Outsourcing: Introduction, Advantages, Disadvantages and Questions

The compilation of these Emerging Modes of Business Notes makes students exam preparation simpler and organised.


About four out of five of the world’s 500 largest companies outsource their work to India. But what does this outsourcing mean? And how does it benefit the country and its workforce? In recent times outsourcing has also been in the news due to the ethical questions it raises. Let’s find out more about it.

Introduction to Outsourcing

Outsourcing is the process of contracting a business function or any specific business activity to specialized agencies. Mostly, the non-core areas such as sanitation, security, household, pantry, etc are outsourced by the company. The company makes a formal agreement with the agency.

The agency then sends the manpower required to the company. The agency charges the company for its services and in turn pays wages to its employees. Global competition has given rise to outsourcing. With the help of outsourcing, companies can focus on their core areas which leads to better profits and increase the quality of their product.


Advantages of Outsourcing

Overall Cost Advantage: It eludes the need to hire individuals in‐house; hence recruitment and operational costs can be minimized to a great extent. It reduces the cost and also saves time and effort on training costs.

Stimulates Entrepreneurship, Employment, and Exports: Outsourcing stimulates Entrepreneurship, Employment, and Exports in the country from where outsourcing is done. Look at the example of India. After the initial success of call centers, there was a sudden emergence of many small scales and medium-scale BPo and KPO companies.

Low Manpower Cost: The manpower cost is much lower than that of the host country. This is exactly the case with India. We have a very large educated workforce. And this causes the labour cost in our country to be much lower.

Access to Professional, Expert, and High-quality Services: Mostly, the tasks are given to people who are skilled in that particular field. This provides us with a better level of service and fewer chances of errors or misjudgment.

Emphasis on Core Process Rather than the Supporting Ones: With its help, companies can focus on their core areas which lead to better profits and increase the quality of their product. They simply outsource ancillary services.

Investment Requirements are Reduced: The organization can save on investing in the latest technology, software, and infrastructure and let the outsourcing partner handle the entire infrastructure.

Increased Efficiency and Productivity: There is increased efficiency and productivity in the non – core areas of an organization.

Knowledge Sharing: Outsourcing enables organizations to share knowledge and best practices with each other. It helps develop both the companies and also boosts goodwill in the industry.

Disadvantages of Outsourcing

Lack of Customer Focus: An outsourced vendor may be catering to the needs of multiple organizations at a time. In such situations, vendors may lack complete focus on an individual organization’s tasks. And the reputation of the organization may suffer as a result.

A Threat to Security and Confidentiality: The inside news of the organization may be leaked to a third party, so there are security issues. The leak of sensitive information may result in losses to the company and also be an advantage to competitors.

Dissatisfactory Services: Some of the common problem areas with outsourcing include stretched delivery time and sub-standard quality.

Ethical Issues: The major ethical issue is taking away employment opportunities from one’s own country. Instead of creating employment and wealth in the origin country, it gets outsourced to another country. In recent times this has been viewed by many as unethical and even unpatriotic.

Other Disadvantages: Include misunderstanding of the contract, lack of communication, poor quality, and delayed services amongst others.


Question 1.
Which one of the following is a category in which Business Process Outsourcing can be categorized?
a. Back office
b. Front office
c. Offshore
d. All of the above
The correct answer is the option “d”.
In this, kind party agencies perform your back office as well as front office data entry tasks effectively in quick turnaround times. In the 90s we used it to refer to big businesses sending jobs offshore.

Question 2.
Outsourcing _______________
a. restricts only to the contracting out of Information Technology Enabled Services (ITES).
b. restricts only to the contracting out of non-core business processes.
c. includes contracting out of manufacturing and R & D, as well as service processes-both core and non-core-but, restricts only to the domestic territory
d. includes off-shoring
The correct answer is the option “d”.
It is a practice of reducing costs by a company by transferring a part of the company to another company. It includes offshoring i.e. relocating a part of the business to another place for reducing costs.