Economics & Human Resource Management: Outsourcing


Outsourcing involves the subcontracting of a process of either a product design, manufacturing, or a third party company to an external service provider. Outsourcing is done to direct the energy towards the benefits of the business. It can also involve making good use of land, labor, capital, resources, and technology. It turned out to be the business lexicon in 1980.

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Outsourcing deals with the transfer of management or other daily executions of all the functions of the business to an external service provider. The transferred service is defined by the contractual agreement that is signed between the supplier and the client organization. Productions means are acquired by the supplier which involves the transfer of all business assets and staff and other resources from the client and services are procured from the supplier through the term of the contract. Some business segments are mainly involved in outsourcing, these include the human resource aspect, the management facilities, and information technology which also includes accounting.

Process of outsourcing

Outsourcing involves a continuous process that ensures that the contract between the supplier and the client is signed and followed effectively for the betterment of the entire business. First of all, the supplier should decide on whether it is right and profitable to outsource the business before making any crucial decision. It is a process that requires broad approval since it is taken at the strategic level of the organization.

In outsourcing, the business needs to come up with a case that can justify the need to outsource after the client has established the need to be outsourced. When the business case has been established for the business scope, the client should get involved in searching for a business partner who will sign the contract to outsource.

An outsourcing consultant needs to be contacted due to the complexity of work definition, legal terms, and conditions, and also the pricing. The consultant will help in scooping, making relevant decisions about outsourcing, and also evaluating a vendor.

When the client acquires the right partners, the short-listed suppliers are issued with a request for proposal (RFP) requiring them to write their proposal and the price that they will pay to the client.

Marks and scores for the supplier are issued by the client where the suppliers are issued with the proposal which is a very competitive stage for the suppliers. Face-to-face meetings are also involved whereby the client can meet with the supplier to clarify the requirements of the business and a response is issued by the supplier which is accessed by the client. It is at this stage that some suppliers are weeded out so that only a few remain for the next stage. Down selection continues until when the required number of suppliers is attained to maintain a steep competition of suppliers, the client should go into the due diligence stage with at least two suppliers. In the due diligence stage, the suppliers supply their “The best and final offer (BAFO)” which is supplied at the due diligence which is accessed by the client, and further down selection is made so that just one supplier can remain.

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The selected supplier then enters into some negotiations with the client. During this stage, the RFP, proposal, and BAFO are all converted into a contractual agreement that takes place between the supplier and the client. All the documentation and final pricing are done at this stage.

An outsourcing deal is reached when the contractual agreement is reached which will define how the client and the supplier will work together. The bidding power and the governance lies in the signed contract which is meant to bide the supplier and the client. The contract has four dates that need to be signed which include effective dates which show the time that the contract term began, the Service commenced date, and the date when the supplier took over to run the services.

After the effective date, there is usually a transition period which takes four months after the date when the supplier commenced the services. This involves staff transfer and taking of services in the business by the supplier.

Execution offset takes place in the transformation step which is the next step in outsourcing These projects are implemented to the service level agreement (SLA) hence reducing the total cost of ownership and This offset can also encompass the implementation of new services. Transformation mainly emphasizes centralization and standardization. Then an agreement is executed on the ongoing service delivery and it is a vast process which in most cases it lasts throughout the term of the contract.

There are outsourcing contracts that may have clauses and this requires the act of benchmarking and this gives a client a chance to benchmark the price. A third-party firm can be acquired for benchmarking which is usually selected according to the terms and conditions which are listed and signed in the contract. This firm compared the relative price that is being paid for the services to that of the current market price. Results of the benchmark are a determining factor in adjusting the price of the contract by the client.

Outsourcings’ last process involves either the termination of the contract or its renewal. When the term of the contract is running out, the client needs to decide whether the suppliers’ contract needs to be terminated or renewed. The termination of the contract will involve (insourcing) or transfer of services to another supplier.

There are several reasons which influence a client to get involved in outsourcing. Those organizations that outsource seek to realize various benefits of outsourcing.

