Essay by dboylesA, October 2008

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The primary objective of outsourcing is improving financial performance mainly through cutting costs. The argument is that outside firms specializing in support functions can work cheaper because they benefit from economies, offer up-to-date expert knowledge, and apply the latest new technologies. A study based on data from 620 US firms, ranging in size from 500 employees to 50,000 employees, found that 69% of the firms engaged in outsourcing obtained significant cost savings and increased performance. However, cost savings may be limited, incidental and well below the 20% claimed by consultancies; cost raises have also been reported. (Outsourcing, page 3-4)A second objective is enhancing operational flexibility. Service contracts with outside suppliers offer the opportunity for purchasing services according to variable needs, which can also save costs. A third objective, especially relevant for technology intensive business activities is to avoid replacement cost for obsolete technical equipment. Other objectives seem to play a role as well.

It has been argued that public organizations as well as business firms copy each other in order to convey the image of modern management to the outside world, which fits into the institutional view on organizations. This view is supported by the fact that outsourcing does not always achieve its objectives.

Impacts of outsourcing on the service provider have received much less attention than that on the outsourcer. Although outsourcing is generally depicted as a win-win strategy, from which both the outsourcer and the service provider profit, this may not always be the case. The conditions of the service contract and especially the guarantees given to the employees regarding employment, career and pay may limit the benefits for some period of time. For the service provider it is crucially important that the outsourcing process goes well in order to ensure that employees are committed...