to their business is subjective and could differ from one organization to another, even if they are in the same industry. For example, when Airtel, Ltd. (Airtel–a telecom provider) announced their decision to outsource their network operations, everyone in the industry (including their CTO) was skeptical (Martinez-Jerez & Narayanan, 2007). Most other telecom providers defined network operations as part of their core business, Airtel did not. By focusing on their core business activities–marketing, sales and customer relations–Airtel became a market leader in India and was able to become a global player. Outsourcing also helps an organization quickly build a team around a certain standard process within days (Bloomberg, 2006). For example, Some companies outsource certain tasks as a risk management strategy (Willcocks, Lacity & Kern, 1999). An example would be a task requiring very specific highly skilled resources that are not internally available in an organization.
Hiring and managing resources for a specific task is a resourcing risk–and there is a high cost involved in case of attrition. From a human resources perspective, it is difficult for an organization to create a growth path for highly specific resources and the organization risks losing these valuable assets, often times without a succession and/or a transition plan. Another reason to outsource and/or offshore would be to leverage a pool of resources in a particular region. An organization may have a team with specific skill sets based out of a particular geography due to various socio-political, economic and geographical factors. For example, MNC/ TNC’s prefer to locate their IT operations out of the Indian sub-continent due to high availability of skilled IT resources (Balakrishnan, 2011).
In conclusion, there are several reasons why an organization would outsource or offshore. As seen above, a strategic choice to outsource would be driven by a need to free resources to perform core activities necessary for a business to survive and prosper. Other reasons to outsource include financial performance and realization of operational efficiencies. For its many benefits, outsourcing has become a way of life in the corporate world (Cutshaw, 2008).
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Cutshaw, K., (2008). Outsourcing is a way of life. Retrieved from https://www.klexserve.com/article/outsource.pdf
Gottfredson, M., Puryear, R., & Phillips, S. (2005). Strategic Sourcing From Periphery to the Core. [Article]. Harvard Business Review, 83(2), 132-139.
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Martinez-Jerez, F. A., Narayanan, V.G., (2007, December 4). Strategic outsourcing at Bharti Airtel Limited. Harvard Business Review. 9-107-003, 9-107-004.
Mosher, R., & Mainquist, D. (2011). The outsourcing relationship. Internal Auditor, 68(3), 35-39.
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