Daniel Loughin
ACC 303
Outsourcing: Is it really a positive?
Outsourcing has become a major practice of companies in recent years. “Over just the past decade, an ever-widening sphere of service activities are being offshored…” (Hahn 598). It has also become a topic of major controversy. The definition of outsource according to Merriam-Webster is, to procure (as some goods or services needed by a business or organization) under contract with an outside supplier. In most cases, companies do this by sending these functions or operations to firms in other countries.
Outsourcing has advantages and disadvantages. The reasons that companies choose to outsource certain activities are many. One such reason is “the offshoring decision has become a major strategy aimed at improving or maintaining profitability in highly competitive industries” (Dunn 26). Outsourcing cuts costs and saves money to help firms compete in the market. It is assumed that these activities are found to be costly through various costing methods. One such method is activity based costing in which all conceivable costs associated with that activity are factored and evaluated. The company takes that cost and compares it to what private firms are charging for their services. Typically if the cost of doing an activity “In-House” is more expensive than the fee that the outside firm charges, the company will outsource that activity. By outsourcing the activity the firm saves money. “Information technology offshore outsourcing is an increasingly important strategic tool for firms as IT skills and communication infrastructures have become readily available at low cost overseas” (Cha 282). Another method to determine whether to outsource or not can be determined from using a value chain approach to that activity. In this method, you examine the financial, internal, customer, and growth and development aspects of an activity. Maybe by outsourcing, the company will be able to operate more efficiently. Perhaps the activity in question is an activity that is essential for producing a certain part is too space consuming. By outsourcing, the company frees that space for other equipment and gets the completed parts delivered. This increases inventory capacity and efficiency. As a result, you gain in the financial and internal aspects. So outsourcing has a big appeal to companies looking to cut costs. But what are some of the consequences that come with this practice?
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There are some concerning disadvantages to outsourcing, the most obvious hitting close to home. By definition, outsourcing means laying-off employees. As a result, the country’s unemployment is directly related to this practice. Is it right for companies to do this to their employees? What happens to those employees? Even if you keep the employees, what will they be doing instead of what they were? Will they still get the same pay? Another worry is the thought of “deskilling” the domestic workforce by taking away the learn-by-doing opportunity when outsourcing (Cha 282). These skills could be potentially completely lost to the domestic workforce, causing dependence on foreign firms for those functions entirely. Going back to the activity based costing model, you have to look at how much you actually would be saving and if it is worth the hassle. If you were to only save $3000 a year, is it really worth it to outsource that activity. You have to consider the size of the company and its income. If it’s a small firm that makes an average net income of $100,000 a year, that $3000 savings may be worth it. But if it is a large firm averaging $1,000,000,000 a year in net income, the $3000 in savings might not even be worth considering. Related to that decision making is the value chain method. If the financial and internal gains are outweighed by the potential losses in customer and growth/development aspects, outsourcing is not the choice to make. Outsourcing can also negatively impact domestic research and development, as well as, innovation and trade secrets. If a company outsources its research and development activities, the separate firm could be less efficient than their own staff, therefore reducing turnover and output. Also, companies risk losing trade secrets by sharing them with outside firms which can cause them to lose their competitiveness in the market.
Outsourcing does have its advantages and disadvantages, but all potential benefits and costs must be considered when making the decision to do it or not. The firm has to weigh the risks involved with this decision and compare them to the savings they would incur by choosing this option.
Bibliography:
Cha, Hoon S.,David E. Pingry, Matt E. Thatcher. “Managing the Knowledge Supply Chain: An
Organizational Learning Model of Information Technology Offshore Outsourcing.” MIS Quarterly 32.2 (2008):281-306. Acedemic Search Complete. EBSCOhost. 15 February 2011.
Dunn, Kimberly, Mark Kohlbeck, Matthew Maglike. “Future Profitability, Operating Cash Flows, and
Market Valuations Associated with Offshoring Arrangements of Technology Jobs.” Journal of Information Systems 23.2 (2009):25-47. Acedemic Search Complete. EBSCOhost. 15 February 2011.
Hahn, Eugene D, Jonathan P. Doh, Kraiwinee Bunyaratavej. “TheEvolution of Risk in Information Systems
Offshoring: The Impact of Home Country Risk, Firm Learning, and Competitive Dynamics.” MIS Quarterly 33.3 (2009): 597-616. Academic Search Complete. EBSCOhost. 15 February 2011.
