There is, however, little information available on the actual realisation of benefits achieved through outsourcing in general, although the literature has revealed that there are numerous claims to benefits having been derived from outsourcing.
Another gap noted is a lack of research on the alternatives available to companies should outsourcing fail. Does the company just insource again, or does it hire the services of 4PL to rectify the situation?
It is important to consider the significance and type of disparity in the performance of the activity. Some examples are that the organisation possesses an advantage due to the economies of scale developed over a period of time. Organisations in this position should keep the activity internal, in the event that the supply market in not able to meet the performance levels required.
This quadrant can include many simple activities required by the organisation. In this quadrant, the most important factors are the ability of the market to supply the services required, and any limitations that may prevent an organisation from outsourcing. The following key questions should be asked: Is there any potential to leverage capabilities from external suppliers?
Are there any internal or external restraints on using an OSP? Will customers recognise the difference in an end product if an OSP is used? Should the organisation choose to outsource, it should assist the OSP to develop a strategy to achieve the service levels achieved by the organisation.
If executed properly, outsourcing can be a source of competitive advantage resulting in a leaner, flatter organisational structure Pearce and Robinson, The authors further stated that performance monitoring allows for the OSP to work out with others how to improve efficiency since problems exist amongst people, technology and processes.
Kathawala et al. However, there are no guarantees that the benefits will be achieved and there are risks involved when an activity is outsourced. This review has revealed that logistics outsourcing has far-reaching consequences, and hence should be carefully considered to avoid difficulties such as loss of control, employee insecurity and supplier dependence.
The decision to outsource is complex and often involves the use of conflicting criteria. A good logistics service will prove to be a source of competitive advantage and prove to be a key in delivering effective customer service. Armstrong and Associates, Bhatnager, R. Third party logistics services: A Singapore perspective. Bryne, P. A new road map for contract logistics. Trasnportation and Distribution, April, pp.
Burns, G. Industry update: Transportation outsourcing survey. Burt, D. Supply Management. International Edition ed. New York: McGraw Hill. Cheong, M. Chow, G. The growth and development of the US third party logistics industry. Council of Supply Chain Management Professionals , Council of Supply Chain Management Professionals. De Villiers, G. Strategic logistics management - A supply chain management approach. This is particularly important in terms of service delivery outsourcing and quality management in manufacturing products.
Resource based theory states that organisations needing to maintain competitive advantage will plug gaps in resources and capabilities in the most cost effective manner Urquhart In recent years this has been through outsourcing. There are however issues around outsourcing areas of core competencies that are not core business, while retaining areas of core business that do not adequately reflect core competencies.
Dobb made particular reference to this in relation to her excursion into book sales. Clegg et al p39 state that outsourcing has become a culturally acceptable phenomena which the public sector has used to reduce the size of government, generate economic recovery by diluting union power, facilitate innovation, and transfer best practices, a position that Walker and Walker p concurs with.
However the Australian Public Service Commission p holds that while services may need to be funded by government, they do not necessarily need to provide them at an operational level. According to Mackay , performance encompasses the efficiency of a project or activity as well as effectiveness. So an activity, such as building a three bedroom house may be efficient if it meets its time and budget objective, whereas it is only effective if it meets the needs of the client.
If the client wanted a two bedroom apartment, then the activity was not effective. Farrar p lends support to this view stating that there is a link between economic importance of corporate governance and investment, which changes pattern of competition, investment and technology.
While Perez notes that as well as statutory obligations, corporate governance and global responsibility are linked through responsibility to any party or third person who is affected by the organizations acts. Perhaps the renewed emphasis on community, is simply measuring effectiveness as opposed to efficiency gains of the outsourcing era. Much rhetoric has been written about the need for efficiency and effectiveness within an accountability framework. Business needs to apply principles of ethics, openness and accountability to work operations, as the number of failed global enterprises increases and the general public clamours for answers.
Farrar cites Enron and HIH as examples. As a consequence, sourcing strategies have been revisited. New strategies have included joint venture partnerships as well as reassessing the insourcing option.
Indeed, many have long believed that outsourcing is a mere fad that would run its course sooner or later. For example Saul indicates that the collapse of globalisation is imminent and perhaps it is in response to this that there has been a renewed emphasis on the effectiveness of contracts, as it relates to the wider community.
Whatever the strategy decided, there is no one answer for all time and situations. The changing political, cultural and economic landscape, a legacy of globalisation and deregulation of the s, will ensure that organisations continue to seek ways of remaining efficient and effective in their business strategies.