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Reasons for outsourcing

The idea of outsourcing saves the cost of operation in an organization which ends up lowering the cost of services in a business. This reduces the scope, re-pricing, reconstruction, and re-structuring of various business processes. Through outsourcing cost of saving can be achieved through lowering cost economies by off sourcing also referred to as labor arbitrage.

The cost of the services can be restructured through outsourcing. This is enhanced by the operating leverage which compares the fixed and variable cost. Fixed and variable cost changes when business is outsourced which increases fixed to variable cost hence making variable cost quite predictable.

By contracting the old services with a new service level the quality of the service that is offered can be improved. Wider knowledge can also be acquired through outsourcing because there is access to intellectual properties which enable one to gain wider experience and knowledge.

By having a contract in outsourcing, various services are delivered to legally binding contracts which when they are poorly delivered they can result in financial penalties from the supplier which benefits the business. When the services are internal, there are no benefits reached. Contracts are also given to operational experts who can offer the best services regarding the terms and conditions of an organization.

Staff will also benefit from outsourcing since they will be drawn into a pool of talent from different suppliers and therefore they have a very high potential of acquiring sustainable skills. The management benefits from outsourcing by acquiring improved methods that help in managing services and technology.

Various steps are changed in an organization whereby outsourcing acts as a catalyst that speeds up these changes which the organization could not acquire alone if it was not involved in outsourcing. The time that the organization can spend in marketing is changed when the business is involved in outsourcing which ends up saving the overall time that the organization requires for other functions. Marketing and development are also accelerated when time is saved.

By outsourcing, commodification is also achieved which gives the business capability of standardization making it able to buy at the right price. It also allows wider access to various business services which were initially available to large corporations only.

Outsourcing enhances risk management. This is enabled when the organization partners with an outsourcer who can provide mitigation better. This will help the organization since the supplier will bear all the risks of the organization during the contract.

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Criticisms of Outsourcing

However, the many benefits of outsourcing, several criticisms cause a lot of fear to the organization when the plans to get involved in outsourcing. These criticisms are either brought about by the failure to acquire a good and reliable supplier or even other factors regarding the type of the organization.

According to public opinion, many people have thought of outsourcing as a way that has damaged the local labor market. Outsourcing affects both individuals and jobs since it involves the transfer of both goods, services, and staff. Individuals who are employed or rely on these organizations end up facing job disruption at employment security as a result of outsourcing. However, those who support outsourcing find it quite useful since it brings down prices and also provides better services to all. In European Union, there are regulations in outsourcing referred to as Transfer of Undertakings which are meant to give security to employment.

The failure to realize business value is another negative aspect of outsourcing since it is brought about by the outsourcers when they fail to meet the agreed-on promises by the client. If the outsourcer does not meet the value of the business, the organization can fall as a result of poor management, and also they have a negative influence on staff.

There are some areas in which lower services can be experienced when the services that are offered by that organization are outsourced. The first language and culture can have an impact on service delivery if such services are outsourced. The language that is used may not be familiar to call center agents which will result in misunderstanding and poor service delivery.

Outsourcing can impact negatively the social responsibilities of a person. Jobs are sent to low-income areas where work is also being outsourced. Lower paid workers can be overexploited but on the positive aspect more people who were originally unemployed end up securing employment.

In outsourcing, the quality of work that is realized is measured through the service level agreement, which is usually outlined in the outsourcing contract. When the contract is poorly designed, there is no service level agreement defined and in case there has been included in the contract, it might be of low standard i.e. lower than the previous one. This can be brought about by the process of implementation and reporting being made for the first time. Low quality can also be realized as a design to have low prices. When this happens, several stakeholders are affected and there is no equality to the previous one. Consumers who receive the end product can at the time value them inadequate even when the supplier has met the SLA since they are not of the required standards as the previous one. This can result in customers shifting to another similar organization for better services.

When the organization is involved in outsourcing, the staff turnover rate is highly affected. The staffs that are transferred to the outsourcer are a major concern of many companies. Some companies need to replace the entire workforce like in the case of call centers so that no misunderstanding can take place between the customer and service provider. When this happens, the staff who were working for the organization initially end up losing their jobs. This process also inhibits the build-up of employee’s knowledge which will eventually result in low service.

