The choice of an effective strategy that organizations need to decide on is related to the key issues that are relevant in the business environment at the present time. The increase of the effectiveness of the businesses’ core activities is ensured by the reorganization of the organizational structure of an enterprise, the transition to an active policy of innovation updates, the ability to adapt to market changes through the allocation of non-core businesses and the organization of outsourcing. Therefore, outsourcing can be regarded as one of the methods of solving the problem of business strategic development. It allows companies to restructure the production, optimize the structure of the external relations of the organization and focus on targeted market segments.
The difficulties that businesses might face during the operational activities are related to the development of new products, entering new markets, and the inefficient use of resources, as well as the lack of the maintenance infrastructure. The developed market infrastructure can provide support to companies on the basis of outsourcing strategies and create conditions for their effective operation.
The organizational management strategy based on outsourcing plays a special role for small businesses. Large companies have the ability to independently carry out the entire range of economic activities, as well as hire well-paid professionals and penetrate new markets. Small enterprises are limited in the choice of means and tools of new technologies, the attraction of financial resources, and access to information, and consequently, the strengthening of their competitiveness. Thus, the companies need to decide whether to carry out the business processes in-house or refuse from the execution of business processes, and delegate them to specialized organizations.
The aim of the current term paper is to compare the features of in-sourcing and outsourcing to show the goals of each approach and the effect they have on businesses. The discussion of strategic courses used in outsourcing and in-sourcing will help to compare the two methods and see the benefits of each of the strategic course that the company can apply for their successful development.
In-Sourcing: Meaning and Functions
In-sourcing is an extension of a company or a department for additional loading of existing facilities or assets. It allows enterprises to reduce the cost of unused capacity. An example of in-sourcing is when the company that has a building as a facility decides to rent it at the market price. It can be depositing of third parties’ goods for the period when the storage is not used, which makes in-sourcing seasonal.
The information required for considering the decision to follow the strategy of in-sourcing is the following. First is the cost of the activity and its practical capacity. Second is the information on the actual capacity, load level, and, therefore, the cost of unused capacity. Finally, it is the data on the alternatives to the sale of unused capacity and economic parameters. In-sourcing allows organizations to reduce the cost of unused capacity or extract additional profit from a competitive advantage (Silverstein, DeCarlo, & Slocum, 2007).
In-sourcing is a promising direction at present but it will not be able to become a mass phenomenon due to the following reasons. First, in-sourcing requires significant investments and resources during the transitional period and after it. It is the reason why in-sourcing is not attractive for the medium-sized business, and it is not attractive for other businesses as well. Second, in-sourcing allows IT companies to switch to a qualitatively different condition by starting making money on an open market as an example. As a result, the leadership of IT services can only act as a driving force for such a transition. Finally, it is the global crisis that forces many companies to invest significant funds to the development of in-sourcing strategies. This step does not refer to the main production and its largely progressive nature is not in compliance with high risks that in-sourcing offers.
Outsourcing and Its Functions
Today, outsourcing is one of the most interesting and rapidly developing approaches in the business world. The essence of this new management strategy is to decide on the most profitable ways of conducting business. Leaders of world businesses use obvious and tangible benefits of industrial specialization and physical boundaries of the company. Thus, the company waives its own business processes and acquires services for its implementation from a third-party contractor.
The basic concept of outsourcing is based on three fundamental principles. First, everyone should do the kind of business they are able to concentrate on. Second, the decision of related tasks can be entrusted to those who will better deal with them. Finally, the distribution of such performance saves a customer’s money and brings income to the executor. Outsourcing allows any company to receive all necessary professional services under flexible contractual terms, save the dynamism, have low fixed costs and gain additional potential for current growth (Mohr, Sengupta, & Slater, 2010).
Outsourcing involves the transfer of the authorities to the executor, but the responsibility for the production of certain goods and the provision of some services lies on business partners. A labor contract is the closest form to outsourcing, which usually means a controlled execution of any particular type of work. At the same time, outsourcing means the transfer of some elements of a company’s life cycle. The customer delegates the executor to carry out one or more business processes under the contract of outsourcing. The key point of this definition is the transfer of control. This condition distinguishes outsourcing from any other form of the interaction between companies.