To this end a continued focus on competencies will ensure that the right competencies, whether previously defined as core or non core, are insourced, thus mitigating perceived risk. There are a plethora of definitions to choose from, some more closely aligned with particular industries than others. This focus on externality forms a key element of this thesis which contrasts the outward focus to that found in organisations that source products and services from within.
While many companies outsource to the local community, there has been a shift in recent years to outsource in the international market, a move which creates its own unique set of risks and benefits Schniederjans and Zuckweiler 2. As such, it is set to continue, both at a national and international level. Turner p19 concurs with this view citing an almost doubling of outsourced networks within trans-European carriers within a four year period.
In the international market, Schniederjans and Zuckweiler p and Anon p 31 state that outsourcing risks fall into three categories including economic or currency stability, political stability, and cultural differences including language barriers. Intellectual property protection is becoming a concern to some Clegg et al ; Dahl , while time zones, time to market and dedicated lines are concerns for Rao These risks are not just seen as belonging to the manufacturing sector. In service industries such as call centres, cultural differences can be marked, with growing customer dissatisfaction with internationally outsourced service functions having an adverse effect on business.
Yet cheap labour is alluring. In manufacturing, there are numerous examples of outsourcing to Asia and India to lower costs. This is particularly the case where contracts are on sourced to a third party. In the Industry Commission Report 48 found that particular groups such as unemployed, women and those on low wages such as cleaners may be disadvantaged by the contracting out of government services, though according to Hodge this will depend on the sector and industry affected, and relates to the distinction between object processing and people processing.
In contrast, Clegg et al p find that while short term costs increases during transition period, outsourcing leads to cost efficiencies, and increased service levels in reliability and quality indicating that efficiency was achieved. Overall, they state that outsourcing produces much better data and management of that data, leading to better preventative maintenance within the facilities management industry.
In short, they believe that savings are a result of redistribution of resources rather than efficiency gains CTC The literature has shown that there are risks associated with outsourcing. Apart from those risks exclusively associated with international outsourcing, such as culture, economic and political stability, loss of quality and intellectual property, Schniederjans and Zuckweiler there are risks that are inherent in any contract set up.
The lack of flexibility within contracts has led IPG Photonics, a US based manufacturing company, to recreate an internal system of sourcing Dahl At the centre of this was the need to control price, quality and quantity of components after the Nasdaq crash. However, they recreated a streamlined approach monitoring each stage of the process. Beaumont and Sohal p rated 14 possible reasons for retaining internal sourcing arrangements and found that among the highest listed were concerns around levels of control, cost and confidentiality issues.
It would seem that these are valid reasons for retaining control internally. In short, there are risks associated with managing outsourced contracts. Insourcing does not negate all of these risks, but it does spread the risk differently. However the literature is not consistent on this point.
A preliminary literature review shows that insourcing means different things to different people and can range from in-house contracting between departments from the same company, service level agreements Dobb , p , and creating new in house departments Canez et al The definition of insourcing provided is overly broad, as it could involve process reengineering only without any comparable bid or externally imposed KPIs. Because the firms were not contractually bound, they cannot be considered even as a joint venture.
At this point it is necessary to mention some of the other terminology connected to the sourcing theory and debate. Inshoring refers to outsourcing within a given community most often America , and is most often linked with American literature on outsourcing. An example is Armbruster who uses insourcing to define foreign companies setting up business in the US or home country. This remains a pitfall for the unwary researcher. Subsequent literature has applied it to mean that both insourcing and outsourcing have been considered, and a decision has been made on strategic fit to do one or the other, or a combination of both.
In short, current popular literature intermingles the three phrases and has blurred the line between the meaning of the three phrases, a distinction which some academics also appear to blur. This means that each department works closely within their own budget and may well charge for services or products provided by that area.
In effect the service level agreement has both benefits and risk associated with normal contracting conditions. As with Beaumont and Sohal the agreement may even be reached after a period of external tendering has occurred, with an internal department tendering on the same terms as those companies from outside the organisation. Dobb p states that insourcing can be a means of providing service, revenue and retaining quality as well as positively influencing reputation.
Since the cost cutting exercises of the s and s, both private and public sectors have found themselves with just as much work but with fewer resources. This has meant that business needs to generate funds from revenue streams that are not necessarily core business simply in order to survive. As with Rao , shared culture and knowledge may be the reason that Dobb p found that revenue increased through insourcing, and that there are greater opportunities for collaboration, greater employee buy-in and enhanced reputation to consider.
