Since the Industrial Revolution, companies have struggled with ways they can exploit their competitive advantage to increase their markets and profits. The ideal organization for the majority of the 20th century was a large integrated company that could own, manage, and directly control its assets (Handfield, 2006). In the 1950s and 1960s, efforts were expended on diversification to broaden corporate bases and take advantage of economies of scale.
Subsequently, organizations attempting to compete globally in the 1970s and 1980s were handicapped by a lack of agility resulting from inflated management structures (Handfield). To increase their flexibility and creativity, many large companies developed a new strategy of focusing on their core business, which required identifying critical processes and deciding which could be outsourced (Handfield). This study will define outsourcing, examine its history and relevance in today’s society, and describe some advantages and disadvantages of outsourcing, as well as the future of outsourcing.
Outsourcing Defined In simple terms, outsourcing is described as a formal agreement with a third party to perform a service for an organization (Martin, 2005). A more comprehensive definition for outsourcing would be that outsourcing is the concept of taking internal company functions and paying an outside firm to handle them. The decision to outsource is based on the following major reasons: -To save money in terms of lowering costs -To improve quality
-To free company resources for other activities such as focusing more on core competencies (Martin). This concept (as we know it today) started with the data-processing industry and today it has spread to vast areas comprising of tele-messaging and call centers (Martin, 2005). Theoretically, outsourcing is not simply the contract with a third party to perform a service for an organization; it also involves transferring a significant amount of management control and decision-making to the external supplier.
The process of outsourcing is very much formal like other business processes, and includes a considerable degree of two-way information exchange, coordination, and trust (Martin). History of Outsourcing The earliest forms of outsourcing date back to the industrial development that began in the late 17th century when America outsourced the making of covers for its wagons to workers in Scotland, using raw material imported from India (Ghimire, 2006). After England’s textile industry became so efficient in the 1830s, the Indian manufacturers couldn’t compete, so the work was then outsourced to England (Ghimire).
The above history presents a brief overview of the early beginnings of outsourcing; however, outsourcing as we recognize it today took root during the latter part of the 20th century when companies began to contract out some of the smaller aspects of their businesses to companies that provided specialized services (Thomas, n. d. ). Prior to outsourcing, organizations handled all aspects of the business themselves. Everything from the sourcing of raw material to manufacturing and shipping finished products, and even selling the products were taken care of by the organization (Thomas. ).