There are several key advantages that outsourcing can bring to companies. Thus, its use allows placing an intra-corporate focus on the main goals and objectives of an enterprise. Secondary functions are delegated to third-party firms specializing in their implementation. In this case, the user of outsourcing services can focus their usually limited resources on strategic tasks and the achievement of competitive advantage. Outsourcing also helps to increase the effectiveness of resource use that is difficult to access. For example, it can be service equipment, security areas and others. Outsourcing reduces costs for provided services for a company as it allows transferring them to the executor. Companies that are engaged in research activities carry out production expenses while being involved in the development, marketing, product promotion and other activities all at once. This burden is transferred to consumers in the form of an increased price for products. A company that provides outsourcing services completes these tasks for less money than usual due to its narrow specialization (Mohr et al., 2010).
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Outsourcing provides the optimization of business processes. It allows the redistribution of resources for the benefit of the company’s main functions. In particular, outsourcing results in the redistribution of intra directions, such as the development of new parts, into the directions that are directly related to customer service and the provision of services. This type of activity allows expanding the market segment and ensuring the development of resistance.
Outsourcing companies negate risks by serving a large number of customers. Outsourcers are responsible for the timing and quality of work and services, and they can be deprived of license for breaching it. Therefore, they are extremely interested in the fulfillment of their obligations. Moreover, latest technologies become available through outsourcing. Outsourcing companies are constantly investing in technology and personnel. In addition, they gain experience in solving similar problems of their clients.
Outsourcing is a global investment in the development of fixed assets. The decision about the investment is one of the most important and is accepted by companies’ top managers. Outsourcing reduces the need to invest in the development of fixed assets related to minor and non-core functions. It can improve businesses’ specific financial indicators as there is no need to show a return on the capital investment in certain types of activities.
At the same time, the use of outsourcing by companies is constrained in management practices for several reasons. These include a risk to transfer too many important management responsibilities, the threat of secluding managers from business practices or become dependent on outsourcing companies in terms of timely provision of services. Outsourcing helps to train the outsourcing companies’ specialists and their personal staff. Therefore, there is always a need to increase personal staff and train it in a hope that employees will be able to bring additional profit. Finally, there is a threat of information leakage (Mohr et al., 2010).
Thus, the implementation of outsourcing into businesses involves positive factors and has negative effects as well. Nevertheless, the impact of positive factors is rather strong so the amount of services transferred to outsourcing is growing rapidly.
The Comparison of In-Sourcing and Outsourcing
In its essence, in-sourcing is the same as outsourcing. The difference between two methods is that the main function of in-sourcing is not beyond the company and is sold internally only. To understand an in-depth difference between the two approaches, it is relevant to compare in-sourcing courses with outsourcing strategic courses.
In-sourcing results in the following conditions. These are the presence of temporary excess capacity or such competitive advantages as the existence of an effective process, presence of a unique resource, database or technologies. In case of the presence of temporary excess capacity, in-sourcing is characterized by certain process operations. In case of the presence of a competitive advantage, the unused capacity is characterized by the presence of alternative directions. It can be the use of customer database, resulting in sales of goods for a certain type of sales promotion or other goods, know-how and unique frames originally intended for the transfer from one activity to another.
There are several approaches to the classification of outsourcing. These are functional, operating and resource outsourcing. Functional outsourcing means the transition of control functions, while operating outsourcing allows transferring the functions of productions, and resource outsourcing implies the refusal of personal resources in favor of the purchase from a third party.
However, the most interesting advanced strategic outsourcing courses include the following classification. First is a full outsourcing. An example of this course is a company transmitting the execution of marketing operations in the Internet to contractors. This service can include the development of a website, its content, and maintenance. Second is partial outsourcing. For example, a company transfers some part of its specific tasks, such as web site programming while the development of the overall strategy and its implementation in practice remain within the scope of the company’s internal affairs. Finally, it is advanced outsourcing when a firm sells a number of functions to a third-party company but sustains a managerial position in this cooperation.