Both Dobb p and Canez et al p indicate that sound knowledge of core competencies, capabilities and cost are paramount to the decision to insource. Currie p confirms this for the IT industry. Lahay confirms that the outsourcing of core business and subsequent loss of competencies maintenance of train tracks was a key reason for the failure of RailTrack.
It was found that on a short term cost analysis contracting out was more profitable, but it failed to take into account the impact on capital maintenance.
The contract has since been overturned and is now sourced internally. Beaumont and Sohal p rated 14 possible reasons for not outsourcing and found that among the highest listed were concerns around levels of control, cost and confidentiality issues. Retaining control internally has been linked to the need for greater flexibility within organisations in responding to changes in economic climate, and can be seen as a one of the benefits of insourcing Cifarri ; King Sahay p77 indicates that customer satisfaction with a product will affect the manufacturing processes including customer buy-in.
With a growing focus on corporate responsibility, both customer and employee buy-in may become risks to non-strategic outsourcing of both products and services. Clegg et al p47; Dahl indicated that productivity could be achieved with fewer people based on improved business processes, more working capital in the form of plant and equipment, and tighter supervising practices, yet it could be equally argued that the same improved processes, applied internally, would provide equal savings.
Vernon and Beiderman concur with this view by stating that process goals and improvements are necessary to retain insourcing and to deliver what is required. However when applied to auditing, James does not concur stating that the community perceived greater accountability and independence where audits were conducted by external companies.
In other words, the community saw external audits as a way of reducing risk related to finance and accountability and a more open society. As noted above, it is not alway easy to compare findings when language and meaning of the term insourcing varies. There are a number of different views relating to the reasons for insourcing. Since this is the same figure that Hodge sites as being generally achievable through outsourcing, it would confirm that factors other than costs are considered when organisations make decisions about from where to source.
This thesis attempts to explain the benefits found by companies who insourced or re-insourced after a period of outsourcing. A number of authors have indicated benefits for those companies that incorporate insourcing into their strategic outlook.
Clegg et al indicate 14 benefits for retaining internal sourcing. In defining what a benefit is, it should be noted that some benefits manifest themselves in the short term while others are long term sustainable benefits that impact on the wider community as opposed to the company and its shareholders. In applying their formula, Canez et al p found that all decision making was enhanced when strategic decision methods were applied.
Company C also achieved cost savings by applying the same strategies to their decision making process, even though it was not the primary trigger for their decision. The main trigger was the need to focus on core competencies and their decision was to outsource non core competencies p Were an organisation to undergo assessment according to this criteria, then there may be a need to change sourcing arrangements.
Their process includes both a briefing and evaluation and feedback stage, and involved people from across the organisation in the decision making process. The attributes are then weighted and rated before analysis of their scores. Through their literature review, Schneiderjans and Zuckweiler identify both benefits and risks to outsourcing, which can be adjusted for international risk sensitivity.
However their formula rates and weights the risks only, and does not include a corresponding formula for rating benefits. While the base formula could be modified to rate insourcing risks, the key drawback to their strategy is that it does not provide a balanced view of both benefits and risks.
However, developing and applying a weighting regime for benefits as it is outside the scope of this thesis. Drejer and Sorensen p recommends that competencies that are of high strategic importance or that the organisation is strong in are located in- house, while those that are of low strategic importance or weak organisational strengths are outsourced.
Sourcing the correct competencies is therefore more important than where they are sourced from. Beaumont and Sohal p are more concerned with the uniqueness of a process or product in relation to where to source from. For both, sourcing across the spectrum is the preferred approach. Business is likely to perceive both risks and benefits differently depending on their strategic outlook, priority and operational sector.
As seen with the Walmart experience Featherstone p53 , pressure brought to bear either from the community at large or through the board room will also influence strategic thinking and sourcing decisions. This thesis clarifies areas for further study and attempts to fill in the gaps to some of those areas. In particular the thesis will concentrate on the first two points outlined above, that of providing clear definitions and consistent language to describe what is meant by insourcing, and attempt to catalogue the benefits of insourcing.
We have seen that some strategic studies in outsourcing weight benefits in an attempt to give priority to those areas which provide the most benefit to the company. While the strategic decision making methodology will be reviewed, the creation of new formula is not part of this thesis.
By imitating, managers send signals to others about their own quality. Such behaviour leads to fads developing in the face of contradictory information.
