Effectiveness of Outsourcing as a Generic Global Strategy

Outsourcing is a decision that has been in the news recently because of the different viewpoints and the debates that it has given rise to. Outsourcing is difficult to define and has often been misunderstood. It is usually associated with jobs being moved overseas. The term ‘offshoring’ refers to the relocation of jobs and production to a foreign country (Garner, 2004) while outsourcing refers to jobs and services irrespective of the location of the provider. Offshoring refers to the location of the work while outsourcing refers to who does the work (Scott, Ticoll Murti, 2005). It is possible to offshore without outsourcing if the company has its own office or a captive unit in another country.Although outsourcing initially started with manufacturing, today services in different forms are being outsourced. Examples of such services include facilities management, IT services, software development, human resource administration, payroll processing and call center services. Outsourcing decision has been taken based on the transaction cost theory, competency-based theory or the relational theory (Mehta et al., 2006). Various benefits have been cited for outsourcing which includes cost savings, reduced inflation, and interest rates, increase in consumer spending and increased productivity. Firms see outsourcing as a business strategy which allows them to focus on core competencies (Isern Benedixen, 2007). It also gives them the flexibility to respond to market forces. However, it is increasingly being felt that firms lack an adequate decision framework to weigh the tradeoffs involved in outsourcing. The existing literature gives diverse opinions about the effects and effectiveness of outsourcing. Firms are realizing that the financial benefits of outsourcing firms may be much lower than expectations. This gives rise to the question of whether outsourcing can be used as a generic global strategy.