Full Outsourcing versus In-Sourcing
Full outsourcing has not been used at early stages of development as there was no proven methodology for the determination of the company’s efficiency or its major direction. It was due to the presence of a plurality of communication channels, lack or barriers to enter the Internet and high pace of its development. However, the improvement of the business forms has led to the emergence of the business process outsourcing concept in the mid-90s, which is shortly called BPO. This concept means the transfer of not individual functions of a department but a specific production or service process in general. BPO considers companies horizontally instead of accepting a traditional way of transferring functions to departments. At the same time, the efforts are directed on the realization of important business management strategies. These are the introduction of innovations, acceleration of the company’s entrance to the market with a particular product, and an increase in the company’s market value through new ways of the organization of the business processes. Additionally, BPO is used for traditional business activities, in particular, the financial management, real estate, the recruitment purposes, administrative functions, separate divisions and documentation (Saxena & Bharadwaj, 2007). This strategic course cannot be applied in in-sourcing due to the impossibility to implement the described above tasks within one company. Full outsourcing requires transferring the entire production to an outsourcing company but not switching between departments within one company.
A good example of a successful implementation of full outsourcing is the one of Microsoft that has eventually transferred an extremely important process of training the client’s staff with the issuance of the certificate to an outsourcing company. The clients’ staff is comprised of specialists in the field of information technology and ordinary employees of the company. The conduction of hundreds of software courses in about a thousand training centers around the world is a very important and difficult task. Microsoft has found an effective administrative solution to this problem, which was the transferal of training activities to its partners. Microsoft provides the partners with the necessary documentation for the conduction of planned courses. Partners do all the administrative work in turn, as well as provide services to every customer, reproducing and distributing the necessary documentation for training and tuition bills and managing the entire process of paid training (Lacity & Willcocks, 2012). This task would be impossible in case of in-sourcing.
Partial Outsourcing vs. In-Sourcing
Partial outsourcing is the transfer of a specific set of functions to a third party company or a specially created subsidiary. The current trend in the development of wide manufacturing cooperation relations is manifested in the creation of high-value products as partners-companies reduce their own risk in the event of failure of the market by establishing such relationships and redistributing the costs between multiple partners. In-sourcing cannot cope with this task, which is another reason why companies apply this advanced strategic course to perform required tasks. The idea that new businesses grow faster, if they are allocated in an independent enterprise from the parent company, is currently gaining more adherents. American Airlines has applied this course to Sabre that is responsible for processing information and reserving seats in aircrafts (St. Amant, 2009).
It is worth noting that one of the main reasons that encourage companies to expand the scientific and technological cooperation using outsourcing is a high risk of large investments in the development process. The development of a new product lasts for five to eight years and more. At the same time, it is difficult to predict the cost-effectiveness of the introduction and implementation of a new product on the market. Thus, the risk of investment in research and development is even higher than in production, although the extent of such investments is also high. The use of outsourcing opportunities allows companies to eliminate the possibilities of the traditional market competition, particularly, price competition, as well as potential threats of innovations and other forms of competitions that can come from the third parties (Van Weele, 2010).
Companies often transfer operations to subsidiary companies under outsourcing since their experience in certain areas of production allows gaining profit from it. For example, General Motors Corporation, the world’s largest car manufacturer, established a specialized firm Electronic Data Systems to solve the production problems. A new company agreed to solve all automation problems for the parent company (Schniederjans, 2006). The transfer of operations to subsidiary companies is impossible in in-sourcing as this approach is associated only with the expansion of the main activities of the enterprise, the use of spare capacity in the main and auxiliary production for the performance of external orders, the provision of storage and development of information technology and software.
Improved Outsourcing versus In-Sourcing
Improved outsourcing is a new direction in the development of this course of business. Companies that transfer many outsourcing functions to the third parties derive maximum benefit from it. The increase of competition in the computing market has forced many enterprises to transfer production to regions with lower labor costs, which has allowed improving the competitiveness of products. For example, the Motorola Company, which is one of the world’s market leaders in the production of equipment for mobile communication, adopted a new marketing strategy in 2001 (Harigopal, 2006). The essence of this strategy was to reduce the company’s own production operations and to provide licenses for proprietary communication technology to other manufacturers of mobile phones. The company’s management believes that the differences in the future positions of companies in the market will be determined not by the technical parameters of cell phones and computers, but the design, as well as the scheme of distribution and pricing. The role of the hardware architecture and software is to ensure that competitiveness will decline. Other companies try to move in the same direction as well. The realization of the task outlined by Motorola Company could not be possible if Motorola decided to go with in-sourcing in this case.
