Understanding Outsourcing: A Theoretical Analysis of its Benefits and Risks to Businesses

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Chapter 1


1.1 Background

Resources have long been the major concern of modern companies as they can underpin corporate strategic capability as well as create competences to ensure companies' survival and out-performance among their competitors (Johnson and Scholes, 1999). Due to increasingly fierce competition, allocation and utilization of corporate resources have not only been restricted in-house, but also gone beyond the individual company, which is known as outsourcing (Quinn and Hilmer, 1994; Lonsdale and Cox, 2000).

As a new corporate strategy emerging in the 1970s, outsourcing is defined as "the buying in of components, sub-assemblies, finished products, and services from outside suppliers rather than by supplying them internally" (Oxford Dictionary of Business, 2000). For the increasingly underperformance of conglomeration and vertical integration in the market and a consensus of "the core competency", more and more companies appear to rely on this strategy to have an effective resource portfolio (Lonsdale and Cox, 2000).

According to Dragonetti, et al. (2003), "86% of major US corporations outsourced at least some services in 1997, up from 52% in 1992". The scope of outsourced activities has ranged from administration, manufacturing and production to R&D, Sales and Marketing (The Fifth Annual Outsourcing Index, 2003).

However, while many practitioners and academics credit outsourcing for its benefits to businesses, such as cost reduction, improved company focus, flexibility in resources allocation (e.g. Quinn and Hilmer, 1994; Quinn 1999; Lankford and Parsa, 1999; Quelin and Duhamel 2003), various studies and research have also shown the "dark side" of outsourcing. Most opponents claim that outsourcing could be risky in terms of poor quality of supply, loss of capabilities, potential rivalry from suppliers (Quinn, 1999; Quelin and Duhamel 2003; Clarke, 2004).

Amidst this controversy, many studies have been undertaken in the last decade, aiming to explore effective management approaches of successful...