Outsourcing

• Main Authors: PURANAM, Phanish, SRIKANTH, Kannan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2004
• Subjects: Business; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4711
• Institution: Singapore Management University

Outsourcing is the transfer of responsibility for the execution of any of a company's recurring internal activities or processes to another company. The outsourcing of component production has been historically well established in manufacturing industries such as automobiles and airplanes (Sako, 2003). Outsourcing became popular in the services sector in the late 1980s when firms began relying on specialist companies for ongoing IT support rather than hire employees with IT skills. In essence, the vendor rents its skills, knowledge, technology, and manpower for an agreed‐upon price and period to perform functions that the client no longer wants to perform (Adler, 2003). Outsourcing is not synonymous with “offshoring,” which involves the relocation of activities to remote (often low‐wage) locations. Firms may continue to use their own employees, albeit in remote locations, or alternatively continue to perform activities in the same physical location but with another firm's employees. Since the 1990s, firms have experienced considerable success in positioning themselves as providers of outsourced services in IT from low‐wage offshore locations like India. The early 2000s saw this model being extended to other activities such as the operation of call centers, accounting, auditing, claims processing, and the execution of a range of other back office operations (Dossani and Kenney, 2003). While offshoring (with or without outsourcing) raises significant concerns about the export of jobs from a country, its proponents argue for the potential advantages of specialization as originally noted by Ricardo in his analysis of comparative advantage. Outsourcing non‐core activities allows both the client and vendor firms to focus on what they do best and improve their performance. Hence, often the client firm is able to obtain the same or higher quality levels from the vendor along with significant cost reductions. However, outsourcing also generates risks for both clients and vendors. Firms can find themselves locked into relationships with incompetent or opportunistic partners, and could face difficulties coordinating interdependent activities that are separated by physical and legal boundaries. Outsourcing has become an interesting empirical setting for testing a variety of organization theories. Since outsourcing results in a redefinition of the economic boundaries of firms and can lead to the emergence of partnerships between clients and vendors, it is of interest to strategy scholars. The transitioning of activities to remote locations and coordinating them offers scope to examine knowledge transfer and inter‐organizational coordination issues. HR specialists may find the impact of outsourcing decisions on employees (made redundant, as well as those remaining in the company) noteworthy.