Running head: DRIVERS AND RISKS OF OUTSOURCING

Drivers and Risks of Outsourcing

July 19, 2014























DRIVERS AND RISKS OF OUTSOURCING 2

The purpose of the study is to discover the major drivers and risks of outsourcing by
different business and government entities. What are the major driving factors and risks
associated with the determination to outsource an internal product, process or service?
Hypotheses;
Ho: major drivers of outsourcing = cost, market demand and internal insufficiency.
Ha: major drivers of outsourcing cost, market demand and internal insufficiency.
Outsourcing is a general term that has been mainly used in offshore outsourcing. The
term has also been widely used in the current business world to obtain an outside source to
perform work currently performed in-house. About three-quarters of U.S. companies began
outsourcing their information technology in the year 2004 and the trend has been on the rise over
the past several years. The process of outsourcing involves not only the determination of when to
outsource, but it also holds many risks. To promote a better understanding of the risks related to
outsourcing, different scholars have carried out multiple surveys to come up with risks related to
this process, and more so, drivers that force businesses and government enterprises to outsource
their human resources. From the different literatures reviewed, it is evident that the areas
organizations focused on are mostly executive, operations management, supply chain
management and procurement communities (Dekkers, 2011).
Drivers of Outsourcing
Of the different surveys conducted, it was found that the major causes of outsourcing fall
into three major categories. First is when a company tries to cut costs or internal headcount. The
second case is seen as a result of increased market demand constraining internal capacity.
Thirdly, the situation could occur in the case where internal manufacturing or service
performance is insufficient or does not meet the requisites. From the survey conducted, and that
which can be seen in Figure 1 below, managers selected constrained capacity instead of cutting
down on costs as the major driver for reviews. On the other hand, the subordinate may be
DRIVERS AND RISKS OF OUTSOURCING 3

assuming that outsourcing could be as a result of cost going out of line. For management to
reduce the resistance from the employees, the best method would be to deliberately communicate
the importance and objectives of each outsourcing program or activity (Fill & Visser, 2000).

Source: OKeeffe, P. & Vanlandingham, S. (2004)



The Decision Making
To determine the item or task to be outsourced from the survey, consideration should be
made on the following four items, as seen in Figure 2.

Source: OKeeffe, P. & Vanlandingham, S. (2004)


Cost of Internal vs. External: These factors have to be taken into consideration,
especially when making decisions on outsourcing. However, it is usually impossible to
DRIVERS AND RISKS OF OUTSOURCING 4

understand the resources to be outsourced, and many organizations will always struggle before
they reach an agreement. Due to these unknown activities, the cost of production or the cost of
the end product will always be affected. Total costs should be well worked out as they usually
lead sub-costs indirectly in relation to the functions of outsourcing.
From the survey, the cost of internal vs. external was rated very vital by all groupings,
apart from the top management. This is in line with the outsourcings top drivers in that it is top
management always viewing outsourcing as a way to attain its objectives and goals.

Source: OKeeffe, P. & Vanlandingham, S. (2004)

Risks of Outsourcing
Despite the fact that outsourcing is proven to be effective, it has some drawbacks which
must be recognized and effectively managed. It is worth noting that in outsourcing, an outsider
dependent on the company will have to perform designated business functions which, if it is not
properly managed, will affect business operations or customer relations. Some of the negative
impacts include the decline in on-time delivery outcome and end customer satisfaction as a result
of delays on the part of outsourced material or tasks. Also, the quality of the product or service
may have a tendency to decline, which in turn affects customer satisfaction. There is also the
issue that budgets may not be achieved due to poor allocation and planning of resources
(Broedner, Kinkel & Lay, 2009). Lastly, there may also be the issue of supply interruption due to
inadequate finance by the providers.
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References
Broedner, P., Kinkel, S., & Lay, G. (2009). Productivity effects of outsourcing. International
Journal of Operations & Production Management, 29(2), 127-150. Retrieved from
http://dx.doi.org/10.1108/01443570910932020
Dekkers, R. (2011). Impact of strategic decision making for outsourcing on managing
manufacturing. International Journal of Operations & Production Management, 31(9),
935-965. Retrieved from http://dx.doi.org/10.1108/01443571111165839
Fill, C., & Visser, E. (2000). The outsourcing dilemma: A composite approach to the make or
buy decision. Management Decision, 38(1), 43-50. Retrieved from
http://search.proquest.com.proxy.davenport.edu/docview/212061448?accountid=40195
OKeeffe, P. & Vanlandingham, S. (2004). Managing the risks of outsourcing: a survey of
current practices and their effectiveness. Protiviti. Retrieved from
http://www.protiviti.com/en-US/Documents/Surveys/ManagingOutsourcingRisks.pdf