According to Hirschheim, Heinzl, and Dibbern (2009), the use of improved outsourcing allows companies to focus on the main goals and objectives of the enterprise. It also allows using resources more efficiently. For example, companies that are aimed at the expansion of business or establishment of a new subsidiary might be interested in the attraction of the outsourcing company that would provide all kinds of services. In its turn, in-sourcing is possible as a practical implementation of the diversification strategy as it provides companies with a competitive advantage through the development of new functions or activities. Such implementation is possible under the following conditions. Thus, new activities will be developed when the main business entities or the company possesses the necessary resources and capacity for growth and development to ensure the involvement of highly qualified specialists. Another option is that the enterprise should be able to attract new customers through the expansion of its activities. These features distinguish in-sourcing from improved outsourcing.
An interest in outsourcing has been increasing in the recent decades. Outsourcing is a developing and promising form of organization of a company, which has a number of advantages. These are the cost reduction, the concentration of management and staff on the main business goals, the improvement of the quality and reliability of services, the use of advanced technologies, and others. The essence of this approach is that companies are run by only those business processes that create a competitive advantage for them and are most experienced ones.
Companies decide in favor of in-sourcing in case there are present the cost of the activity and its practical capacity, the information on the cost of unused capacity, and a chance of selling the unused capacity and economic parameters. In-sourcing allows organizations to reduce the cost of unused capacity or extract additional profit from a competitive advantage.
The term paper has provided an analysis of the feasibility of the use of outsourcing and in-sourcing as strategic approaches that reveal a difference between them and help to understand the tools that can help companies to decide on the most appropriate method. Thus, full outsourcing is the transfer of not individual functions of a department but a specific production or service process in general that considers companies horizontally instead of accepting a traditional way of transferring functions of departments, which is impossible to do when deciding to choose in-sourcing. Partial outsourcing is the transfer of a specific set of functions to a third party company or a specially created subsidiary. The transfer of operations to subsidiary companies is impossible in case of in-sourcing as this approach takes into account only the expansion of the main activities of the enterprise, the use of spare capacity in the main and auxiliary production for the performance of external orders, the provision of storage and development of information technology and software. The use of improved outsourcing allows companies to focus on the main goals and objectives of the enterprise, while in-sourcing is possible as a means of practical implementation of the diversification strategy as it provides companies with a competitive advantage through the development of new functions and activities.
The choice of an effective strategy that organizations need to decide on is related to the key issues that are relevant in the business environment at the present time. Outsourcing can be regarded as one of the method of solving the problem of strategic development for businesses. It helps companies to restructure the production, optimize the structure of the external relations of the organization and focus on targeted market segments.
In-sourcing is an extension of a company or a department for additional loading of existing facilities or assets. It helps enterprises to reduce the cost of unused capacity. Companies should choose in-sourcing in case there are problems with the cost of the activity and its practical capacity, the cost of unused capacity, and the data on the alternatives to the sale of unused capacity and economic parameters.
Outsourcing allows any company to receive all necessary professional services under flexible contractual terms, save the dynamism of the company, have low fixed costs and gain additional potential for growth at the given time. It is related to the transfer of the responsibilities to the executor, but the responsibility for the production of certain goods and the provision of some services remains applicable to the business partners.
In-sourcing takes place with the presence of temporary excess capacity or such competitive advantages as the existence of an effective process, presence of a unique resource, database or technologies. This becomes possible when new activities are developed as main business entities in the future, or the company possesses the necessary resources and capacity for growth and development to ensure the involvement of highly qualified specialists. In-sourcing also takes place when the enterprise should be able to attract new customers through the expansion of its activities.