This has been the dominant stance in relation to the outsourcing phenomena. At best they say the consulting firm almost never goes away as the company becomes dependant on it p Dahl confirms this finding in relation to the manufacturing sector while Levery confirms it for rail infrastructure.
It is statements such as these that make insourcing seem more desirable. Clegg et al p44 believe that second generation contracts often lead to much closer partnership arrangements, as relationships develop between the outsourcing organisation and the provider. Fourth party logistics means using an outside company as a logistics integrator for the sole purpose of helping the supply chain achieve its full strategic value.
At centre is the presence of that integrator and the sense of strategy involved Marino p Similar multi level approaches are becoming usual in the IT industry Currie , p Joint ventures, and pubic-private partnerships provide a way of sourcing core competencies while minimising both risk and cost, as these are shared across the parties Drejer and Sorensen Whether outsourcing is a fad or not remains to be seen. We have seen that there are supporters of both outsourcing and insourcing, both stating that benefits can be achieved.
Certainly there appears to be evidence that the relationship between outsourcing partners changes in some cases to form a closer bond between parties. With increased accountability, greater focus on corporate governance, and business subject to community influence, there are bound to be changes to the way in which business look at their strategy.
It has seen that short term goals may lead to one course of action, while long term goals may lead to the opposite action, even for the same company. If the company implements a new process it can outsource the work to trained workers, instead of investing the time, money and effort to train and maintain internal workers.
Additionally, outsourcing firms often provide management-level employees along with their work teams, which frees up internal employees to take on other work. As a cost-saving measure, outsourcing can have significant impacts in sectors like manufacturing.
In the U. This practice is also known as "offshoring," which involves outsourcing to a third party in a country other than the one where the outsourcing company is based in order to save on labor costs. Outsourcing is not limited to manufacturing jobs.
Customer service jobs, such as those in call centers, and computer programming jobs also are outsourced by companies seeking ways to reduce costs.
A large number of companies outsource at least some functions of human resources tasks, such as employee benefits management and payroll. Outsourcing also can involve the purchasing of components from another source, such as components for computer equipment. Components sometimes can be purchased for less than it would cost for companies to manufacture those components themselves, and the components may be of higher quality. This ultimately enables the company that chose to outsource to lower its labor costs.
Businesses can also avoid expenses associated with overhead , equipment, and technology. In addition to cost savings, companies can employ an outsourcing strategy to better focus on the core aspects of the business. Outsourcing non-core activities can improve efficiency and productivity because another entity performs these smaller tasks better than the firm itself.
This strategy may also lead to faster turnaround times, increased competitiveness within an industry, and the cutting of overall operational costs. Companies use outsourcing to cut labor costs and business expenses, but also to enable them to focus on the core aspects of the business.
Outsourcing's biggest advantages are time and cost savings. A manufacturer of personal computers might buy internal components for its machines from other companies to save on production costs. A law firm might store and back up its files using a cloud-computing service provider, thus giving it access to digital technology without investing large amounts of money to actually own the technology. A small company may decide to outsource bookkeeping duties to an accounting firm, as doing so may be cheaper than retaining an in-house accountant.
Other companies find outsourcing the functions of human resource departments, such as payroll and health insurance, as beneficial. When used properly, outsourcing is an effective strategy to reduce expenses, and can even provide a business with a competitive advantage over rivals.
Outsourcing does have disadvantages. Signing contracts with other companies may take time and extra effort from a firm's legal team. Security threats occur if another party has access to a company's confidential information and then that party suffers a data breach.
A lack of communication between the company and the outsourced provider may occur, which could delay the completion of projects. Outsourcing internationally can help companies benefit from the differences in labor and production costs among countries.
Price dispersion in another country may entice a business to relocate some or all of its operations to the cheaper country in order to increase profitability and stay competitive within an industry.
Many large corporations have eliminated their entire in-house customer service call centers, outsourcing that function to third-party outfits located in lower-cost locations. First seen as a formal business strategy in , outsourcing is the process of hiring third parties to conduct services that were typically performed by the company. Often, outsourcing is used so that a company can focus on its core operations. It is also used to cut costs on labor, among others.
While privacy has been a recent area of controversy for outsourcing contractors, it has also drawn criticism for its impact on the labor market in domestic economies.
Consider a bank that outsources its customer service operations. Here, all customer-facing inquiries or complaints with concern to its online banking service would be handled by a third party. While choosing to outsource some business operations is often a complex decision, the bank determined that it would prove to be the most effective allocation of capital, given both consumer demand, the specialty of the third-party, and cost-saving attributes.
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