Relevant information is denied to staff which they were accessing earlier as a result of a change in management since the supplier wants to minimize the cost and maximize the profit. This is done by many outsourcers to reduce the cost so that more profit can be realized. In some instances, the outsourcer replaces the original employees with those with lower qualifications so that lower wages can be paid to have more profit. The relative effect of this can be poor service delivery which lowers the reputation of an organization.

Outsourcing is enhanced in an organization so that it can lower the cost of production which can affect the organization negatively in terms of its productivity. There is not time to improve the technology in an organization since no much time is allocated for this and they want to realize a lot of profit which will result in improved productivity but rather they will hire few people locally to reduce the cost.

There is no enough security in those organizations which are outsourced. Before outsourcing, the organization takes the chance of itself and its staff. The legal status of staff is changed after outsourcing which can directly affect employees which make them not respond to an organization.

During the signing of the contract, some legal matters need to be addressed and agreed on between the client and the supplier. This area is quite complex and requires a third-party advisor when entering a contract10. Outsourcing can lead to fraud when one wants to have profit using the name of an organization which mainly happens in the case of outsourcing this is a criminal activity. Therefore, the outsourcer should be responsible to their staff so that they can reduce the effect of fraud in an organization.

Client, Supplier’s Relationship

The relationship between client and supplier in outsourcing should be constantly maintained. When a deal has been concluded regarding outsourcing, committed management of the organization which is outsourcing relationship is very critical to its success. For successful transactions to take place there must be regular meetings that will enable the client and the supplier to discuss business proceedings. This will hence strengthen their relationship which will keep them bound strongly to each other. The contract once signed is live and operational and it should be reviewed at all times when the need arises.

Having seen several advantages and disadvantages of outsourcing it is believed that outsourcing does not work well for all organizations. Nevertheless, there are several tips that organizations’ CEO can apply so that outsourcing can work for their organization. These are:

  • Even though the supplier who has won the contract is responsible for all the processes of the organization, one needs to actively manage the relationship between the client and the supplier.
  • Always have time to make valuable decisions that are clear on various terms which you are working on together with the supplier.
  • Have constant communication and flexibility with the supplier.
  • A staff member needs to be nominated who can take responsibility for liaison.
  • Have good communication with staff since they can have major issues of concern that can reduce productivity such as their job security. Therefore, always keep them informed.
  • Consider relevant employment legislation if staff are being transferred.
  • Try and stay with one supplier for a long period which means a long-term relationship needs to be established.
  • Always renegotiate the contract before the term ends since when it is flexible it equally benefits both parties which gives enough time to react to change.
  • There must be a smooth transition which should be modifying services level agreements that can be used in future suppliers.

An exit strategy should be planned. This is best applicable when the relationship ends prematurely or has run its course. A clear exit way should be drafted in SLA. SLA should show the following details:

  1. How to bring outsourced function back in the house.
  2. Show clearly who owns the assets.
  3. Show how much one is compensated and when.

Therefore, the process of outsourcing is quite beneficial to an organization. It allows one to do what is best and concentrates on it, saves money, makes one flexible, and grows in an organization that is managed more effectively. The business can also gain access to outside expertise and come up with new technologies. When properly managed it helps the organization to reduce cost and makes proper use of knowledge and other technical resources in other organizations. But in doing all this, one should consider whether the benefits outweigh the cost to consider outsourcing. Proper management and monitoring of the process needs to be enhanced for outsourcing to be effective.


Angel C., Mike H., Introduction to IT outsourcing, 2008. Web.

Cranfield School of Management, Outsourcing, 2006. Web.

Thomas K., Leslie P., The Relationship Advantage, Oxford University Press, New York, 2002, pp 23-33.

Tim R. H., Michael A. H., Toward a model of strategic outsourcing. Journal of Operations Management, volume 25, issue 2: pp. 464-481.

William L., Globalization of the ICT Labor Force, Oxford University Press, New York, 2004, pp 124-125.

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